LINCOLN, Neb. (AP) — Demand is holding strong for a state incentive program designed to nurture startup businesses in Nebraska that cost the state more than $2.8 million last year.
Nebraska issued the tax credits last year to investors in 22 fledgling companies, according to a new report by the Department of Economic Development. The $2.8 million in credits was up from $2.3 million in the program's first year. The program received 134 applications last year, an increase from 73 in 2011.
Supporters contend the credit promotes investment in high-tech startups that could lead to economic growth, but opponents have questioned whether the tax incentives work.
The report comes as Nebraska lawmakers conduct a review of both the state tax system and the tax incentives that are designed to spur economic growth. The Legislature's Performance Audit Committee is working on ways to evaluate whether the incentives work as intended. In February, the committee reported that Nebraska has no clear way to measure whether its tax incentive programs have succeeded in attracting new businesses, or whether the businesses would have come anyway.
The incentive program is aimed at so-called "angel investors" who provide capital for risky, undeveloped businesses, often those involving new technology. In Nebraska, the tax credits have gone to software publishers in Omaha, data processing and surgical supply companies in Lincoln and a winery in Pawnee City, among others.
It awards a tax credit to an "angel" for 35 percent of the initial investment, and 40 percent if the business is located in an area that is considered economically distressed. By guaranteeing that investors will get at least 40 percent of their money back, the credit is intended to reduce their risk and boost their return if the business succeeds.
"By offering this incentive, it loosens the purse strings a little for investors," said Joe Lauber, who administers the program for the Nebraska Department of Economic Development. "It certainly has been a factor in some businesses located here, but by and large, it has benefited Nebraska startups."
The department limits the amount of tax credits it approves, and once that threshold is reached, the state places investors on a waiting list for next year, Lauber said. In 2012, the department started wait-listing companies in July. This year, they instituted the wait list in April.
"The dollar amounts for the investments are getting larger, and we keep allocating credits until we're out for the year," Lauber said.
The Angel Investment Tax Credit Act applies to individuals who invest at least $25,000 a year in a startup businesses, or funds with at least three members who collectively invest at least $50,000 annually. The companies need to employ 25 workers or fewer, and more than half of the employees have to conduct business in Nebraska.
The $3 million cap is down from the $5 million originally proposed. The Department of Economic Development is required to submit yearly reports to lawmakers and the governor specifying the number of investors and their location, the total amount invested, a breakdown of the industries that have benefited, and the number of jobs created. The law is scheduled to end in 2017 unless renewed by lawmakers.
Companies also have to stay in business at least three years, or the state reclaims the credit. At least two of Nebraska's neighboring states, Iowa and Kansas, offer similar tax credits.
One of the first companies to benefit was PitchBurner, a 2½-year-old technology company in Lincoln that works with universities and other organizations. The tax credit helped secure investors for the startup firm who might otherwise have been reluctant, said Joseph Knecht, the managing director of PitchBurner's parent company, i2rd.
"It entices the investors to invest, which is our greatest challenge," Knecht said. "This makes it more feasible for individuals to invest in new ideas."
The law was introduced on behalf of Gov. Dave Heineman and approved by the Legislature in 2011. It came one year after a study identified a shortage of capital for high-tech startups as a weakness in Nebraska's push for economic development.
Sen. Pete Pirsch of Omaha introduced a bill last year that would have increased the cap to $5 million. Pirsch argued that the additional money was needed to help the program succeed, but the bill has remained in committee so lawmakers could conduct a broader study of Nebraska's tax system.