Providing tax relief to angel investors backing fledgling startups could help the commonwealth compete with other states in the race to become the next technology hub, according to supporters of a tax credit scheduled to be voted on by the state House later this month.
"This is a benefit for not just one region of the state, but for the state as a whole," said state Rep. Stan Saylor, R-York, primary sponsor of the proposed Angel Investment Tax Credit legislation. "I believe this could lead to Pennsylvania becoming one of the top states in the nation for technology and biotechnology innovation."
Mr. Saylor introduced the credit as part of the Republican jobs bill in May. It would provide a tax credit worth 25 percent of an investment made into a Pennsylvania company that has existed less than five years and has raised less than $5 million since its inception.
Qualified investors must have a total net worth or joint or group net worth of more than $1 million, plus net income of $200,000 or joint or group net income of $300,000 for the past two years.
Eligible businesses must keep more than half of their workforce in the state and have fewer than 100 employees when investments are made. They must maintain their headquarters in the state for five years after an investor applies for the credit.
Companies also must have formal business plans that outline their potential for increasing jobs and capital investment in the state, and must feature intellectual properties that are patented, copywritten or are pending for either process.
Credits will be distributed on a first-come, first-serve basis and will be covered through Keystone Innovation Zone tax credits that have been authorized but not issued by the state during the previous calendar year.
Mr. Saylor said the amount of money dedicated toward Keystone Innovation tax credits varies from year to year, but has run between $10 million and $15 million in recent years. Tax credits cannot be used to obtain cash refunds, but can be used to offset tax liabilities owed to the state by investors.
Those who do not have tax liabilities or investors from out of state would be able to sell the credits with permission from the Department of Revenue.
Mr. Saylor said the idea for the investor tax credit formed shortly after he took a trip to Pittsburgh with a bipartisan policy committee to explore the region's biotechnology sector. Among the most pressing concerns expressed by technology CEOs was a lack of capital funds and the fact that many other states provide incentives to investors.
After traveling to Hershey and Philadelphia and hearing similar complaints, he said he knew the state needed to take action. With the bill receiving strong support from Republicans and Democrats alike, Mr. Saylor said he expects it to easily pass through the House with 160 to 175 votes.
"Pennsylvania has got to be far more innovative in incentivizing jobs and being competitive in the world," he said.
Brian Kennedy, vice president of government relations for the Pittsburgh Technology Council, said the legislation could preserve jobs simply by keeping startups from following investment dollars to states such as Ohio that already provide incentives for angel investors.
New Jersey is currently considering a bill to provide up to $500,000 in credits for tech and biotech startups, and Maryland received more than 180 applications in the first three minutes that it allowed investors to apply for a portion of $8 million in biotech tax credits for the 2011-2012 fiscal year.
"More than 20 states have already passed some type of angel investment tax credit or incentive. Pennsylvania's coming late into the game," Mr. Kennedy said.
States that got in early are reaping the benefits, according to the Angel Capital Association, a national trade association for angel investors.
A recent report by the group notes that the Ohio Technology Investment Tax Credit has sparked $109.8 million in private investment to 422 of the state's companies since the program was implemented in 1996.
Wisconsin projected startups would see $30 million in investments in 2005 thanks to tax credits in that state. By 2010, the state's projections for startup funding surged to $180 million. Wisconsin legislators voted to raise the amount of money dedicated toward credits three times: The pot grew from $3 million to $5.5 million between 2005 and 2010, and then was raised to $18.25 million this year.
Mike Gildea, Pennsylvania Angel Network executive director, said there's no reason a tax credit wouldn't reap similar benefits in the commonwealth. The Pennsylvania Angel Network represents 15 angel investment groups and 450 individual angel investors.
Investor and company benefits aside, Mr. Saylor said the state would benefit from the part of the bill that requires businesses to present solid plans demonstrating how they will bring jobs and funding to the region, and that holds them accountable for results. For instance, if companies relocate their headquarters or fail to accomplish goals, investors may be required to repay credits.
"We have standards in here that in the past were not in bills," he said.
The bill should inspire investors who have tightened purse strings during the economic downturn to jump back into the fray, said Mr. Kennedy.
"[The bill] empowers the private sector to move money from the sidelines into the hands of entrepreneurs who are going to make jobs Pennsylvania desperately needs right now," he said.
The bill is set for final vote in the House when legislators return on Nov. 14. If passed, it then would go to the Senate.
Deborah M. Todd: email@example.com or 412-263-1652.