Senate passes expanded angel investor incentive

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A proposed expansion of a program for small, innovative startup companies cleared the Senate after overcoming questions of whether it provided value to the Kansas economy.

The Kansas Senate, marked by a divided Republican caucus, voted 26-12 to reauthorize the angel investors program, which was started in 2004 and is set to end this year.

The program would be extended until 2026.

The Senate vote reflected a split in the GOP caucus with perhaps as many as 11 conservatives joining with Democrats and moderate Republicans to pass the bill.

The bill expands the program, which was the subject of a recent legislative audit that said it was difficult to gauge its success because benchmarks weren’t written into law.

Auditors found that businesses didn’t always produce as many jobs as companies that didn’t participate in the program.

Among other things, the bill makes these changes to the program:

  • Increases the tax credits received from an investment in a single business to $100,000 from $50,000.
  • Increases the total yearly tax credits received for an investor to $350,000 from $250,000.
  • Allow an investor to seek a tax credit up to 50% of their investment instead of requiring a tax credit equal to 50%.

The legislation also makes changes so that businesses will no longer be required to stay in Kansas for at least 10 years after receiving an investment.

The bill now requires a bioscience business to remain in the state for 10 years and a  nonbioscience business to stay in the state for five years.

The auditors recommended changing that requirement after it found three instances from 2012 to 2016 where a business left the state sooner than 10 years.

The bill also would ratchet up the allowable tax credits each year in $500,000 increments, growing from $6 million in 2022 to $8 million in 2026.

The legislation now goes to the House where a similar bill passed 103-12 last year but died when the session ended because of the pandemic.

Republican Sen. Mark Steffen of Hutchinson wanted to cap the incentives at $6 million a year and bar any carryover of those tax credits from one year to the next.

He wanted to sunset the program in three years. He was skeptical of the impact the program would have on the economy. His amendment was defeated 23-13.

“The reality is that the Commerce Department is not able to show us clear data that this program works,” Steffen said.

He was joined by Republican Sen. Molly Baumgardner, who pushed suporters of the bill to demonstrate the benefits of the program.

“Show me the beef,” Baumgardner said. “What corporation, what new business, what startup has come out of this program that has been successful?”

Republican Sen. Rob Olson, chairman of the Senate Commerce Committee, referred to a company called iVerify that sold for $100 million although he didn’t believe it was still in Kansas. He cited a couple other examples as well.

Baumgardner wasn’t impressed.

“We should be able to point to: These are the successes, this is what we’ve accomplished in this state with this program,” Baumgardner said.

“To have the only thing that we can raise up the flagpole is a company that got sold and is now out of state, how is that helping Kansans, how is that helping Kansas,” she said.

Olson reacted angrily.

“I’m tired of people attacking good policy. This is good policy that’s going to create jobs for Kansans,” Olson said as he gestured with his left hand.

“I think it’s time we come up here and work for Kansans. All we do is we fight right, we fight left. We don’t get anything done for Kansans.

“It seems like these guys are sitting here are dogging this credit that has worked and I don’t get it,” he said.

Baumgardner apologized for causing a storm for asking questions about the bill.

“I think it’s our duty to make sure we have transparency in all of the process.”

The legislative audit conducted several different analyses of the angel investor program over the last decade.

In some cases, auditors could not make any conclusions about the effectiveness of the program because there were no established benchmarks to gauge the program’s success.

For instance, the program cost the state about $20.2 million in tax credits in exchange for $51.5 million in investment from 2015 to 2018 for 78 startups companies.

But auditors said they couldn’t determine if the program was meeting its goals.

“The Legislature didn’t outline its expectations for the program beyond its general purpose,” the auditors wrote.

“The Legislature hasn’t modified the program’s purpose since creating it in 2004.”

Most of the investment made in the angel investor program from 2015-2018 came from Kansans who put $37.5 million into the program, with $21.2 million of that coming from Johnson, Sedgwick and Douglas counties.

The remaining $14 million invested from 2015 to 2018 came from investors in 30 states and territories outside Kansas, including $6.4 million from Missouri.

Lt. Gov. David Toland, who doubles as commerce secretary, said the audit showed the value of the program and called for its renewal.

“We believe that this audit clearly shows the value of the Angel Investor Tax Credit
Program to the state,” Toland said in a letter responding to the audit.

“The program is meant to assist innovative Kansas companies so they can compete with companies that have easier access to angel investors (or) early-stage capital,” he wrote.

“As one of the few programs in our state focused on innovative entrepreneurship, we must continue to support this crucial program,” he wrote.