Mark Gritter (markgritter) wrote,
Mark Gritter

Angel Investor Tax Credit

The tax bill Governor Pawlenty vetoed included a 25% tax credit for angel investors. (Up to $10 million a year.)

Some lawmakers and investors warn that local start-ups will move across the border. In Wisconsin, angel investors can claim a 25 percent tax credit over two years of up to $500,000 per investment; venture capital funds can earn a 25 percent credit over one year up to $2 million per investment.

Iowa has a similar tax credit, as do Indiana, North Dakota, and about 15 other states.

The more I think about this, the less sense it makes. This seems like the worst sort of incentives-through-taxation: one that rewards means rather than ends. Proponents claim that this incentive is "proven" but I'd like to see some actual research whether the tax credit is a deciding factor.

The tax credit subsidizes risk no matter how disconnected that risk is from actually accomplishing the desired ends. If Angel A invests in a stupid business model with no chance of success, the state is right there investing 25% too with no return. If Company B outsources its development to India, Angel C still gets his tax credit despite creating only a couple headquarters jobs in the state. (Wisconsin has a requirement that 51% of the employees work in the state, but I'm sure there are ways around this.)

I'm also uncomfortable with the theory that the best use of Minnesotans' capital is to fund Minnesota businesses. The state is saying that they'll give you an incentive to misdirect your capital--- you think that a business out in California is a better investment, but Minnesota will put up some immediate cash if you direct your money locally instead. I can't deny that there may well be a "cross the border for easier access to capital" dynamic, once one state has bought into this idea. But it just seems so... parochial. Minnesotans are better off with a successful startup outside Minnesota than an unsuccessful one inside Minnesota.

Suppose the state funded a $10 million venture capital fund each year. Wouldn't this be decried as the worst form of socialism--- forcing taxpayers to invest in private companies? Yet that's essentially the goal here, except with less taxpayer control over where their money goes and only indirect sharing in the successes.

If we must have tax incentives, why not tie them to results rather investment? Give venture capitalists and angels a credit to offset their capital gains, for Minnesota-based businesses. Tie the tax credit to the company's actual Minnesota hiring. (This would still leave a bad taste in my mouth, but at least it'd have some tie to the purported goal.)
Tags: economics, finance, minnesota, policy, politics, startup
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