Can tax credits help small businesses grow?

Investment tax credits are gaining steam among Minnesota lawmakers, but entrepreneurs are less enthusiastic.

Issei Kato/Reuters/File
A money changer shows some one-hundred US dollar bills at an exchange booth in this November 2010 file photo. Cornwall argues that tax credits geared towards investing in small businesses do nothing to help create jobs or kicksttart the market.

Lee Schafer of the Minneapolis Star Tribune called me the other day to see if I had any information on the effectiveness of angel investment tax credits for a story he was writing.

I told him that all that the tax credit programs do is speed up or slow down investments (to take advantage of their timing).  There is no evidence that they increase angel investment whatsoever. They are not the job creator politicians claim when enacting these programs.  (See my arguments in my editorial at the WSJ).

In his investigation of the program in Minnesota he found strong support among politicians for the program, but very little support from entrepreneurs.

Plymouth-based start-up MetaModix Inc. raised about $1 million earlier in 2012, and its investors got about $254,000 in credits. Co-founder and CEO Kedar Belhe said “most of my investors did not look at it as a requirement, they looked at it as a bonus.” He said any real investor commits to a deal only after first carefully considering the odds of losing everything vs. winning big.

One stated that because the Minnesota program was about to run out, he would have to wait until additional credits were approved to fund raise, since angels will sit on their hands until credits become available.  They will invest, but will wait until they can qualify for another check from the government.

Angel investment tax credit are yet another misguided program that may be based on good intentions, but that has none of the desired impact on business formation or on job creation.  We just can’t afford ineffective programs like angel tax credits during a time when we don’t have the luxury to give away tax revenues.

Schafer puts it this way:

The Minnesota program is a straightforward, get-a-check-from-the-taxpayers subsidy for purely private business activity, so it’s remarkable that the allocation has lasted this deep into the year. It’s remarkable as well that angel credits have such broad bipartisan support when the economic case remains mostly unproven.

If we are going to use the tax code to help entrepreneurs, just cut taxes and let the market do what it does best.

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