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Angel fund incentive comes under more scrutiny from lawmakers

BISMARCK - North Dakota lawmakers raised concerns Tuesday that investors are taking advantage of a state tax incentive program and vented frustrations about the lack of data needed to evaluate whether investments in out-of-state companies have be...

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Rep. Mike Nathe (R-Bismarck), right, speaks during an interim meeting of the Political Subdivision Taxation Committee in the state capitol in Bismarck on Tuesday, March 1, 2016. In back from left are Rep. Nathan Toman (R-Mandan), Rep. Ben Koppelman (R-West Fargo) and Sen. Dwight Cook (R-Mandan). (Tom Stromme/Bismarck Tribune)

BISMARCK – North Dakota lawmakers raised concerns Tuesday that investors are taking advantage of a state tax incentive program and vented frustrations about the lack of data needed to evaluate whether investments in out-of-state companies have benefited the economy at home.

The Angel Fund Investment Tax Credit is one of 21 incentives being analyzed by the interim Political Subdivision Taxation Committee as part of six-year study to determine whether some incentives should be eliminated or changed.

Updated information requested by committee members in January and presented Tuesday by the state Department of Commerce showed that from 2011 to 2014, 19 certified angel funds invested in 116 companies – 61 based in North Dakota and 55 out-of-state companies. Angel fund reporting requirements weren’t in place from 2007 to 2010.

Of the out-of-state companies, 26 currently are returning no economic impact to North Dakota, said Paul Lucy, director of the Commerce Department’s economic development and finance division. Eighteen have an operating presence in North Dakota, seven have used a North Dakota-based contract manufacturer and four have used a North Dakota-based product or service, he said.

Sen. Dwight Cook, R-Mandan, asked how many jobs have been created in North Dakota as a result of angel fund investments. Lucy said it would take a “deeper dive” to retrieve that data.

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“We need to answer that question,” Cook said.

The incentive allows investors to claim an income tax credit equal to 45 percent of their investment – up to $45,000 a year and $500,000 over a lifetime – for investing in an angel fund. Investors have claimed $16.7 million in tax credits on $41.4 million in investments, a Commerce Department official reported in January.

Rep. Craig Headland, R-Montpelier, said lawmakers’ intent in passing the angel fund legislation was to foster opportunities to make high-risk investments. But Lucy said that’s not part of the criteria listed under state law for certifying angel funds, nor does the department evaluate whether the investments will benefit North Dakota.

“Many times we are having conversations with the funds and we point out what legislators’ expectations are as we understand them,” he said. “Where they go from there is kind of beyond our reach at this point in time.”

Headland responded that the department has “a little work to do in that area.”

“Because I think the credit’s being used for some things that probably would be invested in regardless, and people are taking advantage of a very generous tax credit,” he said.

Committee members reviewed a draft bill that would make out-of-state businesses ineligible for angel fund investments.

Rep. Mike Nathe, R-Bismarck, said he’s not against angel funds investing in out-of-state businesses as long as there’s a return on investment for North Dakota. Cook suggested adding criteria to require regular reporting on the number of jobs created and cost of the incentive.

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Tommy Kenville, chairman of the first angel fund in the North Dakota, the Valley Angel Investment Fund created in 2006, said a number of its 28 investors have told him the tax credit was “critical” in their decision to deploy money through angel funds instead of going with less risky investments elsewhere.

Four of their 12 investments have failed, four are “alive but on oxygen” and four are cash flowing, with two having potential for some type of return, Kenville said.

Investors are just now gaining a foothold in developing an angel fund community and discussing second-round funding, and any additional restrictions such as in-state-only investments will make raising repeat funds more difficult, he said.

“It is critical to keep the tax credit,” he said.

Sen. Tim Mathern, D-Fargo, said he appreciates the risk that angel fund investors take.

“But it’s also the taxpayer’s risk,” he said.

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