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Last week, the Public Affairs Research Council of Alabama released a report exploring how Alabama does not utilize tax credits to incentivize economic development.
“One strategy sometimes used to support such a goal is investor tax credits, including angel investing credits. Twenty-five states currently provide some form of investor incentive tax credit programs, a number of which offer refundable credits to out-of-state investors with no in-state tax liability,” reads the report.
Alabama does not offer incentive tax credits to attract out-of-state investors with start-ups in high-growth businesses, such as the technology sector.
An ongoing debate in public finance policy centers around the “tradeoff between maintaining tax revenues and using the tax code to incentivize particular economic activities.” In other words, tax incentives should be justifiable if they lead to an overall increase in tax revenues or contribute to broader economic development goals.
Start-up tax credit incentives should focus on promoting businesses with high growth potential, particularly those in technology, that aim to develop innovative products, services or processes. When states develop a start-up tax credit incentive program it’s also important to identify factors that contribute to start-up failures.
Common issues include a lack of finances, technical management and informational resources. Some start-ups also suffer from insufficient industry experience and the absence of a customer base due to failure to address a real market need in the region.
Many states have created incentives to support start-up ecosystems, mainly through tax credit programs for angel investors, seed capital investors, and venture capital firms. Angel investors are wealthy individuals who fund start-ups, while seed capital refers to the money raised to launch a business, often from angel investors.
Venture capital firms manage funds and invest in start-ups. While the specific terminology may vary by state, the goal of these programs is to provide start-ups with the capital they need to succeed and grow, leading to long-term sustainability and job creation.
All of these methods of funding meet with the same goal of improving the chances of success for start-ups.
As of 2018, 31 states had investor business incentive tax credit programs. Six states let their programs expire without renewal. Of the remaining 19 states, seven do not have an income tax, while 12 have income tax but never started a program. Alabama is one of the latter states.
“Can Alabama afford not to directly incentivize investors for these government goals when other states do so? And for those states with refundable investor business incentive tax credits, can Alabama afford to lose in-state investments to other states,” the report questions.
Even states without income taxes, like Alabama, could benefit from attracting out-of-state capital. For states like Alabama, the challenge is weighing the potential loss of in-state investors to other states against the opportunity to bring in external investment.
Alabama currently ranks 38 out of 50 states in growth which has inspired a look into the way it seeks out investors.
