OLR Bill Analysis
AN ACT CONCERNING THE RECOMMENDATIONS OF THE MAJORITY LEADERS' JOB GROWTH ROUNDTABLE.
This bill increases capital flows to new and expanding small businesses. It does so by authorizing tax credits for business investors and extending the existing job creation tax credit to more small businesses. It also increases state venture capital for developing new business concepts and qualifies export assistance for state economic development dollars. It repeals several underused tax credits.
The bill also sets new policy directives. It requires, instead of allows, the Department of Economic and Community Development (DECD) commissioner to apply for federal funds. It also requires her to provide enough staff to implement cluster initiatives. She and the quasi-public Connecticut Innovations, Inc. (CII) must market the state as a place of innovation. The bill requires membership on CII's board of directors to include an “angel investor,” a person who invests in small, start-up companies.
The bill appoints the DECD commissioner to two energy policy advisory boards and makes energy improvement projects eligible for school construction grants.
Lastly, the bill creates an 11-member task force to study how the state can reduce or eliminate duplicative procedures and paper usage. The task force consists of state officials and people appointed by the legislative leaders. It must report its findings and recommendations to the legislature by February 1, 2011.
EFFECTIVE DATE: October 1, 2010 for the provision authorizing the innovation marketing campaign; other various, see below.
§§ 3 & 4 ANGEL CREDITS AND ANGEL INVESTORS
The bill authorizes personal income tax credits for people who invest in qualified Connecticut start-up businesses (i. e. , angel investors). The credit equals 25% of the cash investment up to $ 125,000. Total credits cannot exceed $ 6 million per year in FYs 11 and 12 and $ 3 million per year in subsequent fiscal years. CII must administer the credits, and angels cannot claim credits on or after July 1 2020.
A person qualifies as an angel investor if he or she is an “accredited investor” under Security and Exchange Commission (SEC) rules. (Accredited investors are typically upper-income, high-net-worth individuals and entities—see BACKGROUND. ) Angels usually invest in businesses that interest them and consequently seek a role in fostering the business' development, usually as a consultant or mentor.
Under the bill, angel investors do not include:
1. someone who controls 50% or more of the business receiving the investment;
2. a venture capital company; or
3. any bank, savings and loan association, trust, insurance company, or similar entity for activities that are part of its normal business.
Businesses Eligible for Angel Investments
The bill specifies criteria a business must meet before an angel can invest in it and claim a credit. The business must have its principal place of business in Connecticut, and may be a wholly-owned subsidiary of a foreign corporation as long as it does most of its business in Connecticut or produces most of its products or services here.
In either case, the business must have:
1. gross revenues under $ 5 million in its most recent income year;
2. fewer than 25 employees, more than half of whom are Connecticut residents;
3. operated in Connecticut for less than 10 consecutive years; and
4. received less than $ 1 million in investments from credit-eligible angel investors.
Lastly, the business' managers and their families must be the primary owners and, as described below, the business must have been identified by CII as eligible for angel investment.
The bill creates a mechanism for connecting eligible angel investors with eligible businesses seeking angel investments. A business seeking such an investment must apply to CII for approval as an eligible business. CII must establish and maintain a list of such businesses and make it available to angel investors for review. CII will add an eligible business to its list if the business provides:
1. its name and a copy of its organizational documents;
2. a business plan describing the business and its management, product, market, and financial plan;
3. a statement of its innovative and proprietary technology, product, or service;
4. a statement of its potential economic impact, including the number, types, and location of jobs it expects to create;
5. a description of the qualified securities it offers, their cost, the amount of requested tax credits, and the earliest year investors can redeem them;
6. the amount, timing, and projected use of the proceeds from the sale of securities; and
7. any other information CII requires.
CII's executive director must compile the list monthly, no later than August 1, 2010. The bill requires him to do so by categorizing the businesses by the estimated amount of tax credits and the type of qualified security they offer. (Apparently, the business must estimate the credit based on the amount of investment it seeks. )
Accessing the Credits
An angle investor who plans to invest in an eligible business must apply to the revenue services commissioner to reserve angel tax credits. In doing so, the investor must indentify the business and the amount he or she plans to invest.
