Angel tax credit: Investment vs jobs

Minnesota’s Angel Tax Credit — a tax break designed to spur small business investment — has been incredibly popular in the two years it’s been around.

State officials today announced that the $12 million they budgeted for the credit for all of 2012 is spoken for already.

Officials have applauded t the credits attracting $140 million in private investment for small and emerging companies since July 2010. But the credit was also passed on the belief that it would be a significant job creator. So far, that hasn’t been the case.

Here’s how the credit works: Qualified investors in the program can receive a 25 percent tax credit on investments of at least $10,000 in companies that are certified to get the credit. These are “emerging Minnesota companies that specialize in high technology or new proprietary technology.”

In its 2011 report to the Legislature, the Department of Employment and Economic Development reported that $15.8 million in credits had been allocated, generating $63.2 million in investment — but only a net 162 jobs, generating about $6.3 million in wages.

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That works out to $97,531 in tax breaks for every job created by the credit through 2011.

Looked at another way, the state paid out $2.49 in angel credits for every $1 in new gross wages the credits generated through 2011.

I understand tax credit supporters hate these kinds of cost comparisons. They argue they are misleading, that eventually these companies will produce jobs so it’s unfair to look at just a couple years of data.

I also admit a bias when it comes to the credit: I believe Minnesota’s already a better state for business than many realize and I’m skeptical of any efforts to use tax policy to keep or attract businesses.

So I’ll ask these questions: When it comes to jobs and the Angel Tax Credit, how should we define success compared to the cost? When should we expect to see the jobs created that justify the investment?

– Paul Tosto

  • Joe

    To my uneducated, mostly self taught brain it seems to me things of this nature really only amount to simply just a tax break for the companies it targets and hardly ever really creates the “jobs” that they are “thought” to be creating.

    The only thing that will REALLY add jobs is the market and it’s demand for whatever it is these businesses are creating.

  • JackU

    When it comes to jobs and the Angel Tax Credit, how should we define success compared to the cost?

    This becomes a bit complicated but for the purposes of this calculation let’s assume that every person hired into one of these jobs reduces unemployment expenditures for the state by one. First we would need to calculate that cost savings (money not paid by the state) from them not being in these programs. To that we add the income tax generated by the jobs created. If that total matches or exceeds the amount paid out in tax credits then the program is a success. Otherwise what has happened is that the state has invested in these companies in the amount of the excess tax credits. With the benefit of that investment (equity in the company) being passed to the investor who gets the tax credit.

  • Colin Lee

    I have a problem with your simplistic model. You’re measuring jobs created before some companies even receive their investments. Even when they finally collect an investment round, very few entrepreneurs are dumb enough to spend down their entire runway to profitability before they’ve proven market traction. Building a profitable company takes years. In your article, you haven’t even given a single business a two year ramp yet! This isn’t the dot-com 90s.

    Almost everyone recognizes that angel tax credits go to early stage companies which may not succeed for the same reasons why all early stage businesses struggle. The credits must also be competitive to prevent companies from leaving for other states with credits and investors with looser wallets. High technology businesses almost default to Silicon Valley because investment dollars are so tight here. With that said, the credits raised an incredible number of dollars, keeping local startups local.