In Trenton, There’s Agreement On One Form Of Tax Break, At Least

John Reitmeyer | July 3, 2019 | Budget
Governor signs law doubling the ‘angel investor’ credit, available to those who fund biotech firms and other startup companies

Biotech lab
Gov. Phil Murphy and lawmakers remain locked in a bitter dispute over New Jersey’s main economic-development tax-incentive programs, but they were able to reach agreement on expanding a lesser-known tax break that’s designed to encourage investment in emerging, tech-based businesses.

Known as the “angel investor” tax credit, a bipartisan bill that Murphy signed earlier this week increases the value of the tax breaks that can be earned by taxpayers who make investments in biotech companies and other innovative startups that policymakers want to see more of in New Jersey.

The new law boosts the tax break from 10 percent to 20 percent of the amount investors bet on such companies. It also offers investors other ways to win even larger tax relief from the state.

The push to expand the angel-investor credit follows a major report issued last year by a legislative task force on things the state could do to help New Jersey reclaim its standing as a national leader in the biotechnology sector.

The task force highlighted what other states offer to encourage investors to buy stakes in startup companies and found that New Jersey’s tax credit is lagging. Some other states offer angel investors as much as a 50-percent tax credit.

The New Jersey tax-break expansion was also supported by leading business groups, including the New Jersey Business & Industry Association, as it moved through the Legislature in recent weeks.

A program with caps in place

Created in 2013, the angel-investor program offers refundable tax breaks worth up to $500,000 to those investing in New Jersey-based emerging-technology businesses. The program is run by both the state Economic Development Authority and the Division of Taxation, and the tax credits can be applied against either personal income or business tax liability.

Qualified investments include businesses that conduct research, do manufacturing or use technology to create usable products or services; the businesses must have fewer than 225 employees, with 75 percent of the workforce based in New Jersey.

A key element of New Jersey’s angel-investor credit is that there are spending caps in place not only for individual investors but for the program itself, up to $25 million annually.

Putting a limit on tax incentives is a key sticking point right now for Murphy and fellow Democrats who control the Legislature as the state’s two most prominent tax-incentive programs were recently allowed to expire after the two sides couldn’t reach an agreement on a host of concerns, including the caps, before July 1.

In the wake of an ongoing scandal involving those programs — which are designed to lure new investments and jobs to New Jersey or to prevent companies from leaving — Murphy has called for major reforms. They include enacting the spending caps and targeting the programs more to specific activities, such as historic preservation and brownfield redevelopment.

Lawmakers passed a bill last month that would simply extend the existing, uncapped programs until early next year to give them more time to study the broader issues. Murphy has vowed to veto the extension bill, but has yet to do so.

Lagging other states

Among the many topics covered in the report issued last year by the New Jersey Biotechnology Task Force was a review of the angel-investor tax incentives that are offered in other states. Two of the programs that were highlighted in the report were Maryland’s, with the 50-percent credit, and Massachusetts’, which offers credits up to 30 percent of an investment.

Assemblyman Christopher DePhillips (R-Bergen)
In the bill that Murphy signed into law Sunday, beyond the doubling of the basic tax break, investors can also get tax credits worth up to 25 percent of an investment under certain conditions. They include making investments in startups that are owned by women or minorities or located in low-income communities or federally designated “opportunity zones.”

Sponsors of the legislation praised Murphy for signing the bill, saying it will make New Jersey a more competitive place for startups to take root.

“New Jersey is in a tough battle with Massachusetts, New York, Pennsylvania, North Carolina and California,” said Assemblyman Christopher DePhillips (R-Bergen), who served on the task force. “We have to fight to keep innovation jobs right here in New Jersey.”

“There are so many businesses that have the potential to be successful and to thrive, they just lack sufficient financial backing,” said Assemblywoman Nancy Pinkin (D-Middlesex).

“This law is designed to help them in their efforts,” she said.

A fiscal-impact note prepared by the nonpartisan Office of Legislative Services estimated the annual loss of revenue from expanding the size of the tax credits would be $15 million. The OLS analysis also said the angel-investor credits that have been awarded in recent years have totaled well below the program’s $25 million annual cap.