A state income tax credit on angel investments is in danger of collapsing under the weight of its own popularity — and because the money the state has allotted to the program may run out as early as this year.
The credit, now in its fourth year, is so popular that applications for 2018 exceeded the annual $3 million cap in one day.
A local investor told Insider that if the state legislature fails to act soon, the collapse of the program would undermine Kentucky’s economic growth.
The Kentucky Angel Investment Act Program allows investors to offset their state income tax bill with at least 40 percent of their investment into startups in certain sectors, including bioscience, energy technology and health.
For example, if a Louisville-based venture capitalist owes state income taxes of $100,000, he can nullify that bill by investing $250,000 into a startup.
Venture capitalists have told Insider that the credit, versions of which also are offered by other states, is critical to attracting investments in startups, and a state officials has said the credit has pumped millions of out-of-state dollars into fledgling Kentucky businesses.
The credit is in danger of collapsing in part because of its popularity: In its first year, the credit was relatively unknown, but by its second, the request for credits exceeded $3 million by the third quarter. Last year, essentially no credits remained after January. For 2018, the state began accepting applications for credits on Dec. 11. Requests exceeded $3 million within 24 hours.
Jack Mazurak, communications director for the Kentucky Cabinet for Economic Development, said the state received online applications as early as 12:01 a.m. on Dec. 11.
The demand reflects the program’s popularity — but it’s also a problem because a credit that used to be an incentive to investors has turned into a disincentive, said Marty McClelland, a Louisville venture capitalist and president of Regent Investment Management.
Investors who would like to invest in a Kentucky startup are unlikely to do so now, because they will want to wait until they can apply for the tax credit — roughly 11 months from now.
And even that may not work because of the $40 million the state legislature allotted to the angel tax credit and the Kentucky Investment Fund Act credit likely will be depleted this year.
McClelland said that without action at the state level, the credit will disappear.
“If they don’t authorize more money, investments in startups will go down,” he said. “There’s no question about that.
“It will be bad for entrepreneurs, which will be bad for job creation, which will be bad for the economy. Bad all around,” he said.
Mazurak said he has heard chatter that indicates the state will address the tax credit as part of a tax overhaul the legislature will tackle after trying to solve the state’s pension crisis.
McClelland suggested that legislators raise the annual cap to assure that the credit is available for longer than one day. To lower the program’s cost to the state, legislators could lower the tax credit to 30 percent, he said. That would mean a venture capitalist who owes state income taxes of $100,000, could nullify the bill by investing $333,333 into a startup.
Mazurak said that it’s clear that the legislature is coming to a decision point where it has to evaluate whether the program is producing the desired results.
Despite the flood of applications the state already has received, Mazurak encouraged investors and businesses to still apply for the credit for 2018 to get their projects in a queue. The Kentucky Economic Development Finance Authority won’t make a decision on the applications until its next meeting, and investors have 60 days from the day of approval to make their investment. If they don’t, they lose their credit, which means it will be given to the next eligible applicant in the queue.