$7 Million in Minnesota’s Angel Tax Credits Begets 47 Jobs

Print Share on LinkedIn More

March 16, 2011; Source: Star-Tribune | As we’ve written before in these pages, a tax credit – a dollar for dollar deduction from taxes owed – is a lot more attractive to donors than a charitable tax deduction that simply reduces one's taxable income. (See our newswire on Arizona's tax credit program for schools.)

Minnesota has a tax credit program that gives angel investors a 25 percent tax credit for investments of at least $10,000 to a registered Minnesota start-up company. Based on that 25 percent, investors got $7 million in tax credits for $28 million invested in 67 Minnesota start-up companies (only 6 in "outstate" Minnesota, the rest in the St. Paul/Minneapolis area). The tax incentive ostensibly spurred investors to make the investments, but obviously these angels could get returns on their investments, both the tax credit and non-tax credit parts, if the businesses succeed.

What did the $7 million in foregone tax revenues achieve? Forty-seven jobs. That's $148,936 in foregone tax revenues per job. Minnesota officials said that the value of the tax credits needed to be measured over the long term, not just on the 47 jobs created immediately. Over the long run, more jobs might be created in these 67 start-ups, but also some of the 47 jobs might disappear as the fortunes of the companies wax and wane.

The use of tax credits to induce capital flows into particular social or economic issues is proliferating at the federal and state levels. The attraction of tax credits makes them sort of like supercharged charitable donations. Do tax credits compete with and draw from what donors might give as charitable contributions to 501(c)(3)s (expecting tax deductions rather than tax credits)? Is the impact of state tax credits different than the impact of federal tax credits? If the Minnesota program ends up with job creation at $150,000 per job, is that a success, a failure, or not the right indicator at all?—Rick Cohen

  • David Cearley

    Rick, $28 million in investment may have resulted I’n only 47direct jobs, but how many indirect jobs were created from investment $$ spent?
    $149k in foregone tax revenues per somewhat permanent jobs. If the companies stay in business and the jobs last five years at an average of $50k per job, that’s $11,750,000 in new payroll, not counting all the taxes and fees the business will incur. If the 7 million were paid out in direct government employment, say for a teacher, at the current cost of $102,000 for payroll plus 97% more in benefits (WSJ), it would fund only 14 jobs for the same period. You could argue that the credit is too high, but it is a much better long term investment than government spending.

  • Charlie Quimby

    Of various tax credit programs

  • rick cohen

    David, nice to hear from you. I don’t think you score analytical points by criticizing investments in teachers, who have direct and indirect social and economic multipliers that far exceed what you, I, or the 47 jobs here might generate. But taking your analysis straight up, you have a number of assumptions built in to your argument, one of which truly surprises me. The conservative argument against the job counts in many programs, from the old Urban Development Action Grants of my day to today’s stimulus, is that they didn’t believe in counting indirect job creation, that the multipliers were unconvincing and at best estimates. A second conservative critique of the jobs tax credits (like WOTC etc.) was that they provided tax credits frequently for jobs that would have been created without the tax credits. My newswire didn’t address the types of jobs created, their social value (or lack of it compared to teaching), whether the jobs might have been created without the tax credit, or the prospects of these new businesses (and the jobs) even surviving 5 years. They may work, they may generate new jobs that are sustainable and of social and economic value, but the jury is still out. It’s good to see that the multiplier for indirect benefits (jobs and expenditures) is so intriguing to you. Thanks for your comment.

  • rick cohen

    Thank you very much for the commentary and the link!

  • Kate Barr

    Rick –

    I’m with Charlie Quimby on this one. Early capital to young companies has been very difficult to raise for the last couple of years. Minnesota used to be a magnet for venture capital but the dollars have drooped off and gone elsewhere. The tax credit created new interest from Minnesota investors who had been sending dollars off to other states. One year job creation is a useless metric for this credit. As an example, I served on the judging panel for a business plan competition two years ago. The winning plan was a start up with some bold plans and 3 employees. I just read that they raised venture money and now have 100 employees. Two years. Let’s use reasonable measures.
    I think this is an important cautionary tale for nonprofits. Charter schools don’t close the achievement gap in one year and we scream when they are criticized for it.


  • rick cohen

    Dear Kate: thanks for the comment. I was hoping for the dialogue on appropriate measures (remember, I used to be a city government administrator in charge of designing and deploying incentives for investment in Jersey City, NJ, and the debate was always around which incentives, at what time, for what purposes, and with what measures). But I think that charter schools in many cases have more than a year’s experience under their belts. Some of the critics of charters aren’t screaming about one year’s charter school results, but more, and with some pretty rigorous analytical techniques. The results, as I’ve seen them, are mixed, but certainly based on more than measures demanding that they close the achievement gap in one year. Let’s hope Minnesotans keep a good eye on this angel investors program–and report back to NPQ on the results. Thanks for the observations, Kate.