Economic development professional Scott Marquardt had a ready answer Thursday when, as a panelist at a state Chamber of Commerce event, he was asked what one thing he wants the Minnesota Legislature to do this year to give job-producing businesses a boost: Offer early-stage angel investors in startup businesses a state tax credit.
"It really goes to the issue of the availability of capital in our state," said Marquardt, a program officer at the Southwest Initiative Foundation and this year's president of the Economic Development Association of Minnesota. "We've heard from hundreds and hundreds of business and community leaders about the need for more early-stage equity capital to advance the opportunities in bioscience and the green, clean-tech economy." Even a limited tax incentive could be just the thing to move Minnesota startup companies onto the radars of individual investors, he said.
Plenty of anecdotal evidence, and the fact that Wisconsin and 28 other states offer angel investors a state tax break, back Marquardt's argument. So does the desire to hasten the end of the jobless phase of Minnesota's recovery from recession. This should be the year for Minnesota to add an incentive for investment in technology-based startup businesses.
A concerted lobbying effort has been mounted to make sure legislators get that message. In truth, noted Woodbury DFLer Kathy Saltzman -- Senate sponsor of the bill that would create the credit -- they've been getting it for some time. A tax credit for people who make substantial early investments in small businesses has been a feature of a number of previous tax bills.
But those bills also included major tax increases, and hence met with gubernatorial vetoes. Gov. Tim Pawlenty supports an angel investor tax credit, but not so much that he would swallow a $1 billion tax increase to enact it.
This year, to their credit, DFL legislators are taking a different approach, and the Republican governor should, too. He's likely to receive a smaller tax bill that includes the angel credit, capped at $5 million per year in cost to the state, and several other targeted, relatively low-cost carrots for job-producing business investment.
The bill is also likely to include the elimination of a comparably sized credit or a deduction deemed by legislators to serve a lesser public purpose (which one it will be is not yet clear). That way, the bill's tax breaks would not add to the state's $1 billion budget deficit.
As long as a swap of new tax breaks for less effective or desirable older ones yields no net increase in taxes, Pawlenty ought to sign it. Tax "expenditures," the credits, deductions and discounts that reduce tax burdens for a select few, ought to be just as subject to review and elimination as state appropriations are.
The same should go for the angel investor credit itself in a few years. House taxes chair Ann Lenczewski's bill includes a required evaluation of its effectiveness as a job-creator by 2014. By then, the hope that's propelling the idea now ought to be confirmed or refuted by hard data.
Many economists frown on such special tax breaks. This one would benefit upper-income people, thereby shifting more of the burden of paying for government to middle- and lower-income earners. It would also reward some investors for decisions they might have made anyway, regardless of the credit. It could aid businesses that leave the state (though both the Senate and House bills contain clawback provisions to recoup a portion of the credit if a business flees after only a few years).
That much regressivity, inefficiency and risk will be tolerable if the credit triggers a visible growth spurt. It's a gamble on growth that legislators should make, then closely monitor.