There’s no disputing it: Arizona is on a trajectory to be a—if not the—prime technology hub of the nation.
Helping the state reach this achievement have been investors showing they believe in what startups and others in Arizona have created to improve our lives. Encouraging many of these financial backers to get involved has been a program credited with generating more than $840 million in seed capital, venture capital and other financing.
But now we’re close to having the good news come to a grinding halt. That is unless the Arizona Legislature acts quickly to extend the highly successful Small Business Capital Investment Incentive program for another 10 years.
More commonly referred to as the angel investor tax credit program, it has helped to incentivize investment in early-stage companies and tech startups in Arizona. The program is set to expire this year on the last day of June, which means there’s not much time to prevent what could be devastating to the entire state because of the state and local tax revenues generated by the small businesses participating in the program.
Legislators established the program in 2005, authorizing the Arizona Commerce Authority to issue up to $20 million in tax credits to expand early-stage investments in small businesses in Arizona. If a qualified business locates in rural Arizona or is 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, all authorized tax credits were allocated by July 2015. A significant drop in the number of investors and investments followed, which demonstrates the program truly incentivized the investment it was intended to. In 2017, the Legislature authorized $2.5 million in tax credits to be issued annually so the program could continue contributing to Arizona’s economic success.
The fiscal 2022 budget package as introduced had included an extension of the program. Unfortunately, a few legislators have asked for its removal from the budget to garner their support of the overall budget package. Although disappointing, we are encouraged that the Legislature will still vote on the proposal as a standalone bill. If not extended this legislative session, entrepreneurs and small businesses in Arizona will no longer have this tool in their toolbox to help attract investment. Adding to that, neighboring states with their own versions of angel investor tax credits may use them to entice companies to relocate their way.
This program has more than paid back the state’s investment by generating more revenue than tax credits approved. It needs to be continued not just because it has helped Arizona’s economic success, but it also has allowed Arizonans to fulfill the American dream of being able to start and grow small businesses while providing for their families and supporting their communities.
Companies such as WebPT, CampusLogic, Qwick, Regenisis Biomedical and many others have become very successful members of the state’s technology community. They have cited the angel investment tax credit as one of the main reasons they could attract private funding.
An example is Chandler-based Keap. CEO and Co-founder Clate Mask explained in a letter to Gov. Doug Ducey last year how the program helped attract about $500,000 in angel investment as a bridge until it secured venture capital. This amount translated into the angel investors being able to use up to $150,000 in credits.
Ultimately, the company raised over $125 million out of state, which was not eligible for the angel investor tax credit but did bring money into Arizona that would not have otherwise been invested here. Combining the Keap employee payroll taxes, Keap’s unemployment taxes, and investors’ state taxes on the sale of their stock, the state received over $22 million in tax revenue from this one company alone.
Keep in mind there are other winners in this scenario. An economic impact study done by noted economist Elliott Pollack illustrates the many benefits to Arizona for the $30 million of tax credits authorized, which include:
- Since the program’s inception, 202 small businesses have received $92.8 million in certified investments due to the tax credits.
- Certified businesses have raised more than $840 million in seed capital, venture capital, and other financing from local and out-of-state investors, the IPO market, and other sources.
- State and local tax revenues generated by these small businesses are estimated to be $35.7 million in just the past six years. The expected annual state and local revenue generated from 2020 going forward is $10.5 million a year from the $2.5 million of tax credits annually.
- In 2020, the economic impact of the program was $402.7 million.
- The total economic output attributed to the program in just the past six years is estimated to be $1.38 billion for Arizona.
- In the past six years, tax revenues generated represent more than a 3.6-to-1 return on investment.
- In the past six years, the small businesses that have received investments as a direct result of this program have employed nearly 1,200 employees with an estimated payroll of $84 million. These are high-paying, high-quality jobs, with each job creating a ripple effect of one additional job created in Arizona.
The Legislature has the opportunity to do the right thing by recognizing the economic engine this program has been proven to be and voting to extend the angel investor tax credits for another 10 years. This is an investment in Arizona’s future, not only for the state’s startup community but also for taxpayers here and future generations of entrepreneurs.
Steven G. Zylstra is president and CEO of Arizona Technology Council