Tax credits proposed to spur business investments in Minnesota

State lawmakers and Gov. Tim Walz want to replenish funding for a lapsed program that gave tens of millions in tax breaks to investors who helped start businesses in Minnesota.

The state could spend up to $20 million a year on investors who support startups, under a proposal in the Legislature. Walz did not commit to an exact amount but told members of the TwinWest Chamber of Commerce on Friday that the tax credits will be part of the budget he unveils Feb. 19.

The angel investment program previously operated from 2010 through 2017, and the state doled out about $101 million in tax breaks over the years. The 431 business owners who qualified for the credit during that time used it to entice people to invest in their companies and netted a total of $422 million in investments.

Businesses that participated created 1,533 jobs, according to the tax credit program's most recent annual report.

Stillwater-based POPS! Diabetes Care, which helps people with diabetes manage their care and employs about 10 people in Minnesota, benefited from the tax credit. CEO Lonny Stormo called it a "ground battle" to find investors. When he started the business in 2016 people were asking him whether he had the angel tax credit, he said.

The startup secured nearly $3 million in investments with the help of the tax credit, and the state shelled out $676,548 to those investors over two years, annual reports show.

"It's expensive to develop medical devices," Stormo said, and he believes the tax credits are a key piece of keeping innovation and medical device companies in Minnesota.

"It's really important to continue looking at the future," Kotyza-Witthuhn, D-Eden Prairie, said. "We talk about growing the state of Minnesota's economy, and there's a lot of great ideas out there."

Walz and Department of Employment and Economic Development Commissioner Steve Grove have mentioned in past speeches that they want to create an enticing atmosphere for startups.

"If folks know that Minnesota is a state that is reflecting on this, that is putting that forward, it makes it a little more appealing," Walz said Friday.

While lawmakers suggested $20 million a year, Walz hinted at something more modest. He said he envisions the funding will be pretty close to the amount that was offered in the final years of the program. The state set aside $15 million for the tax credits in 2015 and 2016, and $10 million in 2017.

Art Rolnick, a senior fellow at the University of Minnesota's Humphrey School of Public Affairs, has long been skeptical of the tax credit program.

Of the 431 businesses that received investments from 2010 to 2017, about 11 percent closed or became insolvent, an annual report states.

"It should be a red flag when government thinks it can do a better job investing in businesses than the market," Rolnick said.

The $20 million would be better spent on early childhood education or the state's infrastructure, he said, and if the state really wants to help businesses it should do an across-the-board tax cut.

Nonetheless, key Republican and Democratic supporters have signed on to the tax credit idea in the Senate and House. Senate Majority Leader Paul Gazelka, R-Nisswa, is a cosponsor of the bill. In the House, Taxes Committee Chairman Paul Marquart, D-Dilworth, said he likes the idea.

However, Marquart said his committee will examine the time frame of the program and the amount of money the state will offer. He suggested the program should be limited to three to five years, and said the effectiveness of the tax credits would be tracked.