Credits for “Angel Investors” Could Be Expanded, but the Devil is in the Details

Thursday, March 8, 2012 at 7:55 PM by

Should the state give special tax breaks to investors who sink money into start-up businesses?  That’s a question the state Assembly is scheduled to take up next Tuesday, when it will consider a bill that would extend an income tax credit currently in place for “angel investors.”

Right now, angel investors get a state income tax credit of up 25 percent of the investments they make in new business ventures in Wisconsin, as long as the businesses meet certain requirements. Angel investors seek higher returns on their money than is available from traditional investments. These investors often bridge the gap between the self-funded stage of a business and the phase at which venture capitalists become involved.

Currently, the state has set aside $47.5 million in tax credits to be available to angel investors. At the current rate of use, that money will run out in 2013. The state Assembly is considering legislation (AB 601) which would increase the amount of credits available for investors. An amendment to the bill has been offered which would cap the amount of credits available at $100 million, up from the current level of $47.5 million.

The bill would cut taxes for these investors, thereby reducing the amount of revenue the state takes in and increasing the state’s deficit in future years. Extending the credit will cost the state $7.8 million in 2014 and $11.3 million in 2015, compared to current law. Our understanding is that the extension of the credits would increase the state’s structural deficit by about $18 million in the next biennium, because the cost of continuing this tax break hasn’t been accounted for in prior budget calculations.

Supporters of the legislation hope that the credit will make these investments more profitable, thereby encouraging additional investment in Wisconsin businesses. That goal and the continuation of the credits enjoy broad support in the Legislature. It is often the most popular measures that devilishly have the effect of increasing the state’s structural deficit.

Tamarine Cornelius and Jon Peacock

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