The investor may claim the credit only for cash investments in the business' qualified securities, which can be equity or debt instruments. The former includes general or limited partnership interests, any type of common or preferred stock, or any combination of subordinate or convertible debt with a means of equity conversion attached. Debt instruments can be secured or unsecured, but must (1) be subordinated to the debtors' general creditors and (2) require no payments of principal, other than payments out of the debtors' future profits, for at least the first seven years of their term.
Angels cannot claim credits for cash they invest in CII.
Using or Transferring Credits
Credits cannot exceed the total income tax an investor owes in a given year. The investor must claim the credit in the same year he or she invested the funds, but can carry forward unused credits for up to five succeeding years. The investor can also transfer all or part of the credit to another taxpayer, and that taxpayer may transfer the credit a second time.
If the investor transfers the credit to another taxpayer, both must notify the revenue services commissioner within 30 days of the transfer, indicating:
1. the credit certificate number,
2. the transfer date,
3. the amount of credits transferred,
4. the tax credit balance before and after the transfer,
5. the tax identification numbers of both parties, and
6. any other information the commissioner requires.
Buyers and sellers who fail to notify the revenue services commissioner cannot claim the credits until they do so.
The bill requires CII to review the credit's effectiveness, but the bill specifies no criteria for doing so. CII must complete the review by September 1, 2015 and report to the Commerce and Finance, Revenue and Bonding committees.
Angel Investor Included in CII Board
The bill places an angel investor on CII's 15-member board without increasing its size by requiring the governor to include an angel investor among the eight board members she appoints. This requirement is effective October 1, 2010.
EFFECTIVE DATE: October 1, 2010 for the provision including an angel investor on CII's board and July 1, 2010, for the tax credits, and applicable to tax years beginning on or after January 1, 2010.
§ 13 — NEW INSURANCE REINVESTMENT FUND PROGRAM
The bill creates a new component to the Insurance Reinvestment Tax Credit Program, using the same type of funding mechanism as the existing one. In this mechanism (1) state-designated funds organize to make business investments, (2) insurance businesses are designated to receive the funds' investments, and (3) taxpayers qualify for tax credits by investing in the designated businesses through the funds.
Taxpayers may claim the credits or transfer them to other taxpayers. In either case, taxpayers must forfeit or repay the credits if the business fails to meet specific performance standards. The existing component offers insurance premium, corporation business, and personal income tax credits to taxpayers that invest in insurance businesses through a state-designated fund. Taxpayers must claim these credits over 10 years, but only if the insurance business receiving the investment (1) developed a new facility, (2) occupies it over the 10-year period, and (3) employs at least 25% of its workforce in new jobs.
The bill's new component has the same structure but matches different investors and businesses. Because the bill's tax credits apply only to the insurance premium tax, only insurance companies can invest through a state-designated fund. The fund can invest in any Connecticut-based business, not just insurance companies, as under current law. A business is based here if at least 80% of its workers live here or 80% of its payroll goes to Connecticut residents (i. e. , its “principal business operations”).
While the existing component imposes performance standards on the insurance company receiving the investments, the new component imposes performance standards on the fund making the investment. A fund that fails to meet the standards faces penalties, and its investors risk forfeiting future credits.
Eligible Investors and Investments
As noted above, only insurance companies qualify for the bill's credits. A company qualifies only if it invests cash at par or at a premium that fully pays for an equity interest in an approved insurance reinvestment fund or in an eligible debt instrument issued by a fund.
A fund's debt instrument cannot mature less than five years after it was issued, cannot amortize the debt's principal faster than five years, and cannot tie interest distribution or payment to the fund's profitability or investment success.
