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CPBJ Extra Blog

Second shot at angel investment tax credit bill

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Maybe the second time is the charm?

A Pennsylvania House bill that passed this week proposed a tax credit to angel investors who pump money into startup companies in the hope the company will prosper and the return on investment will multiply.

House Bill 36, introduced by state Rep. and House Majority Whip Stan Saylor, calls for a tax credit of 25 percent of the initial angel investment to go back to the investor, an effort to stimulate economic growth in startup businesses.

The bill also passed in the House in 2012 but died in the Senate.

Saylor could not be reached for comment this week.

In the bill, an angel investor is defined as someone whose net worth (combined with a spouse) exceeds $1 million, or whose individual income surpasses $200,000 for the last two years ($300,000 combined with a spouse).

The business being invested in would have to be headquartered in Pennsylvania, then stay in Pennsylvania for at least five years. It cannot have been in operation more than five consecutive years.

The bill is similar to ones that have been passed in more than a dozen other states.

There are two ways of looking at this, as the Senate will be sure to tell us.

First is the literal intent of the bill — to create jobs. We've heard hundreds of times in the past five years that banks just aren't lending the same kind of money they used to lend to companies, especially startup companies.

With the reduction of that funding source, startup companies have been forced to think outside the box, and one of the places it seems logical to turn is angel investors, very rich people with a ton of money that can help a company get off the ground.

Those investments aren't loans, though. They're investments on the future of the company. If an angel investor doles out $1 million and the company goes belly-up in a year, bye-bye $1 million.

These are the investors out for the big score, such as what Peter Thiel did with Facebook when he offered a $500,000 angel investment in 2004. He cashed out after the initial public offering in 2012 and sold for more than $1 billion. That's nearly a tidy 200,000 percent profit.

But banks aren't the only ones tightening their purse strings. Angel investors are careful as well, and offering the tax credit, where an investment of $100,000 essentially would cost the investor $75,000, is a way to make someone think twice about a high-risk, high-reward startup investment. And according to the Center for Venture Research at the University of New Hampshire, there were 268,160 angel investors in America in 2012 — down almost 16 percent from 2011. The ones who remained invested more money, according to the school, but startups had fewer options to turn to.

The other side of the argument is this is yet another tax break for the wealthy while the rest of us deal with rising property tax rates and inflation. It's not like we don't invest in business in our own ways, going to dinner at a local restaurant, buying from a local supplier, whatever. Where is our tax credit for that? That's somewhat of hyperbole, but only somewhat.

It's the type of vote an opponent in an upcoming election latches on to and says, "Sen. Soandso gave tax breaks to the rich while the middle class suffered." If something like House Bill 36 passes, campaign lines like that are sneaky, underhanded ... and also perfectly legal and true. They might as well add that he hates kids, old people and dogs, like David Simms from "Tin Cup."

If it goes down in the Senate again, maybe it will have a better chance of passing in a few years when the economic picture clears. But will potential jobs be needed as desperately then as they are now?

Welcome to the vicious political circle.

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