Tax credits for angel investors helped Bandals International land about $100,000 in 2011. Michigan offered a credit of up to 25 percent for anyone investing in certain startup companies. The special incentives to lure venture capital into Michigan expired in many states at the end of that year, leaving many firms looking to attract investors with other methods.
States like Michigan have felt the pressure of mounting public obligations, so they have sought ways to close loopholes, reduce expenses and cancel lucrative incentives that had helped thousands of companies like Bandals every year. The CEO of Bandals, Tom Sesti, said that the ability for investors to get some of their money back was an important part of their ability to secure capital. Now, companies like Bandals will have a difficult time attracting investment capital.
Michigan is not the only state to clamp down on this practice. Colorado had offered a 15% tax break, and Hawaii offered a 100% tax break for angel investors. The National Governor’s Association has long questioned whether tax breaks for this type of investment produce any economic benefits. The association has claimed since 2008 that angel investors also question these credits.
An angel investor from North Carolina, Scott Shane, says that most angels will not make an investment based solely on a tax credit. After all, investors will still lose their money if their beneficiary fails. According to Shane, the credit does very little to boost the prospects of investors, and it does almost nothing to help create job growth. An angel-investor credit program in Minnesota pulled $28 million into the state for 67 businesses during 2010. That program offered a 25-percent tax break. According to records published by Minnesota, that $28 million resulted in the creation of 47 jobs.
Jeffrey Nelson, coordinator for the Minnesota angel-investor program, suggests that sluggish job creation results from the nature of start-up companies. These companies often delay hiring new employees until their business grows roots. However, Nelson says that contractors and similar non-W-2 workers gain a lot of work from start-up companies, so the added investment in the state produces tangible economic results. During 2011, Minnesota capped its program at $16 million. All available credits were taken.
Michigan officials say the angel-investment credit will not return anytime soon, but the state has a desire to develop new incentive programs.
Read more at The Wall Street Journal.