State Weighs Tax Credit For Investors

Connecticut lawmakers could vote as early as this week to create a 25 percent tax credit for wealthy individuals who act as so-called angel investors for startup companies, a move venture insiders say is key step in aiding new companies’ efforts to get off the ground.

Critics, however, counter the proposal cedes too much control over economic development efforts away from elected officials and places it in the hands of private individuals.

Under the proposal, the 25 percent tax credit for angel investors would be subject to a $125,000 cap. They could carry those credits over for five years, and even transfer them to another individual. The total credits in a year could not exceed $10 million, although most experts expect that angel investment tax credits — at least in the first few years — would not even approach that total.

The Department of Economic and Community Development would monitor who gets the credits and which companies get investment dollars.

Every state that borders Connecticut offers some sort of tax credit program to angel investors, said Liddy Karter, executive director of the East Hartford-based Angel Investment Forum.

In New York it’s 25 percent, in Rhode Island it’s 50 percent, and in Massachusetts it sits currently at 3 percent, although the Bay State is close to upping that number to 25 percent.

The Connecticut bill has the approval of all relevant legislative committees, although the current version contains a slightly lower tax credit. Initially, the bill called for a 30 percent credit.

It now awaits a vote by the Senate, which must vote on the proposal by May 7, the final day of the legislative session.

It is not the first time that high-tech advocates in the state have tried to get a bill through the General Assembly that could ease the difficulties startups encounter in attracting seed money and early stage investments.

No Shortage Of Investors

“There is a real need out there for investment and this bill helps meet that need,” said Jeff Vose, vice president and municipal services manager for the MetroHartford Alliance.

“Connecticut has one of the highest per capita income ratios in the country, and there are a lot of people with a lot of investable income,” Vose said.

Karter agrees that the bill would go a long way to help harness both the money and vast expertise of the state’s wealthy would-be investors — many of whom have come from the elite levels of the of the state’s most successful businesses.

In the last year alone, the Angel Investor Forum has grown from 25 investor-participants to more than 70. Karter hopes to hit 100 soon and said the pending legislation would make that easier.

“This is crucial for the success of angel investors in the state,” Karter said. “Thirty-seven other states offer some type of program.

“Many Connecticut angel investors want to invest in their own backyards. But if Rhode Island is offering a 50 percent credit and it’s an hour away, why invest in Connecticut companies?”

Bonnie Stewart, vice president of government affairs for the Connecticut Business and Industry Association, echoed those comments. “This has been going on all over the country. People have money they want to invest, but they will invest in companies outside of Connecticut if they don’t get these tax credits.”

Not everyone agrees that the proposed tax credit program is in the state’s interest.

Shelley Geballe, president of the Connecticut Voices for Children, a think tank for public policy and public investment in the state, said tax credit program would create a directionless vacuum in the state’s economic development plan.

‘Reduces Transparency’

“The broad concern is that an increasing amount of economic development resources are being deployed through tax credits, which unlike grants or loans, do not have the same level of state oversight of the funds and how they are used,” she said. “It reduces the transparency and accountability of those resources.”

Geballe also said her concern with the angel investment tax credit specifically is that unlike traditional tax credits — which are usually made available to all businesses or those in certain industries — angel investments are made by individuals with different criteria and goals.

So while the state may want to encourage investment in say, fuel cells, an angel investor might want something different.

By allowing investment in anything — and getting nothing in return for tax breaks — the state’s economic development plan is essentially directionless, and left in the hands of unelected individuals.

“The state should not let someone who is not elected set its economic development priorities,” she said.