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

SPONSOR Heaton

ORIGINAL DATE

LAST UPDATED

1/21/06

1/25/06 HB 36/aHBIC

SHORT TITLE Tax Credit For Certain Business Investments

SB

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

(7,500.0)

(15,000.0)

(15,000.0) Recurring General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Responses Received From

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of HBIC Amendment

The House Business and Industry amendment clarifies the dates of when the carry forward is al-

lowed. A carry forward is allowed in 2012 and 2013 for investments made in 2009. This means

that credits for investments made in 2009 can be carried forward through 2013. The fiscal im-

pacts reported in the original are unchanged.

Synopsis of Original Bill

House Bill 36 amends the Income Tax Act to provide a credit for investment in high technology

research or manufacturing companies. The credit is for 25 percent of up to $100 thousand in in-

vestment and is a credit against income tax liability. Taxpayers may receive the credit on up to

three distinct investments and a maximum of three years for any individual investment.

Qualified investments beginning January 1, 2006, are eligible for the credit. The credit would be

against the 2006 tax liability, filed in 2007. There is a provision for a carry-forward of unused

tax liability for qualified investments made in calendar years 2009, 2010 and 2011. The credit

expires January 1, 2012.

House Bill 36/aHBIC – Page

2

FISCAL IMPLICATIONS

TRD:

The “2006 Book of Business Lists” published by the New Mexico Business Weekly identi-

fies 25 technology companies that could be identified as having their “principal place of

business” in New Mexico. These companies have combined revenue of several hundred mil-

lion dollars per year. Other companies engaged in manufacturing of technology products

would also be eligible for the proposed credit. The total investment in these companies is

probably well in excess of $1 billion. If even 5 percent of the ownership of these investments

changes hands each year, credits of nearly $20 million per year would be generated. Actual

utilization of the credits will depend on the amount of liability of the investors, with unused

credits being carried forward for use in future years.

Since the proposal takes effect for tax years beginning on January 1, 2006, 50% of the full

tax year impact would accrue in FY 2006. The measure contains a delayed repeal, which

would eliminate impacts on the General Fund after the year 2011.

SIGNIFICANT ISSUES

Generally, the term “angel investor” refers to a high net-worth individual who is able to invest in

a company that is just starting up operations or is still in the research phase and needs capital to

begin operations. HB 36 uses the term “angel investor” and refers to high technology but there is

no language regarding start-up companies. HB 36 defines high-technology research as “research

that is undertaken for the purpose of discovering information that is technological in nature and

the application of which is intended to be useful in the development of a new or improved busi-

ness component of the taxpayer and substantially all of the activities of which constitute ele-

ments of a process or experimentation related to a new or improved function, performance, reli-

ability or quality….” This definition is sufficiently broad that it could apply to many more com-

panies and types of investment than intended.

Anyone who invests in any local manufacturing or high tech research company qualifies

for this credit. This is because HB 36 does not define who a qualified investor is and is vague

as to what a qualified business is. Similar legislation introduced in the 2005 regular session de-

fined qualified business as one with less than $5 million in revenues for the previous year.

TRD:

The proposed measure would provide credits for essentially any investment in a business that

maintains its principal place of business in New Mexico and engages in high technology re-

search or manufacturing activities. The sponsor's intent may be to further limit the types of

activities that would allow the proposed credits. If so, the bill should be amended accordingly

SEC definition of “accredited investor” (for individuals):

a natural person who has individual net worth, or joint net worth with the person’s

spouse, that exceeds $1 million at the time of the purchase;

a natural person with income exceeding $200,000 in each of the two most recent years or

joint income with a spouse exceeding $300,000 for those years and a reasonable expecta-

tion of the same income level in the current year; (Rule 501-D Securities Act of 1933)

House Bill 36/aHBIC – Page

3

Wisconsin has an angel investment credit and requires certification of a qualified “angel” inves-

tor as well as specifies that a qualified business must answer yes to the following questions:

1.

Are you seeking private equity funding for pre-commercialization activities related to the

development of a proprietary new product or process.

2.

Have you been in business for no more than seven consecutive years.

3.

Are your principal administrative offices located in Wisconsin or does at least 80 percent

of your payroll go to people employed in Wisconsin.

4.

Do you have less than 100 full-time equivalent (FTE) employees.

5.

Do at least 50 percent of your employees work in Wisconsin.

6.

Since its inception, has your business received, in aggregate, no more than $5 million of

private equity investment in cash.

(Wisconsin Department of Commerce - www.commerce.state.wi.us)

Kansas defines “angel investors” as:

INVESTOR OR ANGEL INVESTOR

An accredited individual investor of high net worth, as defined in 17 C.F.R. 230.501(a) as

in effect on the effective date of this act, who seeks high returns through private invest-

ments in start-up companies and may seek active involvement in business, such as con-

sulting and mentoring the entrepreneur. For the purposes of this act, a person who serves

as an executive, officer, employee, vendor or independent contractor of the business in

which an otherwise qualified cash investment is made is not an angel investor and such

person shall not qualify for the issuance of tax credits for such investment. (Kansas De-

partment of Revenue www.ksrevenue.org)

Representatives from the venture capital industry have indicated that anything to encourage in-

vestment in small areas is beneficial to New Mexico. In fact, angel investors are much more

likely to invest in rural areas than are venture capitalists who have much stricter criteria for in-

vestments. Many venture capitalists will not consider an investment unless there is some level of

investment locally, primarily an angel investor. Angel investors tend to know the business that

they are investing in in much more detail than venture capitalists. Also, angel investors have his-

torically invested similar amounts as venture capitalists but in ten times the number of busi-

nesses, making this mode of investment much broader than what is typically the domain of ven-

ture capitalists.

ADMINISTRATIVE IMPLICATIONS

Provisions of the proposal would probably require a new claim form to be developed and a new

line on the PIT-ADJ form. The measure would also require changes to forms instructions and

publications. Manual review would be necessary to track credit applications and carry forwards.

The measure would also impose moderate costs for form design and form and publication

changes, as well ass systems changes.

TECHNICAL ISSUES

It does not appear that the credit can be used to lower corporate income tax liability.

Section 1-F-3a indicates that the research should be intended to be useful in the development of a

new or improved business component of the taxpayer. The taxpayer here is the investor receiv-

ing the credit; this definition should refer to the qualified business.

House Bill 36/aHBIC – Page

4

ALTERNATIVES

To address the issue noted above, there should be language indicating that the credit is only for

investment in start-up companies or that the investment has to be a certain minimum size (such

as $10,000).

Another alternative is to include a definition of qualified investor to conform with the Securities

and Exchange Commission’s definition of “accredited investor.”

There could also be a cap on the total amount of the credit for all taxpayers to limit the liability

of the state. In this case the credit would be available to the first to apply. Arizona has a cap of

$20 million over five years on their credit. Wisconsin caps theirs at $3 million per year.

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