The company may claim the credit only if the fund is closed to additional investments and investors after it applies to the commissioner for a license. It may only claim the credit if the fund invests in a Connecticut-based business employing fewer than 150 employees (i. e. , eligible recipient). As noted above, a business meets this standard if at least 80% of its employees reside in Connecticut or 80% of its payroll goes to such employees. A business must meet the bill's standards each time a fund invests in it.
Insurance companies qualify for the credits only if they invest in a state approved “insurance reinvestment fund,” which can be a Connecticut partnership, corporation, trust, or limited liability company. The fund can be organized on a for-profit or nonprofit basis, but it must be managed by two principals or persons that have at least four years of experience managing venture capital equity funds with at least $ 50 million raised from people unaffiliated with them.
Funds must be licensed by the DECD commissioner, who may begin accepting license applications on or before July 1, 2010 (which is before the bill takes effect on July 1, 2010). Each application must:
1. indicate the amount of capital the fund will raise;
2. include an affidavit from each insurance company investor committing investments to the fund;
3. include a nonrefundable $ 7,500 application fee;
4. prove that the fund qualifies an insurance reinvestment fund;
5. include an estimate showing that the investment will generate the same as or more tax revenue than the state will forge due to the credits; and
6. state that the fund will invest at least 25% of its eligible reinvestment funds in businesses employing people in “green jobs,” as determined by the Labor and DECD commissioners under the governor's Executive Order 23.
The application must also include a plan showing:
1. the share of funds it will invest by December 31 of 2013, 2015, 2017, and 2019;
2. the types of businesses in which the fund will invest; and
3. the share of the fund's investment capital each type will receive.
Within five days after the DECD commissioner approves a fund, each investor must invest its committed amount in it. An investor that fails to do this must notify the commissioner by overnight common carrier delivery service. In doing so, it forfeits the credit and the commissioner may reallocate it to another eligible investor. The investor and the fund must each pay a $ 25,000 administrative penalty.
Insurance Premium Tax Credits
These credits apply only to the insurance premium tax and equal 100% of an insurer's investment. An insurer must claim a portion of the credits over seven years, from 2013 to 2019 according to the bill's schedule. The business can claim up to 10% of the credit per year in 2013, 2014, 2015, and 2016 and 20% per year in the next three years (2017 to 2019).
Insurers investing in an eligible fund must apply for the credits, but the bill does not specify to whom. Whether it is to DECD or the fund, the party accepting the applications must do so on a first-come, first-served basis. If the party receives several applications on the same day, it must approve them simultaneously. If their total request exceeds the available credits, the party must allocate them on a pro rata basis. The party must do this because the bill caps the annual credits for both components at $ 40 million per year.
Companies may claim the credits under the same rules that apply under the existing program. These address how companies submitting a combined return may claim the credits. The bill allows insurers to transfer credits to their affiliates. To facilitate these transfers, the bill requires the DECD commissioner to adopt regulations. She must do so in consultation with the revenue services commissioner and the Office of Policy and Management (OPM) secretary.
Lastly, companies claiming credits under the bill cannot claim the other credits the law allows for similar investments.
Funds must invest only in eligible businesses and do so according to the bill's schedule. A fund may invest no more than 15% of the credit-eligible funds in one business without the commissioner's prior approval. The fund may also invest these funds in bank deposits, certificates of deposit, or other fixed income securities. (Presumably, a fund would do so until it is ready to invest the funds in an eligible business. The bill does not specify how the fund must account for the interest income these investments subsequently earn. )
In addition, the fund must have invested 70% of its funds in eligible businesses by December 31, 2015; at least 15% of that amount must be invested in green technology businesses. The fund must have invested all of its funds by December 31, 2019, with at least 25% of the total invested in green technology businesses. (The bill specifies that a fund must meet these targets to continue to be certified. But it specifies no rules or procedures for certifying and recertifying a fund. )
Annual Performance Report
The fund must meet these targets or pay a penalty. It must account for its activity by reporting annually to the commissioner by January 31. The report must show:
1. the year-end balance for credit-eligible funds;
2. each business receiving investments, including its location and industry classification code;
3. the percentage of credit-eligible funds invested in green technology businesses; and
4. distributions or payouts the fund made during the previous year.
