As the premier trade association for science and technology companies, the Arizona Technology Council today is urging state legislators to extend the Small Business Capital Investment Incentive, commonly referred to as the angel investor tax credit, for another 10 years.
“This program has more than paid back the state’s investment through tax credits by generating more revenue than credits approved,” said Steven G. Zylstra, the Council’s president and CEO. “This is a program that needs to be continued because it has helped Arizona’s economic success and helped Arizonans fulfill the American dream of being able to start and grow small businesses here and be able to provide for their families while supporting their communities.”
Over the last decade, Arizona has become a growing technology hub. One of the significant factors contributing to that achievement was creation of the angel investor tax credit. This program has helped to incentivize investment in early-stage companies and tech startups in Arizona. This program is set to expire on June 30, 2021, which could be devastating to the entire state. The combined economic impact of the program has been an estimated $900 million for Arizona’s economy in the past five years.
Lawmakers established the Small Business Capital Investment Incentive Program in 2005, authorizing the issuance of up to $20 million in tax credits to expand early-stage investments in small businesses in Arizona. The Arizona Commerce Authority became responsible for the management of the program. If a qualified business locates in rural Arizona or is a bioscience company, the investor may receive a maximum tax credit of 35% spread over three years. For other types of businesses, the maximum tax credit is 30% over three years. As a sign of the program’s effectiveness, the entire $20 million in authorized tax credits were allocated by July 2015. What followed was a significant drop in the number of investors and investments, which demonstrates the program does incentivize investments into Arizona’s small businesses. In 2017, the Legislature authorized $2.5 million in tax credits to be issued annually for this program.
The budget package, as introduced, includes the extension of this program. However, due to concerns of a small number of legislators, the program is being removed from the budget package. If not extended this legislative session, the program will sunset and no additional tax credits will be issued. Entrepreneurs and small businesses in Arizona would no longer have this tool in their toolbox to help attract investment. And because Arizona led the way with the creation of this program, and neighboring states have followed suit with their own versions, Arizona companies would be at a disadvantage and may be enticed to move out of state.
Companies such as WebPT, CampusLogic, Qwick, Regenisis Biomedical, Keap and many others, have become very successful members of the state’s technology community, and have cited the angel investment tax credit as one of the main reasons they were able to attract private funding. But the companies are not the only winners in this scenario; Arizona is, too. This program has been proven to work. An economic impact study done by noted economist Elliott Pollack illustrates the many benefits to Arizona for the $30 million of tax credits authorized, which include:
• More than $840 million in seed capital, venture capital and other financing have been raised by certified businesses from local and out-of-state investors, the IPO market and other sources.
• State and local tax revenues generated by these small businesses are estimated to be $25 million in just the past five years. The expected annual state and local revenue generated from 2020 will be $7.9 million a year from the $2.5 million of tax credits annually.
• In the past five years, tax revenues generated represent a 3-to-1 return on investment.
• In the past five years, the small businesses that have received investments as a direct result of this program have employed nearly 1,000 employees with an estimated payroll of $65 million. These are high-paying, high-quality jobs, and with each job creating a ripple effect of an additional 1.05 jobs created in Arizona.
The Legislature will get the opportunity to vote on the extension of this program outside of the budget before the session ends. The Arizona Technology Council, on behalf of its members, as well as entrepreneurs and small business owners of Arizona, urges legislators to recognize the economic engine this program has been proven to be and vote to support its extension for another 10 years.
Visit www.aztechcouncil.org/public-policy to learn more about the Council’s public policy activities.