Published: May 12, 2014 By

House of subsidies, part two

Note: This is the second of three stories outlining legislative attempts to spur economic growth by giving tax credits to businesses and industries. Today’s focus: HB14-1012, the Advanced Industry Investment Tax Credit. A fourth story covers federal crop insurance subsidies.

Colorado lawmakers have pushed hard during this year’s General Assembly session to extend and increase tax credits to industries and corporations in the hopes that such breaks would spur job growth and the overall economic performance in the state.

CU News Corps analyzed this year’s legislative session and the key corporate tax-credit incentive bills that lawmakers proposed and passed. News Corps found that many of the programs put in place don’t always work as well as lawmakers intend.

House Bill 14-1012, which proposed the advanced industry investment tax credit, aims to incentivize so-called angel investors, wealthy individuals looking to put their money into local startups, to help new businesses with early-stage capital.

An amended version of the bill passed the Senate on April 30, and the House confirmed the changes in a second vote two days later. The bill will become law once Gov. John Hickenlooper signs it within the next month.

State Rep. Max Tyler (D-Lakewood), one of the bill’s three House co-sponsors, said early-stage capital was one of the problems most startup businesses encountered.

“Maybe this bill can be the tipping point by providing an incentive to invest into those businesses,” Tyler said.

The advanced industry investment tax credit allows an investor to claim a reduction of their state income tax bill equal to 25 percent of their investment. If the startup operates in a rural or economically distressed area, investors can even claim a credit equaling 30 percent of their financial engagement, which has to be at least $10,000.

In Colorado, advanced industries include companies that specialize in aerospace, advanced manufacturing, bioscience, electronics, energy and natural resources, information technology and infrastructure engineering.

The Boulder Chamber of Commerce welcomed the efforts put forward by Tyler and the bill’s other sponsors, state Rep. Cheri Gerou (R-Evergreen) and state Sen. John Kefalas (D-Fort Collins).

“We need to support the advanced industry programs because that’s how we excel as a community,” said John Tayer, president and CEO of the Boulder Chamber. “The success and vitality of our economy are everyone’s business. We need to thoughtfully invest in key state industries, in particular those which provide [economic] growth.”

This year is not the first time state legislators tried to incentivize angel investors with tax credits. In 2010, lawmakers created a similar program. But those incentives never worked – because of the program’s small scale, as backers of this year’s new attempt argued.

The 2010 bill capped a 15-percent tax credit at $20,000, and only investments made in 2010 were eligible in the first place. The program’s overall size was limited to $750,000.

This year’s bill, which replaces the innovation investment tax credit, takes a large, multi-year approach. The maximum amount for a single tax credit is now $50,000. Investors can claim tax credits for multiple investments into different businesses, though.

The original bill’s language allowed for up to $2 million annually to be granted in advanced industry investment tax credits within the next four years. But the amended version cut that scope to $375,000 in 2014 and $750,000 for each of the years 2015, 2016 and 2017.

The national Angel Capital Association estimates that by now, half the states provide some form of comparable benefits. Still, the bill passed in Colorado this spring is highly experimental, as most angel investment tax credit programs nationwide have emerged within the last five years and have failed to produce reliable data so far.

According to Tyler, the program will be worth the risk.

“Colorado is now the No. 4 job creator in the country,” he said. “We would like to improve that so that at some point, maybe we will be No. 1.”

In 2017, the bill requires the Office of Economic Development to report to legislators on the advanced industry investment tax credits and their economic benefits.

According to Carol Hedges, the executive director of the Colorado Fiscal Institute, relieving individuals of their tax duties is the wrong approach. “The use of the tax code to pick out individual groups and treat them differently is at an apex this year,” Hedges said.

“If you give someone a tax credit to make them do something they normally wouldn’t do, you basically pay for that,” said Linda Gorman, a senior fellow at the Independence Institute, a free-market think tank in Denver. “If the government wants to achieve something, they should pay for it upfront so the taxpayers can see the costs.”

Despite the criticism, the advanced industry investment tax credit isn’t the only incentive for the high end of the corporate sphere. The new bill complements the advanced industries accelerator programs that were created in 2013.

In a press release, Gov John Hickenlooper said then, “We can boost Colorado’s advanced industries by increasing their access to capital. These types of bipartisan efforts will help Colorado continue to grow and sustain a long-term innovative ecosystem that creates highly skilled jobs and prepares Coloradans to fill them.”

Corporate subsidy criticism

The debate over whether the billions of dollars that companies nationwide claim in corporate subsidies each year is money well invested isn’t limited to Colorado. Read what some national figures have to say about sponsoring corporations to spur the U.S. economy.

“Large corporations get most of the subsidies because they are lobbying for policies that expand their existing subsidy benefits. The market is providing all the job-creation incentives large corporations need. Tax credits are just icing on the cake.”

Tyson Slocum
Director
Public Citizen Energy Program

 

“Policy privilege corrupts the free market by rewarding political connections over competitive excellence. It subverts the rule of law by codifying inequality.

It undermines social solidarity by pitting citizens against one another, twisting cooperative communities into rival special interests.”

Sen. Mike Lee (R-Utah) in National Review Online

 

“Subsidies can help institutions, but on net, corporate subsidies reduce job numbers. The government collects taxes from everyone but some. Those who get re-distributive subsidies might be able to hire, but others can’t keep up.

Companies could do without corporate subsidies, but some would do worse. That’s a perfectly fine thing. Most people fear changes in the economy. People fear creative destruction.”

Anthony Randazzo
Director of Economic Research
Reason 

 

“The sheer size of the corporate welfare system should spark outrage, whether we are conservatives, liberals or libertarians.”

David Brunori
Deputy Publisher, Tax Analysts
Forbes.com

 

“It’s very simple, really: Republicans have to be willing to cut weak claims, not weak claimants, as Regan budget director David Stockman used to say.”

Stephen Moore
Chief Economist
The Heritage Foundation

 

“Mitt Romney had it wrong. When it comes to the Fortune 100, it’s 99 percent, not 47 percent on some form of the government’s gravity train.”

Adam Andrzejewski
Founder
Open the Books

"Advanced Industry Advancement Tax Credit"

HB 14-1012 At a Glance

Sponsors

Rep. Max Tyler
(D-Lakewood)

Rep. Cheri Gerou
(R-Evergreen)

Rep. John Kefalas
(D-Fort Collins)

Votes

House

Yes: 41
No: 20
Other: 4

Senate

Yes: 21
No: 14
Other: 0

House (amended)

Yes: 38
No: 24
Other: 3

Signed into law: not yet

Summary: The bill repeals the Colorado Innovation Investment tax credit and replaces it with an advanced industry investment tax credit. So-called "angel investors," wealthy individuals who invest their money into Colorado start-up in the advanced industries prior to Jan. 1, 2018, can claim a tax credit equal to 25% of their investment. If the business is located in an economically distressed area, investors can claim a 30% tax credit. The maximum amount of a single tax credit is limited to $50,000, and the overall available tax credit funds are capped at $375,000 in 2014 and $750,000 annually in 2015, 2016 and 2017.