The annual reports for 2014, 2016, 2018, and 2020 must also show if the fund is meeting its investment schedule. Besides submitting these reports, each fund must also submit its annual audited financial statements to the commissioner.
The commissioner must review these reports to ensure that the funds are complying with the bill's investment schedule, reporting requirements, and distribution rules. She can revoke a fund's license if it fails to meet any of these. In this case, she must notify the fund's officers that she can revoke the license within 120 days after notifying them unless she waives the deficiencies or the fund corrects them.
Forfeiture and Fine
The bill states that revoking the license does not require the fund's investors to repay (i. e. , recapture) the credits they claimed. But it requires the investors to forfeit unclaimed credits and the fund to pay a fine equal to the value of all claimed credits. Penalties and forfeiture are triggered if the fund fails to meet the bill's investment targets for specified years.
As stated above, the fund must invest 70% of its credit-eligible funds by 2015 and it must invest 15% of those funds in green technology businesses. If it fails to meet these targets and its license is revoked, the investors must forfeit the unclaimed credits. The fund must pay a fine equal to the value of these credits. If the fund met the 70% investment goal but not the 15% goal for green technology business investments, it must pay a fine equal to the value of the credits claimed in 2014 and 2015.
The forfeiture and fine rules are different if the fund fails to meet the 2019 investment goals (i. e. , 100% of funds invested; 25% in green technology businesses). In this case, investors do not forfeit any credits claimed in 2013, 2014, or 2015. These include the credits the investors claimed and those they will carry forward. Nor does the bill require the fund to pay a penalty equal to the value of the credits claimed and the ones carried forward.
But it does require investors to forfeit any credits they are carrying forward from 2016, 2017, 2018, and 2019. And it requires the fund to pay a penalty equal to the value of the credits investors claimed for each of those tax years. If the fund met the overall investment goal but failed to meet the 25% green technology business goal, the penalty equals the credits claimed for 2018 and 2019.
The commissioner cannot require forfeiture or impose penalties on investors or funds if the fund invests 100% of the credit eligible funds by 2019 and, by that date, invests 25% of the funds in green technology businesses.
A fund cannot begin paying investors their returns on investment (i. e. , distribution payments) until it meets specific requirements. The fund must still be operating in Connecticut and must have invested all of the credit-eligible funds, with at least 25% of the amount invested in green technology businesses and at least 5% in small “preseed” businesses (those with fewer than 10 employees and gross annual revenues under $ 1 million). The fund can invest no more than $ 100,000 in any preseed recipient.
Although the fund must meet these investment standards before it can distribute funds, it can distribute funds before it meets these standards for reasons the bill specifies. These include payments, debt service, and operating expenses.
EFFECTIVE DATE: July 1, 2010.
§ 11 — JOB CREATION TAX CREDIT CHANGES
The bill simultaneously extends the job creation tax credit program to more businesses, tightens the criteria for claiming them, and reduces the credits' value and term. Current law limits the amount of credits available to all eligible businesses to $ 10 million per fiscal year. The bill increases the annual limit to $ 25 million.
Under current law, the program is open to businesses paying the corporation business, utility company, and insurance premium taxes. The businesses subject to these taxes do not include “S” corporations and limited liability companies and partnerships, whose owners and partners pay income taxes on their share of the income the business generates. The bill allows these businesses to qualify for the credits by extending them to the personal income tax.
The bill also extends the program to more taxpayers by reducing the minimum number of full-time jobs they must create to claim the credits. Current law requires them to create at least 10 full-time jobs; the bill requires them to create only one.
The bill makes the program more accessible by reducing certain application requirements. Under current law, a taxpayer applying for the credits must show that it qualifies for the credit and that the expansion resulting in the new jobs will benefit the economy without sacrificing the state's conservation and development goals. The DECD commissioner must weigh this analysis in deciding whether to award the credit.
