‘Angel’ Incentives Halfway Through Legislature

July 8, 2011

Investigative Reports

Print Friendly, PDF & Email

The NerveEconomic development incentives – think Amazon.com in the Midlands – and transparency related to such tax breaks – or lack thereof – were major issues in this year’s legislative session.

But amid much attention on those matters, a pricey proposed subsidy for a high-risk, high-dollar type of speculative investing made it halfway through the General Assembly with little notice.

The form of bankrolling at hand is called “angel” investing, and a hefty portfolio of legislators want to use the state treasury to help underwrite this financial activity in an effort to spur more of it in South Carolina.

Enter House bill 3779.

Sponsored by Rep. Joan Brady, R-Richland, the legislation would allow an “angel” investor to claim a 35 percent state income tax credit of up to $100,000 per year against money they put into new businesses in certain industries. Those include manufacturing, software development and information technology services.

The total amount of subsidies would be capped at $5 million annually.

Hence, if enacted, the bill “is expected to reduce general fund individual income tax revenue by an estimated” $5 million per year, according to a fiscal impact analysis of the legislation. The state Board of Economic Advisors prepared the review.

And what of “angel” investors? Accredited by the Securities and Exchange Commission, they are wealthy financiers with a healthy tolerance for risk who focus on seemingly promising ventures that are too new to attract mainline sources of monetary backing.

From the revenue impact statement on the bill:

“Angel investors are different from venture capitalists. Angel investors generally invest their own money in business start-ups and very early stage companies, while venture capitalists mostly provide capital they have raised from others to later-stage businesses for growth.”

So-called angels often band together, and there are two such groups in South Carolina: the Upstate Carolina Angel Network and Charleston Angel Partners.

About half of the states, including North Carolina and Georgia, have angel investing tax credits on their books, according to the revenue impact assessment.

The House passed the angel incentive bill in mid-April and sent it to the Senate. The House’s crucial second-reading vote on the legislation was overwhelming: 78-18, according to the chamber’s Journal.

Just prior to that vote, Rep. Laurie Slade Funderburk, D-Kershaw, spoke against the bill and other proposed economic development incentives on the House floor.

“I mean it just felt like they were coming up every time you turned around,” Funderburk said in a phone interview Wednesday. She emphasized that she was not singling out the angel investing bill.

Funderburk noted that state revenues have withered because of the recession. She also pointed out that the Legislature created a special panel, the Taxation Realignment Commission, to study and recommend ways to overhaul the state tax code. “And yet we were just continuing to do more and more of these” carve-outs.

After the TRAC group issued a 240-page final report in December, the Legislature summarily ignored it.

“We say we want to study the tax code, and when somebody does, we don’t give it any thought,” Funderburk says, calling for the state to engage in “a broader conversation about the future of tax exemptions.”

When the angel bill got to the Senate, meanwhile, it was referred to that chamber’s Finance Committee. That’s as far as it got before last month, when lawmakers concluded all of their legislative business for the year except redistricting.

The bill, however, remains alive and well. When the Legislature is scheduled to reconvene in January, the Senate can take it up because each session runs for two years and 2012 will be the second half of the current session.

If history is any indication, the prospects of the bill in the Senate would seem to be promising.

Sen. Hugh Leatherman, R-Florence, serves as chairman of the Finance Committee.

In that position, Leatherman often champions economic development incentives. Refraining in tones at once soft yet gravelly, he touts the tax breaks as fuel to create jobs “for our people” in South Carolina.

It is a scene repeated over and over again on the Senate floor.

Indeed, Leatherman, in a manner of speaking, never met an economic development incentive he didn’t love.

Moreover, Sen. David Thomas, R-Greenville and a member of the Finance Committee, is sponsoring his own bill to give tax breaks to angel investors, S. 460, and it too is pending in the Finance Committee.

Similarly, Thomas also occupies a leadership position in the Senate – the chairmanship of the chamber’s Banking and Insurance Committee.

Efforts to reach Thomas on Thursday were unsuccessful. He did not respond to two phone messages for a previous story by The Nerve on the angel incentive legislation.

Julia Rubin, a Rutgers University professor who specializes in economic development finance, says she is quick to criticize programs that enable people to enrich themselves on the backs of taxpayers.

But Rubin says the House-passed bill does not strike her as out of line with what other states are doing when it comes to angel investing.

She contends that such incentives can be useful, particularly for a largely rural state like South Carolina where plenty of wealthy individuals live, but early-stage investment infrastructure for the most part does not exist.

“There are very few institutional investors who are doing that, especially in South Carolina,” Rubin says.

The incentives also can help retain growing companies that might otherwise move to another state that offers better opportunities for financial backing, Rubin says. “For example, North Carolina does not have a lot of trouble attracting venture capital.”

Perhaps, but on its home turf, the North Carolina Institute for Constitutional Law works against such tax favors in the Tar Heel State. The institute is a nonprofit, nonpartisan legal advocacy organization.

Jeanette Doran, senior staff attorney for the institute, argues that subsidies like the angel incentives bill amount to the government artificially influencing the free market. “And we really should let the market play out and control the investment decisions of the angel investors,” Doran says.

Observes Rubin, “But that doesn’t tend to get people re-elected.”

Reach Ward at (803) 254-4411 or eric@thenerve.org.