Session will feature competing ‘angel’ investor bills

Fueled in part by high-profile business defections from Minnesota to Wisconsin last year, a number of legislators are planning a renewed push on long-standing efforts to pass “angel” incentives for early-stage investors in new state businesses.

But the emergence of opposing bills at the state Capitol portends a significant debate in the 2010 legislative session about the appropriate policy for spurring investment in Minnesota start-ups.

And the most interesting tussles may be within the DFL.

In the House, Rep. Jim Davnie, DFL-Minneapolis, has introduced a bill that gives angel investors a 25 percent tax credit. In the Senate, Kathy Saltzman, DFL-Woodbury, is likewise pushing for angel credits.

However, House Taxes Chairwoman Ann Lenczewski, DFL-Bloomington, has introduced legislation that goes against the standard approach of creating credits in the tax code.

“I believe that grants will work better than tax credits in attracting angel investments to Minnesota,” Lenczewski told Capitol Report.

Meanwhile, Gov. Tim Pawlenty is getting ready to announce a new angel-investor proposal of his own.

The Senate last year passed an omnibus tax bill that included tax credits for angel investors. But the measure died due to Lenczewski’s vocal opposition during conference committee.

In July, the VitalMedix biotech firm announced its plan to move from Minneapolis to Wisconsin, which has an angel tax credit law. In September, the Draths Corp. closed its Plymouth-based office and moved to Michigan.

Since the 2009 session ended, Minnesota Revenue Commissioner Ward Einess has had several meetings with legislators and investors about angel-investment legislation.

“It’s prominently on the radar screen,” Einess said.

With a $1.2 billion deficit projected for 2010-2011 and an even larger shortfall anticipated for 2012-2013, proposals that require new spending will be difficult to pass. Einess said he hasn’t made a final decision about how to pay for the angel tax credit.

But, he added, “It will be fully funded in the governor’s proposal.”

“With respect to [Lenczewki's] particular proposal, it’s flawed,” Einess said.

Lenczewski, who has been House Taxes chairwoman since 2006, is a well-known opponent of “tax expenditures,” the formal name for what it costs the state to create special exceptions in the tax code.

In 2009, she introduced a bill to eliminate most of the business tax breaks on Minnesota’s books. In another proposal last year, she proposed to “sweep the barn” of tax benefits - such as the mortgage-interest deduction - that favor certain taxpayers.

House Biosciences and Work Force Development committee Chairman Tim Mahoney, DFL-St. Paul, said he respects Lenczewski for her stance as a “purist” on tax issues. But he said tax policy is an appropriate tool for economic development.

“We’ve always used the tax code as a way to build businesses. Taxes should improve business,” Mahoney said.

Mahoney is a co-author of Davnie’s bill, under which the state would chip in $6 million for the 25 percent tax credit.

Mahoney said the return on its investment would be greater with a tax credit:

“In a grant, you get a dollar to a dollar invested.”

Mahoney also said direct grants to early-stage ventures don’t encourage accountability as much as the alternative.

“As a legislator, I’m not going to call a CEO and say, ‘Are you in the Bahamas or are you in Roseau doing biofuels?’” Mahoney said.

Lenczewski, however, is plowing ahead with her argument that grants are preferable to tax credits as an incentive for angel investors. Ventures that receive at least $100,000 in private investment would be eligible for grants under the terms of her bill. She noted that there are also federal tax consequences for credits to angel investors in high-income tax brackets.

“A tax credit is much more expensive to the investor since they have to account for deducting their federal taxes. They lose about 35 percent of the tax credit value right off the top. In a grant, they would not,” Lenczewski said.

Mahoney and other legislators have met with Einess and are hopeful that there will be progress on finding a way to pay for the tax credit.

Lenczewski, meanwhile, said her bill provides a way to pay for the grants. She proposes s slowdown on the state’s ongoing effort to apportion corporate income taxes based solely on sales. The phase-in to so-called sales-only apportionment is a move away from the old policy of taxing the property and payroll portion of a company’s income.

“A grant is a spending program. …A tax credit is a spending program. They are both new spending programs. Whether you do them as grants or as tax credits, you have to find the money for it. My bill actually pays for it,” Lenczewski said.

Lobbyists and budget and tax analysts are poring over the details of Lenczewski’s bill, which was pre-filed Jan. 7. One lobbyist said businesses are wondering how much certainty the grant program would offer. The lobbyist said it’s not clear whether the grant would be a better bet for investors than an incentive in the state’s tax code.

A tax-policy analyst who asked not to be identified pointed out that the angel- investment issue is potentially more complicated than other tax expenditures. While direct appropriations generally offer more accountability than setting new tax law, there’s a potential multiplier effect that comes with the tax-credit approach, the analyst noted.

Lenczewski and Mahoney’s committees will meet at a joint hearing Feb. 9 at the State Office Building to discuss angel-investor and other venture-capital bills.