New York’s Proposed Angel Tax Credit Could Discourage Outside Investors

Is the threat of losing out to Connecticut real?

065 New Yorks Proposed Angel Tax Credit Could Discourage Outside Investors

Mr. Kellner

Last Friday, Democratic Assemblymember Micah Kellner proposed a new tax credit to incentive investing in local startups–an area of particular interest to Mr. Kellner, whose district includes Roosevelt Island, the future home of Cornell and Technion’s applied sciences campus designed to unleash an army of developers and untold number of startups into the five boroughs.

The Angel Investor Tax Credit, which Mashable reports is currently under discussion in the New York State Assembly, would give 25 percent tax credit to investors who invest between $25,000 and $1 million in a New York City-based startup. In order to qualify, 60 percent of the startup’s employees must be based in New York. According to Mr. Kellner, similar incentives in Connecticut and Wisconsin, have seen boosts in angel investments of up to 500 percent over five years.

“The last thing I want is the next Twitter or Facebook being developed in New York, only to be commercialized and have their company headquarters end up in Connecticut,” Mr. Kellner told Mashable.

But over at BostInno, Walter Frick expressed a different perspective–warning of a potential downside. “While angels likely invest even closer to home than VCs, we know that Boston VCs invest significantly in New York and vice versa,” writes Mr. Frick, arguing that geographic incentive could discourage angels outside New York from investing here.

Geographic handcuffs are a major cause of distortion in government-run venture capital efforts, and we should seek to avoid them in the tax code just as we do elsewhere. If every state were to copy this behavior — and each time another one does this there’s more pressure on the others — it would result in a distorted market where angels are actively discouraged from looking across state lines. If you value market efficiency, that should be a good reason to oppose this provision.

 Naturally, Mr. Frick has a bias towards how this affects Boston, especially considering New York’s has eclipsed our neighbor’s growth as startup hub. Boston’s well-being might not be top-of-mind for local angel syndicates. But, Mr. Frick points to another potential drawback. “A tax credit is a subsidy. The revenue that’s lost could go to something else.”

Considering the froth in the early stage of the financing, it makes sense to wonder whether such a credit is even necessary–or whether, like bills making it easier for companies to IPO–the crisis about losing out to Connecticut is one imagined by politicians.