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.”

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.”

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.”

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.”

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.”

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