SUNDAY EDITION | Will Kentucky's new angel investor tax credit l - WDRB 41 Louisville News

SUNDAY EDITION | Will Kentucky's new angel investor tax credit lead to jobs?

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Kentucky's angel investor credit (By Mike Petrig, WDRB) Kentucky's angel investor credit (By Mike Petrig, WDRB)
Stu Pollard Stu Pollard

LOUISVILLE, Ky. (WDRB) -- Louisville is not exactly the center of the film industry.

But native Louisvillian Stu Pollard, who now lives in Santa Monica, California, has shot two movies here, and now he's building an entertainment company that will have a significant presence in Louisville.

Called Lunacy Productions, the company hopes to produce independent films – whether traditional two-hour movies or episodic series – meant to be consumed online instead of sold to a film festival, Pollard said.

One of Pollard's early funders is Republic Bank CEO Steve Trager, who has given Lunacy $25,000 in start-up money.

But in effect, Kentucky taxpayers will foot the bill for $10,000 of Trager's investment, as Trager will get an “angel investor” tax credit under a new program meant to prop up fledgling Kentucky-based businesses.

The tax credit, which began Jan. 1, is meant to encourage one of the riskiest forms of investment in new companies.

Trager, for example, explains his investment in Lunacy Productions almost as if it were a donation to a good cause.

“I think it's potentially an OK business opportunity… but really I just wanted to support Stu. He's gotten films to production, so I guess you never know, but I think it's pretty high-risk thing,” Trager said.

Other Louisville businesses, such as the Comfy Cow ice cream makers and Kinetic Corp., which makes language translation software, are getting similar investments through the program, which was authorized during the 2014 legislative session. (Full list of investors and companies).

The goal, according to State Rep. Rick Rand, chairman of the House budget committee, is for young companies to get off the ground and create Kentucky jobs. In turn, the state provides a tax credit to the investors who put in money at the beginning.

But there is no requirement that the businesses that receive the “angel” investments actually create jobs, and Rand said state lawmakers will take a hard look at the results of the program later this year and during the 2016 legislative session.

A company that receives an angel investment could employ only one person and not grow employment at all, but the investor would still get the credit, said Katie Smith, executive director of the Office of Financial Services in the Kentucky Cabinet for Economic Development.

Investors are rushing to snap up the credits, which are typically worth $4,000 to $25,000 (or 40 to 50 percent of the investment). The state will give out only $3 million in total credits each year, and more than 70 percent of the money allocated for 2015 has already been claimed.

Not just anyone qualifies for the angel credit. The program is limited to “accredited” investors, who generally have a net worth of more than $1 million not including a primary residence, or annual individual income of at least $200,000 (or, as Greater Louisville Inc. CEO Kent Oyler says, “certified rich guys”).

The angel investor credit is “a very top-down approach to job creation,” said Jason Bailey, director of the progressive Kentucky Center for Economic Policy. In other words: give rich people a tax break to help a risky start-up company, and jobs will eventually follow.

“We are interested in more bottom-up and middle-out approaches based on supporting low- and middle-income Kentuckians,” Bailey told WDRB. “Oftentimes the resulting wealth that's created from a top-down approach accrues more to those at the top and doesn't necessarily trickle down.”

Rand, a Democrat, said he struggled with those very issues in the four years he considered the angel credit idea before finally allowing it into the House's budget bill last year.

The credit's $3 million annual cap means the state can test it out with little impact on the $9.7 billion General Fund budget, Rand said.

While the credit is now permanent law, legislators can lower the cap to $0 if they think it hasn't worked out – or raise the limit if they want to encourage more angel investments, Rand said.

Kentucky's approach isn't unique. Since 1988, 29 states have established angel tax credits, according to a brief from the nonpartisan Tax Policy Center.

Kentucky's credit is one of the most generous awards, according the research. Some states allow investors to recoup only 25 percent of their money through the tax break.

While the credit is not refundable, it can be “transferred” – or sold – among individual taxpayers. That means an investor who doesn't live in Kentucky could still be rewarded indirectly by selling the credit to an in-state taxpayer.

The Kentucky credit makes a big difference for investors considering writing checks to very risky businesses, said Terry Gill, director of the Enterprise Corp., the unit of Greater Louisville Inc. focusing on entrepreneurship.

“Let's say your investment in that company goes to zero – they blow up. Well, you've got a 40 percent tax credit, so in theory, there's been a return,” he said.

Angel funding is the first pot of capital that young businesses raise after the founders – and perhaps their friends and family --put in their own money, Gill said. At that stage, many companies don't even bring in money, much less turn a profit, Gill said.

Gill added that the credits are not encouraging irresponsible investments, but merely limiting the amount of money investors can lose.

“Although it does bend the risk curve, it doesn't incentivize someone who doesn't believe in that investment to make the investment,” he said.

Another positive aspect of the credit, Bailey said, is that it's “about building Kentucky-based businesses as opposed to recruiting branch (manufacturing) plants.”

But as with other job creation incentives, there's a risk that Kentucky taxpayers are wasting money by rewarding business activity that would have occurred anyway, Bailey said.

He said it's impossible to know whether any particular investor was really motivated by the credit -- or if that person would have written a check to a startup company even without any incentive to do so. "It's inevitably some of both,” Bailey said. 

Trager said the credit had “some impact” on his decision to put money into Pollard's film company, but he couldn't say exactly how much.

“It's a really great program and I think it had some influence, but my real desire is to support a young man who's done a lot of good work locally,” Trager said.

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