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F I S C A L I M P A C T R E P O R T

SPONSOR SCTC

DATE TYPED 2/4/05

HB

SHORT TITLE Technology Investment Income Tax Credits

SB CS/150/SCTC

ANALYST Taylor

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

(94.0)

(375.0)*

Recurring

General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

See text

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Economic Development Department (EDD)

SUMMARY

The Senate Corporations and Transportation Committee substitute for Senate Bill 150 provides

an income tax credit for qualified investment in certain qualified businesses. The credit is called

the “angel investment credit”, and its stated purpose is to encourage investment in qualified busi-

nesses. A qualified investment is defined as a cash investment in a qualified business for equity.

A qualified business is defined as: a business whose principal place of business is New Mexico;

that engages in high technology research or manufacturing in New Mexico; whose gross reve-

nues during the prior fiscal year were $5 million or less; a business entity that is independent of

another business entity; and is not primarily engaged in certain businesses (these are specified).

The income tax credit is limited to 25 percent of the investment, but may not exceed $25 thou-

sand. A taxpayer may claim up to 3 three qualified investments per tax year, but each invest-

ment must be in a different company. A taxpayer may claim the credit for investment in the

same business for a maximum of three years. The credit may only be deducted from the tax-

payer’s income tax liability, but any unused portion of the credit may be carried forward for

three consecutive years.

CS/150/SCTC -- Page 2

The provisions of the bill would be applicable beginning January 1, 2005. The bill carries a de-

layed repeal (sunset) of January 1, 2011. Temporary provisions allow credits approved for in-

vestments made in 2007, 2008 and 2009 to be carried forward to tax years 2010 through 2012.

FISCAL IMPLICATIONS

TRD estimates the FY06 impact of this legislation to be a $375 thousand dollar reduction in gen-

eral fund revenues. Their analysis notes that they have no information on the number of angel

investments in New Mexico, and thus caution that estimated impacts should be regarded as a

rough approximation.

Although TRD does not provide the methodology employed to determine the estimate, they re-

port that only about 2,300 New Mexico taxpayers report tax obligations in excess of $25 thou-

sand, and fewer than 10 report tax obligations greater than $75 thousand. The estimated impact

implies that both current and prospective (stimulated by this incentive) angel-like investments

are likely to be quite limited. A $375 thousand fiscal impact only implies $1.5 million in quali-

fied investments and only about 15 investors (full value equivalent) taking full advantage of the

credit. This is less than 1 percent of the 2,300 taxpayers with income tax obligation in excess of

$25 thousand. Note also that TRD reports that nationwide Angel investors reported roughly $18

billion of investment in 2003 and approximately 20 thousand or so angel investments. Assuming

that New Mexico’s share of such investments is only 0.1 percent would imply potential qualified

investments could exceed 200 implying a much larger fiscal impact. Although this assumption

may be high in the near term (it will take time for people to learn about and use the credit), it

does imply that the long-term fiscal impacts could be significantly higher.

Finally, it also should be recognized that if the credit is successful in encouraging investment in

qualified firms, the fiscal impact could be significantly higher.

ADMINISTRATIVE IMPLICATIONS

TRD reports modest administrative impacts that could be absorbed with existing resources.

TECHNICAL ISSUES

TRD submitted the following technical issues:

1)

It would be difficult for the Department to know if the qualified business has gross reve-

nue of less than $5,000,000.

2)

The measure does not identify procedures by which a taxpayer can claim the credit. The

proposal does not make clear, for example, whether the taxpayer must apply for the credit

and whether the Department, prior to a taxpayer taking the credit on their personal in-

come tax return, must approve the claim for credit. For comparison, see 7-9A-8 and 7-

9A-9, setting forth procedures for claiming a tax credit. If, on the other hand, the tax-

payer may simply claim the credit without advance approval from the Department, then

the Bill should specify in which tax years the credit may be claimed.

3)

The proposal contains a typographical error in subsection F(4)(e) excluding “.preparing

meals for immediate consumption”.

CS/150/SCTC -- Page 3

OTHER SUBSTANTIVE ISSUES

TRD submitted the following issues:

•

The proposal appears to be motivated by the view that angel investment activity benefits

the state by providing capital to relatively risky business ventures – that would not other-

wise be provided by market forces. And resulting economic development would benefit

taxpayers in excess of the "tax cost" of the proposal.

•

An angel investor is generally defined as an individual who provides capital to one or

more startup companies. Angel investors are affluent and have a personal interest in the

success of businesses in which they invest. Unlike partners, angel investors rarely man-

age firms they invest in. Angel investments are characterized by high levels of risk and

potentially high returns on investment. Venture capitalists are also investors that provide

capital for start-up or expansion and seek higher rates of return than would be given by

more traditional investments. The primary difference between venture capitalists and an

angel investors is that venture capitalists are professional investors. Venture capitalists

often have no business experience in the industries they invest in. Angel investors, on the

other hand, often have business experience relevant to the companies they invest in and

want to add value to the firms in addition to making a return on the investment.

•

According to the Angel Capital Association, angel investors provided approximately

$12.4 billion in financing to almost 28,000 entrepreneurial businesses in the first half of

2004, a substantial increase over the $18.1 billion in all of 2003. A typical investor pre-

fers to invest locally and enjoys a net worth in excess of $1 million and an annual income

of $250,000.

BT/yr