Minnesota House Tax Committee Chair Ann Lenczewski
ST. PAUL, Minnesota– You think passing national health care reform is hard? Try getting Minnesota leaders to agree on basic economic development.
Just when proponents of the much-needed, but long elusive angel investment tax credit dared to hope, Rep. Ann Lenczewski is crashing the party. Or, depending on whom you ask, killing the state Democratic (DFL) party.
The powerful House Tax Committee chairwoman has unexpectedly proposed a bill of her own, something that has nothing to do with taxes. Instead of awarding tax credits to investors who fund early-stage, high tech start-ups, the bill provides grants directly to the companies.
At worst, the bill could ruin the best chances for an angel investment tax credit to pass in years. At best, the bill will confuse lawmakers who are only starting to pay attention to Minnesota’s distressing lack of venture capital.
I can’t say I’m surprised. Like I previously wrote, the fate of the tax credits comes down to two people: Gov. Tim Pawlenty, a half-hearted supporter of the bill, and Lenczewski, a vehement opponent of tax incentives.
First, let’s analyze the guts of Lenczewski’s bill. Under her plan, the state would provide $50 million in grants over three years ($11 million- 2011, $14 million-2012, $15 million-2013) to start-ups receiving at least $100,000 in seed money. Individual grants are capped at $600,000.
Far be it for me to argue against start-ups receiving free, nondilutive capital. But grants are no replacement for tax credits. By bypassing angels, Lenczewski ignores the heart of the venture capital model: When a start-up gets funded, it receives capital and expertise from its investors, usually smart, experienced industry vets who know to vet technologies, craft long-term strategies, evaluate talent and mentor entrepreneurs. Under this bill, the state would have to determine which high-tech companies deserve funding, something best left to private investors. We’re talking about stents and pharmaceuticals here, not dry cleaners and bakery shops.
Angels best work their magic when putting their own money at risk. And this bill does nothing to convince them to do so. Angels are a social, tight-knit group, so if one angel funds a start-up, he or she might convince their buddies and colleagues to pony up cash, said Joy Lindsay, president of StarTec Investments in Bloomington, an angel investment group. Lindsay also served a Pawlenty-appointed tax commission that recommended the use of angel tax credits.
Grants are also at the mercy of annual state budgets. Tax credits function as good, long-term incentive programs because they are harder to revoke. Suggesting we eliminate, say, the $8,000 tax credit for new home buyers will not win you a lot of friends on Main Street.
Now let’s get into the real reason behind Lenczewski’s bill: politics. I don’t doubt Lenczewski’s sincere belief that grants are superior to tax credits, which she calls giveaways to the rich, because they go directly to the company instead of investors pockets. But let’s face it: Her bill has no chance of succeeding. Zero. Nada. Zilch.
It’s hard to believe Pawlenty would support a bill authored by a liberal Democrat and staunch ideological opponent, especially when the governor and legislature are too busy fighting over budget control in the courts. By contrast, supporters of the angel investment tax credit bill have spent months working with Ward Einess, Pawlenty’s top tax advisor, to carefully craft a bill that wins support from both parties.
And then there’s money. Requesting $50 million from a state $5 billion in the red seems like a tall order, something Lenczewski seems to acknowledge. “If insufficient funding is available for the fiscal year, award of the grant is deferred until funding becomes available the following fiscal year or a subsequent fiscal year,” the bill states.
In other words, don’t hold your breath.
Lenczewski doesn’t say how to pay for the $50 million. And that may be the point. Tax credits originate from Lenczewski’s committee while grants are somebody’s else budget problem, said Rep. Tim Mahoney, chair of the House Committee on Biosciences and Workforce Development, and a strong supporter of the tax credits.
Sen. Kathy Saltzman, one of the chief architects of the tax credit bill, prefers a more positive spin. At least Lenczewski is finally offering a concrete proposal instead of simply opposing tax credits. A debate will finally draw out the tax committee chair and bring much needed attention to the issue, Saltzman said.
There’s a certain amount of truth to that. I’m guessing Lenczewski must believe tax credits might actually pass, either as a standalone bill or a broader jobs package, if she’s willing to devote some time and political capital to crafting an alternative. She even has called for a joint tax and biosciences committee hearing to discuss both bills, now scheduled for Feb. 9.
