As usual, bad ideas at the legislature just don’t seem to die. Lawmakers are considering legislation to expand the “Angel Investment” Tax Credit Program, a scheme that would dole out millions to wealthy investors to subsidize their risky venture capital investments in Arizona. Even worse, these same investors and businesses will also be exempt from paying any capital gains tax to the state.
Under the bill, employees at the Arizona Commerce Authority will select “qualified” investors (I.E. politically connected millionaires with relationships with the Arizona Commerce Authority) for a generous tax credit to hedge their potential losses in risky new start-up companies. And if the business venture does pan out, the investor can then sell and pay zero to the state in capital gains. Great deal for them, a bad deal for every other taxpayer in the state.
The argument made in defense of the program is that Arizona needs the tax credit to attract more venture capital to Arizona, otherwise good ideas won’t locate here. This of course is not true. Good business ideas will attract capital because investors stand to gain millions of dollars in profit to do so.
And if a business is unable to attract the start-up capital it needs without the credit, it means the venture is extremely risky and should be avoided. After all, we don’t stand to benefit monetarily from the businesses’ success, why should we therefore shoulder the losses of its failures? And if a business was to attract the necessary start-up capital regardless of the tax credit, why are taxpayers subsidizing a business activity which would have occurred anyway?
Venture capital investing is inherently risky. Successful speculations have the potential to enrich their investors immensely. The Arizona Commerce Authority is not better equipped than the free market to facilitate these types of transactions or properly gauge risk.
Taxpayers should not be in the business of subsidizing risky venture capital investments by wealthy investors that stand to reap windfall tax benefits. It’s a program that picks winners and losers among taxpayers, among venture capital investors, and among aspiring entrepreneurs.