More than three years after reporting deficiencies were found in the Kansas Angel Investor Tax Credit program by the Kansas Division of Legislative Post Audit, questions still remain about how effective the program is — and how well the Kansas Department of Commerce is tracking it.
A new audit recently released by LPA was commissioned to discover how the Angel Investor Tax Credit affected the behavior of both investors and businesses.
While LPA found that most investors said the program caused them to invest more or sooner than they otherwise would have, and businesses said the AITC helped them to do more than they otherwise would otherwise have been able to do, the audit also found that concrete benefits are difficult to show.
“Our surveys in this audit show both investors and businesses like and use the program, and many said the program influenced their behaviors,” LPA wrote. “However, determining whether the program leads to better business performance is still unclear. According to the literature we reviewed, lower-growth businesses are most often the beneficiaries of angel investor tax credit programs.”
Moreover, LPA said, the 2020 evaluation found businesses that participated in the AITC survived about as long as similar businesses that did not participate. They were also unable to determine if the program had no effect on businesses or helped lower-growth businesses perform better than they otherwise would have.
“The business survey from this evaluation suggests the program helped some participating businesses perform better,” the auditors wrote. “But we don’t know if those businesses had lower growth potentials. We also don’t know whether the program helped businesses that didn’t respond to our survey.”
Additionally, LPA found that Commerce’s program data was incomplete and sometimes inaccurate and that while the department “appears to have implemented a process to monitor whether participating businesses leave the state sooner than state law allows,” but added, “the process needs improvement.”
LPA recommended Commerce should “develop processes to regularly and systematically review its Angel Investor Tax Credit program data and correct inaccuracies” and continue to work to make its monitoring more efficient. LPA also says, “After implementing its plan, Commerce should evaluate whether it helped them provide all the oversight functions required by state law.”
Problems with Angel Investor Tax Credit are hardly new
As the Sentinel reported in Dec. of 2020, five years into the program, it was impossible to tell if the program had functioned as designed.
Just like this latest audit, LPA found no significant performance between companies receiving the credit and those that didn’t, the political appointee in charge of the program, Commerce Secretary David Toland, says the program is a success.
In 2020, LPA found that only about 25% of the total total investment was “new money” from outside the state, with the rest coming from Kansas investors. That has improved somewhat, with 40% of the roughly $44 million in investments coming from out of state, but the majority is still from Kansas investors, and it is unclear if they would have invested anyway.
According to the 2020 report, while two studies reviewed by LPA indicated angel investor programs could increase the number of investors and amount of investment in startups, two studies showed that increases in investor and investment quantity aren’t linked with increases in quality. The reports showed that investors who use angel investor tax credit programs are often inexperienced, more likely to be first-time investors, and less likely to be professionals than the average startup investor. Additionally, investments made under credit programs tend to go to lower-quality businesses with lower sales and employment compared to similar startup investments.
On top of all that, the report noted, “Overall, few of the businesses that participated in the angel investor tax credit program lasted for 3-to-5 years. But they weren’t statistically different from our control group.”
LPA had several recommendations to improve the program:
- The Department of Commerce should proactively enforce the statutory requirement that participating businesses stay in Kansas for 10 years.
- The Kansas Legislature should consider amending the statute to shorten the 10-year requirement.
- The Kansas Legislature should consider amending the statute to clarify the AITC program’s goals. This might include specific benchmarks for program success.
Another audit by LPA in April of 2023 — less than a year ago — could not determine if Commerce had implemented any of their 2020 recommendations. According to the audit, the only employee who could provide the information LPA needed was on “extended leave” and Commerce failed to even respond to LPA’s conclusions.