Fine. But let’s hope this latest bit of political theater is just a bump on the way to a signed bill that includes tax credits. The concept is not revolutionary folks; we’re not talking about banning nuclear weapons or taxing carbon emissions. Over 20 states offer angel credits, many with a great deal of success.
The situation is dire in Minnesota. On Monday, I traveled to Mayo Clinic and spoke to the head of the intellectual property office. He told me early stage capital is nowhere to be found. If a prestigious organization like Mayo can’t find investors for its inventions and technologies, do you think a single entrepreneur with a good idea will fare any better?
I leave you with this final thought. I said two people hold the key to the tax credit bill: Pawlenty and Lenczewski. I like to add one more name to the list: House Speaker Margaret Kelliher. Until now, Kelliher has largely avoided responsibility for this issue. Mahoney says she supports the tax credits but why all of those years of failure?
The House has always been the problem. The Senate, under majority leader Larry Pogemiller, is already a lock. As leader of the House Democrats, Kelliher ultimately will decide whether or not tax credits will make it to the final package.
Lenczewski, I assume, is subordinate to Kelliher. It’s time for the House Speaker to show who’s really the boss.
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[...] this article: Shocker! Angel investment tax credit drive in Minnesota hits snag … You can leave a response, or trackback from your own site. Printed from: [...]
Comment by Shocker! Angel investment tax credit drive in Minnesota hits snag … – ReLogical — January 14, 2010 @ 2:10 am
This article is “spot-on”! I attended the early stage venture conference in Wisconsin a couple months ago and the accolades around the tax credit program and it’s very positive impact on the economic development environment in the State. Investors love it, lawmakers love it, the UNiversity system loves it, and most importantly, the entrepreneurs and business owners love it. As a consulting firm working with early stage businesses, and as a former venture capital investor myself with Space Center Ventures, I can tell you that the idea of grants is just another way the government would control the business community. Also, $11M in grants doesn’t go very far in this state. Maybe the State should consider doing both! Provide $250,000 seed-stage grants to qualified new ventures, and also apply tax credits for those willing to risk more capital and offer their time and resource to help the business grow!
Comment by Jim O'Reilly — January 15, 2010 @ 3:27 pm
[...] of a much-needed, but long-elusive angel investment tax credit in Minnesota dared to hope, Rep. Ann Lenczewski crashed the party. The powerful House Tax Committee chairwoman has unexpectedly proposed a bill of her [...]
Comment by Diagnostic Hybrids could add depth, innovation to Quidel’s line of diagnostic tests — MedCity Weekend Rounds, Jan. 16, 2010 : MedCity News — January 16, 2010 @ 1:29 pm
To the MedCity News Editor:
As the author of H.F. 2580, the bill discussed extensively in Thomas Lee’s article, “Shocker! Angel investment tax credit drive in Minnesota hits a snag,†(MedCity News, published 1/13/2010) I would like to respond to a couple of the points he made and correct what I consider to be misleading and inaccurate information in the article. I wish Mr. Lee had contacted me to talk about this issue before publishing his article; I think it could have cleared up a number of misperceptions about my bill.
I introduced this bill because I believe that grants will work better than tax credits in attracting angel investments to Minnesota. I believe this for two reasons: First, if properly structured, they can avoid the adverse federal tax consequences that result from giving tax credits/reductions to high income taxpayers. This means that under a credit, an investor in the top federal tax bracket could lose $17,500 of a $50,000 investment to taxes. Under the grant, this adverse tax impact does not occur. Second, grants can be more effective in attracting out-of-state investors (who pay no Minnesota tax and thus are not interested in Minnesota tax reductions).
I would also like to correct some errors and clarify some mischaracterizations of the provisions and effects of my angel investment grant bill that Mr. Lee made in his article:
Error #1: Thomas Lee writes “Under this bill, the state would have to determine which high tech companies deserve funding, something best left to private investors. We’re talking about stents and pharmaceuticals here, not dry cleaners and bakery shops.â€
This is not true. In fact, my bill no more has the state picking which businesses gets grants than the tax credits bills do in picking who gets tax credits. The bill requires the commissioner of the Department of Employment and Economic Development (DEED) to award provisional certification to all qualified business ventures. If the business can succeed in getting angel investors to invest in its business, it gets a grant. The bill uses the same definitions of qualifying businesses and angel investors as the tax credit bills. If my bill has the state picking winners and losers, the tax credit bills do the same. To get a grant, the business only has to meet the qualifying criteria of the law and find independent angel investors to invest in their venture.
