Why the Georgia Angel Tax Credit is Bad Policy
October 7th, 2014
In 2010 the Georgia legislature passed Georgia HB 1069 creating the Georgia Angel tax credit. I did some analysis back in 2010 and decided it was bad policy back then based on the mechanics, optics, and impact. I believed then (and now) that this is a tax credit that accomplishes nothing - other than give wealthy investors an unneeded tax break. It isn’t creating jobs and it isn’t doing anything to improve Georgia’s economic competitiveness.
You might want to go read the two posts I did on Georgia HB 1069 (part 1, part 2) so you understand how, in my view, this legislation was setup to be a net loser for Georgia taxpayers. You can also read about my personal bias back in 2010, although some of that has changed (e.g., Shotput Ventures is no longer active although I do still go angel investments - some of which would qualify for the Georgia Angel Tax Credit).
The Financial Breakdown
Based on the legislation, Georgia angels would get a tax break on up to a little more than $28.5 million in investments. If this tax credit was really doing the job that it was designed to do that would mean a net increase in investments over the time frame of the original legislation (2011 - 2013). Unfortunately there isn’t a foolproof way of getting at this data so I’ll share some different data analysis that will help explain what happened. Remember, this credit only works for startups that are technology or manufacturing focused, less than 20 people, less than $500k in annual revenue, and less than $1 million in raised funding at the time the investment is made for this tax credit.
PWC Moneytree Report
PriceWaterhouse Coopers used to do a great series of reports on funding rounds. I don’t hear about their report unveiling events anymore so I’m not sure how much effort is still being put into this data. That said, the data is still current according to the site. Here is what they have for first round investments in Georgia and nationally. I’m assuming that first round investments are angel investments although sometimes they may not be so this data leans towards being more optimistic.
Note: I removed the funding round for AirWatch from the 2013 numbers because that round was huge ($154,284,000) and was clearly not qualified for or encouraged by the Georgia Angel Tax Credit. There are likely many more funding deals in these numbers that are either venture rounds or done by angels outside of Georgia and thus do not qualify for the Georgia Angel Tax Credit.
|# Georgia||Georgia||# National||National|
|Year||Deals||Total Investment||Deals||Total Investment|
This data shows that every year since the angel tax credit was available, first round investments decreased. Compare this to the national trends where investments (in number and aggregate dollar amount) increased in 2011 and 2013 versus the prior year.
I tried to see what Crunchbase could provide in terms of data and honestly, it’s just not great. Crunchbase covers 923 funding events in Georgia. I had a conversation on Twitter with their head of product and engineering in the hopes of getting them to improve the data coverage and quality.
First I selected all the funding rounds labeled as either “angel” or “seed” in Georgia. Compared to the numbers above, they are way off and there is no way I’d trust this data.
|Year||# Georgia Deals||Georgia Total Investment|
I then decided to include every investment from $5 million and below. It didn’t matter if the investment was listed as angel, seed, venture, private equity, or undisclosed (I did remove crowdfunding money - product or equity - though). Now the numbers swing way the other way for Georgia but with a similar trend.
|Year||# Georgia Deals||Georgia Total Investment|
Since AngelList has taken the startup world by storm and they’ve got a great API (which you can query at a much higher frequency than the CrunchBase API), I thought I’d analyze their data. Unfortunately their data set encompasses a relatively scant 510 funding events between 2000 and now. I broke down their data and looked at all the funding events at and below $1 million and at and below $5 million.
|Year||# Georgia Deals < $1m||Georgia Total Investment|
|Year||# Georgia Deals < $5m||Georgia Total Investment|
I believe that the more recent AngelList data (2013 and 2014) is likely more accurate than the older data given that AngelList launched in 2010. Regardless, all of this data shows that investments haven’t rocketed in Georgia because of this tax credit. If anything, investment has slowed and lags the rest of the nation.
Georgia Department of Revenue
I filed a FOIA request to the Georgia Department of Revenue for data and statistics around the Georgia Angel Tax Credit. Since I couldn’t get perfect data elsewhere, this was my last shot. And as it turns out this was the smoking gun.
