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Flurry of TBED Tax Incentives Pervade State Legislatures amid Increased Scrutiny

March 13, 2013

Measuring impact is critical to the success and sustainability of any economic development initiative, and as the national debate over fiscal austerity and taxpayer spending continues, TBED organizations can expect increased scrutiny and accountability for their investments.

Amid growing skepticism from the public, lawmakers increasingly struggle with finding a balance for funding new efforts that may take awhile to pay off with more pressing state needs. This year, measures to encourage the creation or expansion of high-growth companies through the use of tax incentives have been unveiled in several states. At the same time, lawmakers in some states are pushing for greater disclosure requirements through transparency measures. SSTI has compiled pending and recently approved legislation below.

Angel Tax Credits
Two states, Kentucky and Missouri, will try again to pass angel investor tax credits that failed to garner enough support during last year's legislative sessions. Lawmakers in Kentucky want to extend an angel investor tax to individuals for investment in high-tech startups currently available only to companies (HB 280). The tax credit is capped at $40 million. Missouri, on the other hand, does not have an angel investor tax credit, but lawmakers have introduced HB 191 to create such an incentive, which would cap total tax credits for angel or early stage investments at $6 million a year. The measure would limit businesses to $50,000 in tax credits and individuals to $250,000 per year. A similar measure was passed in the House last year but did not make it through the Senate, reports the Kansas City Business Journal.

With increased demand for access to capital from high-tech startups, Nebraska lawmakers have introduced two bills increasing the amount of funding available under the state's Angel Investment Tax Credit Act. LB 281 would increase the program's funding by $2 million a year, to $5 million while a competing measure, LB 475, provides a $1 million increase per year.

Earlier this year, New Jersey Gov. Chris Christie signed into law a $25 million angel investor tax credit program to encourage early investment in emerging businesses. The bill, S 581, provides tax credits for up to 10 percent of a qualified investment in businesses that conduct research, manufacturing or technology commercialization. Companies must have fewer than 225 employees.

R&D Tax Credits
Lawmakers in Texas introduced HB 800, a bill aimed at reestablishing an R&D tax credit repealed in 2006 to help promote the creation of high-skilled, high-wage jobs and to encourage innovation in existing industries such as manufacturing. A companion bill, SB 859, was introduced last month.

Governors in at least two states are backing increases in their state's R&D tax credit as a way to remain competitive. In New Hampshire, Gov. Maggie Hassan wants to double the R&D credit, from $1 million to $2 million and make it a permanent part of the state's tax code. The expansion of the R&D tax credit (SB 1) is a key component of the governor's Innovate NH jobs plan.

Maryland Gov. Martin O'Malley proposed a $2 million increase in the R&D tax credit as part of his FY14 budget proposal. Meanwhile, a bill introduced last month, HB 386/SB 203, expands the existing R&D tax credit even further by increasing to $18 million from $6 million the aggregate amount of credits that can be approved in each calendar year. The amount of basic credits that can be awarded annually would be increased from $3 million to $9 million. The bill also defines small businesses as entities making less than $5 million annually, thereby allowing more companies to qualify for the credit.

Tax Breaks for Startups
Insurance companies investing in Arizona startups would be eligible for new tax breaks under a bill recently approved by the House. HB 2464 establishes a premium tax credit of $50 million over three years for qualified investments funded by insurance companies and administered by the Arizona Commerce Authority. Funding would be used to help high-tech businesses relocate or expand.

In Maryland, Gov. O'Malley proposed boosting the state's biotechnology tax credits by $2 million ($10 million total) to encourage more seed and early stage investment in qualified businesses. The tax credit is refundable and aims to reduce investors' risk in providing capital to biotech firms.

A Washington House Committee gave its approval to a HB 1693, a bill granting $1 million in annual business tax deductions to startup ventures during their first three years of operations. The measure was included as part of Gov. Jay Inslee's economic policy blueprint and is tailored for high-tech and manufacturing industries.

Transparency Measures Gain Traction
Lawmakers from at least two states, Indiana and Maryland, have introduced legislation requiring greater transparency for publicly funded programs—specifically calling for more data on companies that receive tax credits and other state subsidies.

A measure that sets new transparency guidelines for the Indiana Economic Development Corporation (IEDC) passed with a near unanimous vote in the Senate last month. SB 162 would require IEDC to collect annual information regarding job creation and projected outcomes from businesses receiving economic development incentives.

A similar bill in Maryland (HB 1231) would require companies that receive at least $25,000 in state subsidies (tax credits, loans and grants) to file a specified disclosure report with the agency that provides the subsidy. Reporting measures include jobs created and compensation plans for top executives, among others. The state agencies then would compile the data to make available to the public in the form of a searchable database or spreadsheet.

Arizona, Indiana, Kentucky, Maryland, Missouri, Nebraska, New Hampshire, New Jersey, Texas, Washingtonr&d, tax credits, angel capital, capital