Center Maryland: The case for an angel investor tax credit

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Editor’s note: The following commentary appeared on CenterMaryland.org on March 6, 2015.

By Donald C. Fry

In the recently released report of the Maryland Economic Development and Business Climate Commission, the commission’s principal finding was that Maryland has not reached its potential in growing business and creating jobs.

Though the state boasts high rankings in terms of research and development and other metrics measuring Maryland’s capacity for innovation and entrepreneurship, significant challenges remain when it comes to job creation, technology transfer out of our state’s institutions of higher learning, and the overall business climate.

In today’s economy, a state’s ability to create jobs is often closely correlated to the strength of its startup community. A large body of research suggests that new and young businesses contribute disproportionately to job growth with some, such as the Pacific Research Institute, pegging the economic impact of these companies at almost $1.2 million more in state gross domestic product annually for each job created by a startup firm.

In order to grow and be successful, the number one thing startup companies need is capital. Traditionally the role of providing capital to startup firms was filled by venture capitalists. However, over the past few years angel investors have emerged as the most active early-stage investor group. The Kauffman Foundation estimates that angel investors provide up to 90 percent of early-stage equity that is not provided by friends or family and tend to invest in a wider range of innovation than traditional venture capitalists.

Though they have received more attention in recent years, angel investors have been around for at least a century. In the early 1900s, angel investors provided Henry Ford with the capital he needed to start a now very well-known automobile company.  Since then, they have had a hand in creating companies such as Facebook, Google, Starbucks, Amazon, and Apple.

Maryland has a few active angel investment groups – including the Baltimore Angels and the Dingman Center Angels – that are providing some much-needed capital for startups in the state. However, in order to incentivize a level of investing that would position Maryland to compete with startup hubs like Boston and California it is important that the state create an economic development tool that will effectively motivate existing angel investors to invest more and mobilize individuals who have the means but are not currently investing to get involved in the angel community.

Currently moving through the General Assembly in Annapolis is a bill that seeks to do just that. As proposed, SB 584/HB789 would provide a nonrefundable tax credit equal to 50 percent of an investment made by a qualified investor in a qualified innovation business. Unlike other tax credits in the state, the Angel Investor Tax Credit would not be specific to any one industry. This flexibility would make the Angel Investor Tax Credit an especially important tool for an evolving economy that is constantly presenting new opportunities. With the passage of this legislation, when the next “hot” industry evolves, Maryland would be well-positioned with an effective private-sector incentive to nurture that industry’s growth.

The idea of tax credits for angel investors is not unique. Other states across the country have implemented angel investor tax credit programs, many with great success. Studies have shows that 29 states implemented angel investment tax credit programs between 1997 and 2011 and have data gauging impact. Of those, 22 experienced an increase in entrepreneurial activity within the first two years of the program. Eight implemented their program during a slowdown in the national economy and still managed to demonstrate an increase in entrepreneurial activity.

The Angel Investor Tax Credit would provide not only an incentive for investors and startups, but also an important tool in the toolbox for our state’s economic development professionals who are constantly engaging existing businesses and potential startups at the local level. For our state’s institutions of higher learning, this program offers another way to incentivize technology transfer. The Journal of Multistate Taxation and Incentives called angel investment tax credits a “win-win-win proposition,” citing benefits for investors, new business ventures, and states.

In order to grow our economy, there must be incentives in place that are flexible enough to grow with the economy and work to overcome the imminent problems facing our state’s entrepreneurial community. Passing the Angel Investor Tax Credit would be a smart investment in our state’s economy, one that will effectively leverage private-sector investment capital and deliver dividends, in terms of economic growth and job creation, for years to come.

Donald C. Fry, president & CEO of the Greater Baltimore Committee, writes a weekly commentary for Center Maryland. His e-mail address is donaldf@gbc.org. 

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