The bill eliminates these requirements and makes conforming technical changes. It specifies that the commissioner must approve credit requests on a first-come, first-served basis. It also allows, instead of requires, the commissioner to charge an application fee.
Although the bill reduces the minimum number of jobs a taxpayer must create, it tightens the criteria each new job must meet before business can claim a credit. Under current law, only new full-time jobs filled by new employees count toward the credit. Temporary or seasonal jobs or those that require an employee to work less than 35 hours per week do not count toward the credit. Under the bill, the wages for the new full-time jobs must be at least 80% of the state's median income and include health care benefits. Also, these jobs must be filled by Connecticut residents.
The taxpayer must verify that it paid these wages and provided the benefits when it applies, as it must by law, for the DECD certificate that allows the taxpayer to claim the credit on its return. The taxpayer must, by law, apply for the certificate within 30 days after the end of its income year.
The bill also reduces the credits' value. Under current law, the credit equals 60% of the income withheld from the new employees' wages for income taxes. Under the bill, the credit equals 15% of the wages paid to the new employees. Current law imposes no cap on the dollar amount of the credits a business may claim and allows it to claim the credits for five successive years. The bill imposes a $ 4,000 cap on the total amount of credits a business can claim each year and reduces the term to three years.
Lastly, the bill specifies that businesses claiming credits for creating new jobs under the job incentive program cannot claim credits for creating these jobs under other tax credit programs.
EFFECTIVE DATE: July 1, 2010 and applicable to income or taxable years beginning on or after January 1, 2011.
§ 14 — REPEALED TAX CREDITS
The bill repeals the current tax credits for donating computers to public and private schools (CGS § 10-228b), making grants to colleges and universities for research and development (CGS § 12-217l), constructing new facilities that house financial institutions (CGS § 12-217u), and paying Small Business Administration guaranty fees (CGS § 12-217cc).
EFFECTIVE DATE: Upon passage and applicable to income years beginning on or after January 1, 2011.
§§ 1 & 2 — Preseed Funding
The bill authorizes $ 12 million in bonds to provide (1) funds to businesses to prove new concepts (i. e. , “preseed” financing) and (2) support services to “high potential entrepreneurs” (which the bill does not define). It establishes a nonlasping General Fund account for receiving the bond proceeds.
It requires CII to establish a program to administer these funds. CII must provide the services through a nonprofit corporation that serves entrepreneurs and businesses. CII must do so by entering into an agreement with the corporation.
EFFECTIVE DATE: July 1, 2010.
§§ 5 & 7 — SBIR Matching Grants
The bill expands CII's Early Stage Venture Capital Program to provide matching grants for businesses receiving federal SBIR funding.
The SBIR Program provides grants to small, technology-based businesses for researching, developing, and commercializing new products. It provides the grants for two developmental phases. Its Phase I grants up to $ 100,000 are for determining if a proposed new technology is feasible. If so, the program provides a Phase II grant of up to $ 750,000 for developing the technology's prototype.
CII's Early Stage Venture Capital Program provides capital for similar purposes. Its grants go to newly established or expanding businesses in the early stages of developing new products or processes. Current law requires CII to apportion the program's funds based on the stages of a business' development. The bill requires CII to apportion at least 10% of the funds for the SBIR matching grants and correspondingly reduces from 40% to 60% the portions allocated for expansion financing to 30% to 50%.
The bill limits the matching grants to no more than 50% of each federal grant, up to $ 50,000. CII must revise its criteria for awarding early stage venture capital grants to incorporate the SBIR matching grants. In doing so, it must consult with its Small Business Innovation Research Office.
EFFECTIVE DATE: October 1, 2010.
§ 9 — Manufacturing Assistance Act (MAA) Expansion
The bill authorizes the commissioner to use MAA funds to support exporting. Current law allows her to use these funds to create and support organizations that provide technical and engineering services to businesses. It also requires her to create and support activities to promote the export of products and services.
