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.
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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.
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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.
