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PLAIN ECONOMIC SENSE
For release after April 26, 1999
Column 376
Tax Breaks for Insurance Versus Venture Capital in Iowa
By Mark A. Edelman
Extension Public Policy Economist
Iowa State University Extension to Communities
Recently the Iowa House passed HF 767 and sent it to the Senate. This proposal would allow "creation of certified capital companies to make qualified investments in qualified businesses." Initially from the media reports, I concluded the bill might provide real hope for encouraging more venture capital in Iowa, particularly in rural areas where it is sorely needed to diversify the economy. But the bill's explanation says it's primarily a tax break for insurance companies, and it will not be generally available to all Iowa investors.
Here is the official explanation attached to the end of the bill: "A person applying to become a certified capital company shall submit an application to the (Iowa) Department of Economic Development (IDED). The bill provides that the application shall be granted upon a finding that the application is competitive with other applications, the person is a partnership, corporation, trust or limited liability company with a primary business activity of investment of cash in qualified businesses, that the person has a net worth of at least $500,000 and has at least $500,000 in cash, cash equivalents or marketable securities, that the directors, officers, general partners, trustees, manages or members are familiar with the requirements related to certified capital companies, that at least two officers, directors, general partners, trustees, managers or members have at least two years of experience in venture capital industry, that proper notice requirements have been met in any offering material, and that an application fee has been paid."
The bill provides that IDED shall certify not more than $60 million in certified capital investments. Not more than 25 percent is allowed for investments in an agricultural industry finance corporation qualifying as a certified capital company.
The bill provides that a business is a qualified business [for receiving venture capital investment] if the business is "headquartered in the state and its principal business operations are located in the state, the business is in need of venture capital and is unable to obtain conventional financing, the business has no more than 100 employees at least 75 percent of whom are employed in the state, the business had a net income during the two most recent fiscal years of not more than $2 million, the business has a net worth of not more than $5 million, the business is not predominately engage in providing professional services by accountants, attorneys or physicians, the business is not engaged in the development of real estate for resale, the business is not engaged in banking or lending and the business is predominantly engaged in certain targeted industries, and it is the intent of the business to provide attractive, long-term compensation packages.
The bill allows a certified investor to claim an insurance premium tax credit equal to the total amount of the certified capital investment. The bill prohibits an annual tax credit from being claimed that exceeds 10 percent of the total amount of the certified capital investment. The bill allows any excess credit to be carried over to the future years until depleted. The bill provides for a recapture tax in the case of decertification of the certified capital company or disqualification of an investment pool. The bill allows for the sale of the a certified capital company tax credit.
In conclusion, instead of creating a broad-based incentive for all Iowans to invest in new ventures, the General Assembly is considering a narrow tax credit to encourage insurance companies to invest in new ventures. In addition, this highly bureaucratic approach appears to assure that primarily those who have access to attorneys and tax accountants with connections to IDED are likely to jump through the hurdles to become "certified."
In the final analysis, Iowa's proposed venture capital incentives provides a targeted tax break for the insurance industry rather than encouraging broad based regional venture capital funds, community development seed capital funds, investment clubs and angel investment networks that are needed in all of Iowa's rural and urban communities. To create and organize these equity capital markets and the entrepreneurs that they would attract would require something similar to what Missouri is trying for cooperatives -- a 50 percent tax credit up to $15,000 for those willing to invest in new co-op valued added agriculture ventures. I would suggest the Missouri approach should be made even broader by providing the tax credit to any taxpayer--not just insurance companies or farmers -- for all qualified new ventures whether they are agricultural or not, if they meet private sector criteria in rural and urban communities. That would be something that would have a much bigger and lasting impact on Iowa's future.
Edelman is a professor of economics and an extension public policy specialist at Iowa State University.
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