Companies must first register with the Georgia Department of Revenue before their investors can apply for the credit. Here is a breakdown of the number of startups that have registered each year of the initial law.
|Year||# Companies Registered|
Yes, that’s it. The number registered is very small and fewer companies registered in 2013 than in 2012. That isn’t a great trend. Unfortunately, it gets worse.
For 2011, there were just 12 qualified taxpayers who claimed the credit. They invested $746,014 and got a credit for $261,105. This means they invested, on average, about $62,167 and got $21,758.75 in credit back from the state of Georgia. This was out of $10 million set aside for this credit in 2011. Compare this to the Georgia Qualified Education Expense Credit (directing tax money to scholarships at private schools) which allocates $50 million in credits per year and is exhausted earlier and earlier every year (in fact it is being exhausted within days of the start of the application season).
Not only is the Georgia Angel Tax Credit bad tax policy but only a handful of angels are benefiting from this welfare program which isn’t producing any conceivable positive results for the state of Georgia. Anyone trumpeting this tax credit is likely one of these 12 individuals getting over $20k back from Georgia.
In 2013 the Georgia legislature renewed this tax credit for the 2014 and 2015 tax years. I’m not sure if the legislators looked at any data (we really should have a state equivalent to the non-partisan Congressional Budget Office) but likely they were lobbied by the (twelve) recipients of the original credit and were convinced that this credit was good for Georgia. Unfortunately as the numbers bear out, this credit isn’t good for Georgia. It’s only good for the (twelve) angels receiving the credit because it blunts their risk exposure while doing nothing valuable for the state or Georgia taxpayers in general.
A “Crowdfunding Tax Credit” Instead
We need to engage the broader public in funding startups. Georgia is currently just one of two states to have legalized equity crowdfunding from non-accredited investors (the other state being Kansas). So lets implement a “Crowdfunding Tax Credit” that heavily borrows from the structure of the current “Angel Tax Credit”.
I propose a “Crowdfunding Tax Credit” which would be accessible to any individual with an AGI of up to $75k or couples with an AGI up to $150k. These unaccredited investors are limited to investing $10k per year so a 35% tax credit (the same tax credit level as currently provided by the Georgia Angel Tax Credit) would refund $3,500 back to these investors.
By encouraging middle class investors to engage in crowdfunding campaigns, I believe we can accomplish two goals. First, we’ll increase awareness about startups among the general public that currently does not have any interaction with the startup community (instead of angel investors who are already involved in the startup community). Second, we’ll potentially create the opportunity for wealth creation for those who have never had, or never considered, investing in startups as a viable opportunity.
Even modest success could have a further effect of finally eliminating the prohibition of the Georgia teacher’s pension from investing in venture capital and private equity. The objections being raised by those involved with the teacher’s pension revolve around a Chicken Little view of the world and are not grounded in well accepted and understood theories of investment diversification. By creating awareness about positive Georgia startup outcomes, we can start to dispel this myth.
Like I said back in 2010 (part 1, part 2), the Georgia Angel Tax Credit is bad policy. The way these tax credits were designed were not meant to encourage more angel funding. This tax credit is welfare for Georgia angels and the results bear out that there is no positive policy result because of this credit. It doesn’t help anyone except for angels who are looking for a way to mitigate their investment risk. If you were a proponent of this tax credit I urge you to reconsider your position and let your legislator know about your change of heart. Let’s focus our efforts on enacting legislation that creates positive change for all of Georgia instead of financial gain for the fortunate few.
PwC Moneytree data is available on their site.
I asked on Twitter and it seems like others may want to look at my source Crunchbase data for their own personal needs. It is available here. Feel free to make a copy and use it but know that it is licensed by Crunchbase under a Creative Commons Attribution-NonCommercial License [CC-BY-NC].
Unfortunately due to the licensing of the AngelList API and data agreement, I do not believe that I can freely share that data. Sorry.
Addendum: We Need Better Data
One thing that this exercise has highlighted is that we need better data about Georgia startups, investments, angel activity, and results. I ask that everyone make an effort to enter relevant information in AngelList and then opt-in to the data sharing arrangement that they have with CrunchBase. That way the activity in Georgia will be accurately reflected for us to use and understand and hopefully we can use this data to make better decisions.
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