The restoration of an angel tax credit in Michigan looks doubtful before the present legislative term expires at the end of the year.
The bills sponsored by Republican Rep. Jeff Farrington of Utica cleared committee last month on narrow votes and continue to sit in the Republican-controlled state House. Leadership in the House has told Farrington “that given the limited time left in session this term, the bills are not a priority, especially with the less than overwhelming support they received coming out of committee,” he wrote in an email to MiBiz.
The legislation also faces opposition from Gov. Rick Snyder, further dimming their prospects for passage this year.
“The fact that the governor does not support the tax credit process at this stage is also a concern for moving the package forward,” Farrington said. “To say the least, we have an uphill battle before us, a battle that more likely will not be accomplished during this term.”
Lawmakers in Lansing five years ago eliminated a previous 25-percent angel investment tax credit, as well as many other incentives, when they rewrote the state’s business tax code.
Backers of Farrington’s legislation to restore the credit see it as a way to grow the number of angel investors in the state, improve access to capital for early-stage startups, drive job growth in Michigan and diversify the state’s economy. They note that Michigan is the only Great Lakes state without an angel investment tax credit.
“Michigan should offer every incentive for backing innovation and economic growth that starts and stays in the state,” said Stephen Rapundalo, CEO of MichBio, the statewide bioscience trade association. “This will ensure that all Michigan entrepreneurs with creative ideas and novel discoveries will have the best opportunities to access the capital necessary to begin building the next bigger thing. It will add an important tool for our state’s economic development efforts.”
Opponents view an angel investment tax credit as merely a benefit to the wealthy using state tax dollars. Gov. Snyder objects as well to using tax incentives, preferring a broad-based, low-rate tax code.
Restoring an angel tax credit “is not good tax policy,” Greg Gursky, deputy state treasurer for tax policy, told lawmakers during a recent House Tax Policy Committee hearing on the bills.
“The objective is to keep the base broad and keep pressure off of the rate having to potentially be raised if in fact there is a bunch of these different credit preferences that find their way back into these tax acts,” Gursky said. “There are ways the Legislature could support this kind of a program absent creating a credit in the tax code.”
Under Farrington’s legislation, angel investors could get a nonrefundable credit of up to $200,000 per qualified investment that they could carry forward over five years. The bills would cap the total amount of credits awarded to a maximum of $6 million, putting an automatic sunset on the program and giving legislators a built-in opportunity to review its effectiveness.
“This is meant to be a trial program,” Farrington said.
The $6 million cap also should alleviate worries about the credit creating a hole in the state budget, he said. Farrington called the amount a “decimal point in the budget.”
Under the bill, angel investors could receive a credit on their investments in a company that’s in the early stage of development and headquartered in Michigan. The company must have a pre-investment valuation of less than $10 million and employ fewer than 100 full-time equivalents. It would also need to have been in existence for less than five years. The legislation would exclude retail businesses from the program.
Michigan at the end of 2015 had 10 angel investing groups that invested $16 million into startup and early-stage companies over the year. Those groups had about 300 active angel investors, a 59-percent increase from five years earlier, according to an annual research report published by the Michigan Venture Capital Association.
The 128 startup angel investor-backed companies headquartered in Michigan as of last year represent a 42-percent increase over the number of firms from five years ago.
Farrington’s legislation “will capitalize on the momentum that is building and will increase the amount of angel capital needed to create thriving companies from start-ups, bring and keep high-paying jobs in Michigan and make sure there are good reasons for young professionals and great ideas to stay in Michigan,” said MVCA Executive Director Maureen Miller Brosnan.
“Access to capital and mentorship at the earliest stages of development is what allows a startup company and its founders to establish Michigan as its home base,” she said.