Individuals investing in Michigan-based businesses could seek a credit on the state’s income tax under legislation proposed in Lansing.
House Bill 4116, sponsored by state Rep. Bronna Kahle, R-Adrian, would allow taxpayers to claim up to a 50-percent tax credit on investments in privately owned businesses based in Michigan that generate at least 80 percent of their gross revenues and hold 80 percent or more of the assets in the state. The legislation would require the Michigan Strategic Fund to certify within 60 days of an investment that a business meets the requirements so investors can seek the tax credit.
A tax credit could not exceed an individual’s annual income tax liability, although they could carry forward the excess to future tax years for up to a decade.
The bill would prohibit tax credits for investments in which an investor or their family “is an employee or owner or with which the investor or any member of the investor’s family has a preexisting fiduciary relationship,” according to a House Fiscal Agency analysis.
The bill offers a “plan that is designed to encourage Michigan residents to make direct financial investments in new or existing Michigan businesses,” Kahle said during a recent House Tax Policy Committee hearing.
Kahle argues that restoring an investment income tax credit in Michigan is “more timely than ever because this is local, community-focused above all” in light of the COVID-19 pandemic. If enacted and signed into law, the legislation could accelerate the local investing movement by encouraging residents to invest in Michigan businesses, she said.
“An income tax credit for investments made in Michigan businesses could help Michigan businesses become established and allow existing businesses to continue operating or to expand their operation,” Kahle said. “Think about COVID, think about the impact to the mom and pops, the small restaurants, the local businesses in your downtown. This kind of investing is uniquely and powerfully beneficial to local communities.”
Incentivizing local investors
Michigan had a similar investment tax credit that was eliminated nearly a decade ago when lawmakers early in then-Gov. Rick Snyder’s first term scrapped many state tax credits and incentives. The former venture capital investment credit that existed from 2010 to 2012 allowed taxpayers to claim up to a 25-percent tax credit for investments in qualified businesses.
Kahle sees an opportunity now to encourage residents to invest in local businesses through crowdfunding campaigns conducted under the Michigan Invests Locally Exemption (MILE) Act. Enacted in 2013, the MILE Act allows residents who do not meet the federal definition for accredited investors to invest up to $10,000 in a Michigan-based business through an online platform.
Chris Miller, the former economic development leader for the city of Adrian who worked to secure passage of the MILE Act, said 36 states have similar laws providing some form of an angel or early-stage investment tax credit. In the Midwest, those states include Ohio, Illinois, Wisconsin and Iowa, according to Kahle.
A federal law enacted in 2014 also allows investments across state lines by non-accredited investors, Miller said.
Investment crowdfunding in 2021 surpassed $1 billion since those laws took effect, said Miller, who also works with the National Coalition for Community Capital, which promotes local capital investing.
“But we recognize that we still need to find ways to incentivize people to invest in their communities,” he said.
Miller told lawmakers that an investment tax credit could help retain capital in Michigan that may otherwise flow elsewhere.
“This is not a perfect solution. It’s a way to incentivize a good solution and an effective use of government incentives,” Miller said.
State revenue concerns
The House Tax Policy Committee has not yet voted on the bill, which has the support of the Michigan Chamber of Commerce and the Michigan Municipal League.
However, the Whitmer administration has raised concerns with the legislation.
The 50-percent income tax credit proposed is higher than what most states with a similar program offer, and Kahle’s bill lacks a cap on the amount of annual tax credits awarded, said Aaron Keel, director of legislative affairs with the Michigan Department of Treasury.
In the previous venture capital investment credit, the Michigan Strategic Fund was limited to certifying $9 million in credits and $250,000 per individual in a calendar year. The previous law also included lifetime tax credit limits of $250,000 per taxpayer and $1 million in total investments in a business.
Lacking a similar cap, tax credits could vary from year to year, Keel said.
“Couple this with being able to carry the credit forward for up to 10 years, and this legislation has the potential to blow a hole in future state budgets,” Keel told members of the House Tax Policy Committee.
Based on the level of 2020 angel investing in Michigan, Keel’s “best estimate” is that the proposed tax credit could cost the state up to $25 million annually in revenue, although the exact yearly cost right now is unknown.
State Rep. Andrew Beeler, R-Port Huron, countered that encouraging business formation and growth with an investment tax credit “could grow the size of the pie,” resulting in an expanded tax base statewide to offset the cost.
“We ought to consider the benefits of allowing folks to invest more freely in small businesses to the maximum extent possible,” Beeler said.
The Treasury Department also notes that the bill lacks limits on the types of businesses where an investment would qualify for a tax credit: “So, we’re not incentivizing anything in particular here,” Keel said.
“In fact, it is difficult to predict whether the income tax credit will have the intended effect of increasing any angel investment in Michigan businesses,” he said. “Recent studies confirm that while it may increase angel investing, that investment has no significant impact on entrepreneurial activity, more generally.
“If the state is going to fund angel investors and venture capital, we believe it should be more targeted.”
As well, the Treasury Department prefers that state support for investments in businesses go through a fund, not as a tax credit. “And a fund that we could get equity from,” Keel said.