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States of Innovation 2017: States look to tax incentives to spur startup investments, R&D, business growth

November 02, 2017
By: Robert Ksiazkiewicz

This week we continue our series on state legislation pertaining to the innovation economy that has been enacted this year around the country. This third installment of the States of Innovation 2017 series deals with innovation and entrepreneurship-focused tax credits.

Over the past year, state lawmakers in approximately have looked to grow innovation and entrepreneurship in their respective states by introducing and expanding tax credit efforts intended to increase the availability of startup capital, support R&D activities, facilitate business growth, and spur job creation. The two most common types of tax credits proposed to support innovation at the state level are angel tax credit programs and R&D tax credit programs. In addition to these two areas, states also proposed other tax credits intended to support job creation and business growth.

Angel tax credit programs

Angel tax credits are intended to create a more favorable environment for early stage investment by reducing the tax burden of individuals that make investment in qualified companies. States that passed legislation related to angel tax credits include:

  • Arizona’s angel tax credit program was revived after the state’s original program sunset in 2015.  The state will commit $10 million over next five years (with an annual cap of $2.5 million) to award tax credits of up to 30 percent on qualifying investments, or 35 percent for investments in rural or bioscience startups.
  • Connecticut lawmakers passed new legislation that expanded the state’s tax credit program to cover additional technology areas (including all emerging technology) to increase the availability of angel capital for more Connecticut–based startups. Previously, the state’s angel tax program was limited to a select number of key industries.
  • Illinois legislators made several changes to the state’s angel tax credit program including extending the program to 2021 and increasing the maximum aggregate amount to $20 million.
  • Louisiana extended the sunset on its angel tax credit program to 2021 with an annual cap of $3.6 million for those years.
  • In April, North Dakota passed legislation that would establish a new $10 million angel tax credit program. Individual investors would be eligible for a tax credit of up to $45,000 annually.

While several states passed changes or launched new angel tax credits, several other states could not rally enough support for their efforts:

  • In Arkansas, proposed  legislation died in House committee with the legislature’s adjournment;
  • A proposed angel tax credit program in Montana died in committee; and,
  • Oregon lawmakers allowed proposed legislation for an angel tax credit program  to die due to adjournment.

In Delaware, the state’s proposed Angel Tax Credit Program remains in limbo due to a recess after passing the House with support from the governor.

Other states that introduced legislation to establish an angel tax credit program include: Missouri, New York, and Oklahoma. These states, however, adjourned without voting on the respective bills.

R&D tax credit programs

While the angel tax credit programs saw mixed support from states, R&D tax credits received less support from states with only Louisiana passing legislation that extended their existing program from 2019 to 2021. The law also recapitalized the program and made changes regarding the transfer of tax credits.

In three states, lawmakers failed to pass new or extend existing R&D tax credits including:

  • Connecticut lawmakers tabled a bill due to the end of the session that would have established a tax credit for certain investments in bioscience and biotechnology businesses in the state that qualify for the "incremental" research and experimental expenditures tax credit;
  • New York lawmakers failed to pass a proposed biotechnology R&D tax credit;
  • Oregon allowed the state’s R&D tax credit to sunset as discussed in last week’s Digest; and,
  • In Washington, state lawmakers looked to reinstate the high-technology research and development tax credit. However, it remains pending in the state’s Senate Ways & Means Committee.

Other innovation-focused tax credit programs

Beyond angel and R&D tax credits, several states passed other tax credit programs intended to grow the innovation economy including:

  • Arkansas lawmakers passed a law that expanded the state’s income tax credit to allow for all types of experiential learning (e.g., apprenticeship or work-based learning programs) to be eligible for a $2,000 tax credit (or 10 percent of the wages earned) per individual over the age of sixteen – previously the tax credit was only available to individuals between 16 and 21.
  • In Florida, the state passed an internship tax credit program that provides companies with a tax credit of up to $2,000 for hiring a student after that student has completed a paid internship with the businesses..
  • Louisiana passed a new manufacturing tax credit pilot program that is intended to encourage private investment in and provide incentives for businesses manufacturing in the state. to further manufacture products and component parts of products into marketable products in Louisiana.

Proposed legislation in New Jersey would have established innovation zones around the state’s universities to stimulate university technology industry clusters as well as receive tax credits for technologies located in those zones. The bill, however, stalled in the Senate Budget and Appropriations Committee. 

angel, state budget