Incentives for Innovation: Lawmakers weigh extending successful tax credit programs

by Don Rodriguez, Writer + Editor for the Arizona Technology Council

Keeping the lights on today and even tomorrow. For a small business, achieving such a simple goal signals to the owner that there is a chance of making it past the early stage in the life cycle.

But financial results of participants in Arizona’s Small Business Capital Investment Incentive Program offer the hope for small business owners to do more than just make it. Companies such as WebPT, CampusLogic and Keap (formerly known as Infusionsoft) have had the chance to become wildly successful members of the state’s technology community.

Even better, Arizonans beyond those working for the businesses certified to participate in the program can share the good news. In the past five years, the combined economic impact of the program has been an estimated $900 million for the state’s economy.

But there is the possibility that the clock is about to run out for entrepreneurs with great ideas to pursue but are lacking enough money to make payroll—and keep the lights on.

The program also known as the Angel Investment Tax Credit program is set to expire June 30, 2021. That’s why the Arizona House of Representatives is considering HB 2409 in the current legislative session. The measure to continue the tax credits is sponsored by Rep. Regina Cobb.

This isn’t the first time the Legislature has been asked to help keep the program alive. Lawmakers established the Small Business Capital Investment Incentive Program in 2005 and authorized the issuance of up to $20 million in tax credits with the objective of expanding early-stage investments in small businesses in Arizona.

The Arizona Commerce Authority was made responsible for overall management of the program, including qualifying small businesses wishing to participate. If a qualified business is located in rural Arizona or a bioscience company, the investor may receive a maximum tax credit of 35% spread over three years. For other types of businesses, the maximum tax credit is 30% over three years.

As a sign of the program’s effectiveness, the entire $20 million in authorized tax credits was allocated by July 2015, leaving no funds in the program. What followed was a significant drop in the number of investors and amount of investments.

In 2017, the Arizona Technology Council was able to help convince lawmakers to recapitalize the program. That move allowed the ACA to certify an additional $2.5 million worth of tax credits per year. If the cap was not met in a given year, the amount was allowed to carry over into the next year to be utilized.

But once the program sunsets, that’s it. No additional credits will be issued.

Such an event could spell the end for some types of support that can ensure tech companies have a chance to grow in Arizona. Not surprisingly, the program has been cited by participating small businesses as being one of the key reasons they have been able to secure private funding sources.

A report recently released by ACA offers financial details that indicate why the program has not been a drain on the taxpayer but, instead, has delivered a number of returns on the investment.

To start with, a total of 184 small businesses have received approximately $83 million in certified investments. This means those companies had a chance to grow and succeed in Arizona.

In the past five years, the certified businesses employed nearly 1,000 workers combined at the time of certification and had an estimated payroll of $65 million. These positions were considered quality jobs, with each job creating a ripple effect of 1.05 additional jobs in Arizona.

To date, $27 million in tax credits has been approved. In addition to the certified investments the small businesses have experienced, the benefits include:

• More than $840 million in seed capital, venture capital and other financing raised by the certified businesses since their founding from local and out-of-state investors, on the IPO market and from other sources;
• State and local tax revenues alone generated by these small businesses that is estimated to be $25 million in just the past five years, with the annual state and local revenue generated from 2019 going forward expected to be $7.9 million a year; and
• In the past five years, tax revenues generated representing a 3.1 to 1 return on investment.

This program has more than paid back the state in its investment through tax credits by generating more revenue than credits approved.

A separate measure also focuses on maintaining another set of tax credits beyond a 2021 sunset date, only this time with the purpose of encouraging companies to invest additional research and development funding in Arizona. HB 2771 sponsored by Rep. Ben Toma would keep the current levels of the Research & Development Tax Credit program in place through the end of 2028.

In 2008, the Legislature approved increasing the R&D tax credit value from 20% to 24% for the first $2.5 million in qualifying expenses and increasing the rate for qualifying expenses in excess of $2.5 million from 11% to 15%. In 2017, the enhancements were reauthorized through 2021. This all has helped Arizona become a leader in encouraging research and development.

In its 2020 Public Policy Guide, the Council recommended an analysis be conducted to determine ways that companies can utilize some of their unused R&D tax credits and that these levels should be extended permanently. To download a copy of the guide, go to https://www.aztechcouncil.org/public-policy/