Error #2: Thomas Lee writes “Angels best work their magic when putting their own money at risk. And this bill does nothing to convince them to do so.â€
This is not true either: In my bill, the angel grants provide as direct an incentive to an angel investor as the tax credit and arguably more. As noted above, an angel investor can know that when she invests in a business with a provisional grant certification her investment will attract a 30% matching grant from the state. The angel’s investment will be matched and she will now own a more valuable company. (As Mr. Lee notes, this is a non-dilutive grant – the state gets no stock for its investment!) The business only gets a grant by attracting angel investment and angel investors can fund the business by putting up less of their own money, because the grant carries part of the weight. Money is money (whether it comes as a grant or a tax reduction) and will provide an inducement to angel investors when they understand the facts. And you can bet that the entrepreneurs who (by Mr. Lee’s account) are starved for capital will make the circumstances very clear to potential investors in pitching their companies.
Error #3: Thomas Lee writes: “Grants are also at the mercy of annual state budgets. Tax credits function as good, long term incentive programs because they are harder to revoke.â€
This is not true: Both the tax credit bills and grant bills have dollar limits and their credit authority expires or requires reenactment by a future legislature. For example, the version passed by the legislature (which I voted for) and vetoed by the Governor in 2009 had a $10 million annual limit and a $40 million total limit that would have expired after fiscal year 2013. The usual budget battle would have ensued to renew this tax credit; the same was true of the governor’s proposal. It is simply not accurate to think that the angel investment tax credits proposals are a permanent entitlement that must be affirmatively repealed in some way different than the grant appropriation in my bill.
Error #4: Thomas Lee: “Lenczewski doesn’t say how to pay for the $50 million.â€
This is also not true. My bill is revenue and budget neutral. It offsets the cost of the grant by slowing down the phase-in of single sales apportionment, a pending corporate tax reduction. By contrast, none of the tax credit bills makes it clear how they will cover the very real and significant budget cost of the proposals. They simply propose to cut taxes for angel investors to be made up somewhere else in the budget; in many cases, they push the cost to state budget and benefits to investors off to future budget periods. H.F. 2580 provides an immediate and tangible benefit (now, not three years from now) and identifies where the money will come from.
Error #5: Thomas Lee implies that only the grant bills limit funding, when in fact the credit bills limit funding as well: Lee writes: “And then there’s money. Requesting $50 million from a state $5 billion in the red seems like a tall order, something Lenczewski seems to acknowledge.â€
This statement implies the angel investment credit bill will not compete against other budget priorities like education and health care, while my grant bill will. This is false. Both credits and grants have to be paid for and they compete against other budget priorities in exactly the same way. Both angel investment grants and angel investment tax credits are new spending programs. Whichever new spending program is chosen by the Legislature – this new spending program must be paid for either by raising a tax on someone else in Minnesota or cutting a current program that some other group of Minnesotans receive. Honest debate with the facts will be required as legislators decide whether or not to create new spending programs in a time of deficit.
As always, I welcome and ecourage all inquiries, ideas and respectful discusssion.
Sincerely,
State Representative Ann Lenczewski
Chair, House Tax Committee
651-296-4218
Comment by Ann Lenczewski — January 19, 2010 @ 2:34 pm
[...] when two House committees convene a joint hearing on February 9 to discuss the legislation and an alternative grants bill. Share and [...]
Comment by Minnesota start-ups seeking venture capital suffer disastrous 2009 : MedCity News — January 23, 2010 @ 10:28 am
[...] Lenczewski did not immediately respond to a phone call and e-mail. But she did send yours truly a blistering reply to a column I recently wrote that slammed her grants proposal. [...]
Comment by Minnesota House Tax Chair and angel credit foe embraces….an angel credit. : MedCity News — February 5, 2010 @ 10:34 am
[...] if I’m not mistaken, Lenczewski’s grant proposal would certainly qualify as a new spending program- $40 million over four years to be [...]
Comment by Angel investment tax credit in Minnesota: The Burden of Proof : MedCity News — February 10, 2010 @ 6:56 pm
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