Bills would restore tax credit for angel investors

Rep. Jeff Farrington, R-Utica

 

LANSING — Michigan’s venture capital industry says a proposal from a Macomb County lawmaker to restore a tax credit for angel investors is “a great first step” toward expanding funding for entrepreneurs in the state.

Yet the bills, introduced during the Legislature’s summer recess, could be tough to sell: A short-lived angel tax credit ended when Gov. Rick Snyder overhauled the state’s tax system during his first term, and the Republican governor isn’t keen on bringing it back.

Rep. Jeff Farrington, R-Utica, said the legislation has been on his to-do list since he was first elected to the House in 2010. His bills would allow investors who contribute at least $20,000 to an early-stage company through a recognized seed venture capital or angel investor group to claim a 20 percent income tax credit.

Early-stage companies are defined as those in business fewer than five years — less than 10 if spun off from a university — with fewer than 100 employees and valued at less than $10 million. They also have to be headquartered in Michigan, with most of their employees working here. Retail startups are excluded.

“There’s no doubt in my mind that we have an untapped market,” said Farrington, who is term-limited. “The money will follow the opportunities, but we have to plant the seeds.”

Venture capitalists point to the credit as a way to make Michigan competitive with other states for startup funding, which they say in turn sends the message that Michigan welcomes entrepreneurs — particularly in high-tech, high-risk fields such as information technology, healthcare and pharmaceuticals, alternative energy and advanced manufacturing.

A 25 percent income tax credit on an investment in early-stage companies was signed into law in December 2010, but it ended shortly afterward under Snyder’s tax reform. That initial credit “is really when we began to see the increase in angel activity,” said Maureen Miller Brosnan, executive director of the Michigan Venture Capital Association.

There is some evidence to suggest the forerunner to Farrington’s proposal helped as intended. The venture capital association’s data show 294 people invested in nine angel groups across the state in 2015, which is a 59 percent spike in five years. In all, 128 startups received funding from an angel group in Michigan, 42 percent more than five years ago.

The state’s nine angel groups — a 10th recently formed in the Upper Peninsula — invested more than $16 million in early-stage companies last year, Brosnan said, adding that the data is only a fraction of the total angel investment in Michigan and doesn’t account for individual contributions made by people not affiliated with angel groups.

“We have seen a growth trajectory here, but one that clearly won’t be sustained unless we continue to feed it,” she said. “This is a way for the state of Michigan to once again embrace entrepreneurism and make this a priority for the state at a relatively low cost.

“We really have all the right pieces in place. It is that funding component that is giving us the greatest pause.”

Others share that view. A recent report from Columbus, Ohio-based consultant TEConomy Partners LLC for the Michigan Economic Development Corp. said states that lead in the so-called innovation economy have a strong network of angel investors, themselves entrepreneurs who have accumulated wealth and can provide not only funding but mentorship and guidance. Offering a tax credit helps build that network, the firm said.

More than 20 states have some kind of tax credit program available to angel investors, according to estimates from the Overland Park, Kan.-based Angel Capital Association.

“There are ongoing efforts in Michigan to encourage angel investments,” the TEConomy authors wrote. “However, this activity could be spurred with financial incentives provided by the state. In discussions with some of the individual private equity investors in Michigan, many mentioned that it is difficult to organize angel investors and to catalyze investment in what are perceived to be riskier ventures due to the lack of a state angel investment tax credit.”

Support for tax credits in Michigan has waned under Snyder’s tenure. A tax credit offered to manufacturers under the now-defunct Michigan Economic Growth Authority program left the state liable for more than $9 billion in obligated credits. Lawmakers last year killed a film production tax incentive, arguing that it was a subsidy to the movie business. Snyder has said he doesn’t think state government should pick winners and losers through tax credits.

“Gov. Snyder appreciates the mentorship and generosity of angel investors who help startups get off the ground,” spokeswoman Anna Heaton said via email. “Legislative measures, such as the crowdfunding bills he signed in 2014, have helped to increase support for startups, and Michigan has really led the nation on that front. However, we eliminated this tax credit as part of a restructuring of taxes on employers when we also eliminated the Michigan Business Tax. So the governor is not inclined to support bringing it back.”

Farrington said he didn’t introduce the legislation earlier because the tax code had just changed. Since then, though, he said he sees a need for more economic diversity and ways to create more jobs.

He said he crafted his bills based on practices in other states, and capped the angel credit at $6 million to allow Michigan to get its feet wet.

Farrington said he is hopeful he can get Snyder’s administration on board, citing the governor’s background as a venture capitalist: “He knows that market better than probably anybody in the administration.”