After many years of lip service to angel investment tax credits, the House voted 112-20 to approve a package of tax credits designed to stimulate job growth in Minnesota with a subsequent 58-3 approval by the Senate shortly thereafter and it now goes to Gov. Tim Pawlenty for signature.
Sponsored by Rep. Ann Lenczewski (DFL-Bloomington) and Sen. Tom Bakk (DFL-Cook), HF2695/SF2568 includes a small business investment tax credit — the so-called “angel investor” credit — and several others.
While we applaud and are delighted by the passage of this historic tax credit to kickstart Minnesota innovation, why did this get passed in a time when Minnesota is struggling mightily with balancing our state budget? Is this more about competing with Wisconsin for startups, or a true effort to create a climate that is a catalyst for innovation in Minnesota?
NPR’s Bob Collins take on it might shed some light when he points out how VitalMedix’ CEO talked to the StarTribune about the need for an angel tax credit, took investment predicated on moving his operations to Wisconsin, and has now filed for bankruptcy:
An “Angel investment” tax credit rewards investment in companies with tax breaks. Investing in a start-up company, especially in the high-tech world, is risky. The angel investor credit provides a cushion for the investor, its proponents argue.
Wisconsin has such a program. Minnesota doesn’t.
While Collins didn’t come right out and say that this bill is a reaction to Wisconsin luring startups away from Minnesota–especially when it comes to a sector, medical devices, many proudly boast that within which Minnesota enjoys a dominant position–but there is evidence that this Wisconsin competition is precisely why this modest angel investment tax credit was included in this bill at this time rather than true leadership in startup investment incentives.
If you read through this report Tax Incentives and Venture Capital Financing (PDF) you’ll see the evidence (Wisconsin, Wisconsin, Wisconsin). This is a report prepared by MN House Research staff at the request of the chair of the Committee on Taxes to provide the committee members with background information as they evaluate whether to provide incentives (either tax incentives or direct spending incentives financed with cutbacks in other tax incentives) for venture capital investments in Minnesota businesses. It summarizes the arguments for venture capital incentives, describes incentives provided in Wisconsin, and then provides three types of information:
- A compilation of data on the amount of venture capital financing in Minnesota from 1995 to 2009, and comparison of Minnesota with Wisconsin, the region, and the rest of the nation. This data is taken from what appears to be the only comprehensive, publicly available, nationwide source of information on venture capital finances by state, The MoneyTreeTM Report prepared by PricewaterhouseCoopers and the National Venture Capital Association.
- A discussion of the investment incentives provided in Wisconsin, based on the Wisconsin and Minnesota experience as reflected in the MoneyTreeTM Report data.
- A discussion of the advantages and disadvantages of using tax incentives versus a direct spending approach (e.g., matching grants instead of tax credits) to encourage one narrow form of venture capital investment in Minnesota, angel investment.
This report is just a presentation of the data and it appears that, while a great first step, more must be done to place Minnesota in a national and globally competitive state as well as one that fosters innovation in multiple sectors of our diverse Minnesota economy.