The bill allows the commissioner to use MAA to promote exporting, including sponsoring export support programs, helping companies access U. S. Department of Commerce export assistance services, and providing export-related marketing materials and website improvements. Lastly, the bill makes export assistance eligible for MAA funding.
EFFECTIVE DATE: July 1, 2010.
§ 10 — School Construction Grants for Energy Improvements
The bill makes energy improvement projects eligible for school construction grants. The funds can be used to construct, purchase, extend, replace, renovate or significantly alter a public school building to improve its energy use. They can also be used to upgrade schools to meet state energy and environmental design standards.
EFFECTIVE DATE: October 1, 2010
§ 8 — DECD Commissioner Powers and Duties
The bill increases the commissioner's general duties and powers in several policy areas.
EFFECTIVE DATE: July 1, 2010
Energy Policy Advisory Boards. The bill requires the commissioner to serve on the Connecticut Energy Advisory Board and the Energy Conservation Management Board. The former is a 15-member board charged with promoting competing energy solutions. Its members include the Agriculture, Transportation, and Environmental Protection commissioners; the chairperson of the Department of Public Utilities Control; the consumer counsel; and the OPM secretary, or their designees.
The 13-member Energy Conservation Management Board advises utility distribution companies on developing and implementing comprehensive, cost-effective energy conservation and market transformation plans. Its members include representatives of the attorney general, the Office of the Consumer Counsel, and the Environmental Protection commissioner.
Exports, Manufacturing, Clusters and Regulatory Assistance. The bill requires the commissioner to take more steps to promote exports and manufacturing by assigning enough staff to (1) provide technical assistance to businesses regarding exporting and manufacturing, (2) help groups of related businesses implement policies designed to improve their overall competitiveness (i. e. , cluster-based initiatives), and (3) help businesses comply with regulatory requirements.
Marketing and Technology Development. The bill increases the commissioner's duties regarding new technologies. It requires her to develop a marketing campaign that promotes Connecticut as a place of innovation. It also requires her to implement a 2000 agreement with Massachusetts to promote the biomedical device industry in the Connecticut River Valley region between Hartford and Springfield (i. e. , the New England Knowledge Corridor).
Applying for Federal Funds. The bill requires the commissioner to apply, qualify, and accept federal funds related to economic development. Current law gives her the discretion to do so. The bill also requires the commissioner to report annually in her comprehensive annual report to the legislature on her activities to secure these funds.
§ 12 — Waste Reduction Task Force
The bill establishes an 11-member task force to determine how state agencies and departments can reduce or eliminate duplicative procedures and paper usage. In doing so, the task force must determine how technology can help agencies and departments achieve these goals.
The task force consists of state officials and corporate executives, economists, and information technology experts. The task force includes the administrative services commissioner, the OPM secretary, and the Information Technology Department's chief information officer, or their designees. The other members are appointed by legislative leaders. The House speaker and Senate president pro tempore each appoint two and the other four leaders each appoint one. They must make their appointments by July 30, 2010. Members must serve without compensation, but are reimbursed for expenses.
The speaker and president pro tempore must also select the task force's co-chair persons from among the members. The chairpersons must convene the task force's first meeting by August 29, 2010. The Commerce Committee's administrative staff must provide administrative support. The task force must submit its findings and recommendations to the Commerce Committee by February 1, 2011.
EFFECTIVE DATE: July 1, 2010
sSB 323 (File 298), which the Commerce Committee favorable report on March 18, contains identical provisions regarding angel tax credits the and angel investor member on CII's board, and the SBIR funding.
sSB 395 (File 259) and SB 454 (File 307), which the Commerce Committee favorable reported on March 18, contains identical provisions regarding the DECD commissioner's duties and exporting under MAA.
sHB 5357 (File 278) makes identical changes regarding the job incentive grants and the repealed tax credits.
Joint Favorable Substitute