02 Jan Will there be more money for investment credits?
Madison, Wis. – The recommendations of a state technology organization to remove restrictions in Wisconsin Act 255, the tax-credit program designed to encourage more investment in technology-based companies, might go unheeded due to the state’s fiscal situation and philosophical disagreements about the act’s purpose, according to state officials.
In a recently published white paper, the Wisconsin Technology Council called for removing investment limits in the law, which was enacted in 2004.
Noting that both angels and venture investors like to follow initial investments with additional funding rounds as companies reach performance-based milestones, the council suggests removing a Department of Commerce rule that limits individual investors to $500,000 in credits on the first $2 million of investment, and up to $1 million on the first $4 million.
Venture investor John Neis, a senior partner in Venture Investors, said the council has issued a “fabulous set of recommendations” that should pay for themselves in the long run if the state is willing to make the investment.
But will it? Gov. Jim Doyle is scheduled to outline his proposals for the 2007-09 state budget in February, but Commerce Department officials have said any increase in Act 255 funding will be contingent on the state’s fiscal health. Under the program, state tax credits are provided to investors that commit financing to qualified businesses.
The state closed its 2005-06 fiscal year with a $2.15 billion general fund deficit, according to the Wisconsin Taxpayers Alliance, and a projection for the new budget is due early this year. “That’s overarching with anything, to pin down what that deficit is going to be,” said Josh Wescott, communications director for new Senate Majority Leader Judy Robson, D-Beloit.
As it stands, Act 255 calls for $30 million in angel credits and $35 million in venture fund credits over 10 years. Thus far, however, mostly angel investors have used tax credits to invest in early-stage companies, and the law is credited with doubling the number of angel networks in Wisconsin.
The tax credits are viewed as too small to provide an incentive for venture investors, who typically seek larger deals. Neis said some companies need tens of millions of dollars before they make their first dollar in revenue, so the incentive for companies that represent the largest opportunities is miniscule. “The dollar amounts are so small that its [Act 255’s] ability to have a meaningful impact is really limited,” he said.
Needs vs. wants
State Sen. Ted Kanavas, R-Brookfield, said he will propose an additional $25 million for Act 255 tax credits for the next biennium. He also said the law should be modified so that the credits are not subject to state tax, which has resulted in investors getting 93 percent of the intended benefits.
Kanavas, however, said he would withhold judgment on recommendations to remove limitations on investors. He said the law was created as a way to help fund start-up companies, and expanding its focus beyond start ups will require a policy debate.
“I think we’re going to have a real debate about what is necessary – not what is desired, but what is necessary,” he said.
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