By Steve Zylstra – Guest blogger
Dec 8, 2019
How do you measure success?
For some small businesses, it’s simply being able to keep the lights on. But for others, it’s making it past the startup stage with access to enough capital to thrive.
The latter scenario is at the heart of Arizona’s Angel Investment Tax Credit program. Briefly, the program incentivizes investment for startups by giving investors a 30% state credit on qualifying investments or a 35% state credit for investments in startups in the rural or bioscience arenas.
A 2016 economic impact study commissioned by the Arizona Commerce Authority credited the program with an economic output of $1.3 billion and a tax revenue of $44 million—both of which continued to increase with job growth—since its launch a decade earlier.
Let me put names to the numbers. One of the first companies certified to participate in the program was Chandler-based Infusionsoft, which is now known as Keap. Keep in mind Arizona in 2006 wasn’t exactly the darling of tech investors, who instead were flocking to Silicon Valley and other places. Keap CEO Clate Mask tells the story that being certified for $150,000 in tax credits captured the attention of a handful of investors, which led to funding from venture capitalists. Fast forward 10 years and combining employee payroll taxes, state unemployment tax and investors’ state taxes on the sale of their Infusionsoft stock, the state received more than $22 million in tax revenue during the decade.
But with success came a dark cloud. The amount of angel investing in the state decreased significantly after the initial $20 million in authorized funds was depleted in summer 2015. Mask’s experience and that of other companies is why the recapitalization of this program was so critical to the Arizona Technology Council and why its members lobbied so hard before the Legislature. Lawmakers saw our side of things, and in the 2017 session authorized the ACA to certify an additional $2.5 million in tax credits each fiscal year for investments made in qualified small businesses.
More good news, right? Since the first certification on July 1, 2006, through Sept. 23, 2019, the ACA reports there have been 575 small businesses that met the eligibility requirements to be certified for tax credits. That translates into higher economic output and tax revenue for Arizona.
Now, the bad news. Of the $2.5 million of maximum tax credits available for fiscal 2020, nearly $1.6 million worth of tax credits was authorized as of Oct. 8, according to the ACA. If you add that to the pending requests for $25,240 in credits, the remaining allocation totals a little more than $877,200. That means with nearly three quarters remaining in the fiscal year, nearly two-thirds of the allocation already is spoken for.
Despite this program, some companies needing capital to enter the critical early stage of business development still choose to leave Arizona because crucial funding remains scarce. While we are now seeing venture capitalists come into the market, they wouldn’t have anything in which to invest without the activity of the angels who precede them. That ultimately translates into our losing some of the most desirable types of jobs in the nation along with its growing status as a tech hub.
This is why among the Council’s legislative priorities for the 2020 session is extending the Angel Investment Tax Credit for an additional 10 years instead of allowing it to sunset. Extension of the angel program by the Legislature will underscore Gov. Doug Ducey’s mantra that our state is open for business. If we let this opportunity slip, other states could have a different measurement of success: an influx jobs that were born in Arizona.
Add to that, the program is scheduled to sunset on June 30, 2021. That simply can’t happen. Re-authorization of the program beyond 2021 is necessary to continue the infusion of investment in the startup community and is necessary to continue the tech success Arizona has experienced since the inception of the program.
Steve Zylstra is president and CEO of the Arizona Technology Council.