A damning report from the Kansas Legislative Division of Post Audit says the Angel Investor tax credit program designed to spur investment in the state cost $20.2 million in foregone tax revenue over four years, but it was impossible to tell if the program had performed as designed. And even though the audit 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.
Post Audit was asked to estimate the economic and fiscal impacts of the Kansas Angel Investor Tax Credit program for the years 2015-2019.
The program was intended to spur investment in Kansas startups, but LPA says it’s unclear if that happened, particularly since there are no statutory benchmarks by which to determine success or failure.
“The angel investor tax credit program cost Kansas about $20.2 million in foregone income tax revenue in exchange for about $51.5 million in investment during 2015-2018, but we couldn’t tell if the program met its goals,” the introduction to the report reads.
The report found multiple issues with the way the program was administered.
Only eight counties saw any investment as a result of the program — Johnson, Douglas, Sedgwick, Wyandotte, Cowley, McPherson, Riley, and Shawnee — with Johnson County startups receiving the lion’s share. Forty-eight Johnson County businesses received $32.6 million in investments — or about 63% of the total.
Moreover, it appears that there was not a substantial performance difference between businesses receiving the credit and those who did not.
“During 2009-2019, the participating businesses we reviewed stayed in business through their first 3-to-5 years about as often as non-participants,” the report reads.
Additionally, only about 25% of the total investment was “new money” from outside the state, with the rest coming from Kansas investors.
“Kansans invested $37.5 million (about 73% of the total) during 2015-2018,” the report read. “… most Kansas investment came from Johnson, Sedgwick, and Douglas counties. $21.2 million or about 56% of in-state investment came from investors in Johnson County alone.”
Moreover, according to the report, while two studies reviewed by LPA indicate angel investor programs can increase the number of investors and amount of investment in startups, two studies show the increases in investor and investment quantity aren’t linked with increases in quality. The reports showed investors who use angel investor tax credit programs are often inexperienced, more likely to be first-time investors and less likely to be professionals compared to the average startup investor. Additionally, investments made under credit programs tend to go to lower quality businesses that have lower sales and employment compared to similar startup investments.
On top of all that, the report notes “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. Our analysis showed participating businesses lasted about as long as non-participating businesses:
- Only 39% of the participating businesses we reviewed operated for 3 years. 28% lasted for 5 years.
- For our control group of non-participating businesses, 53% lasted for 3 years. 38% stayed in business for 5 years.
Kansas State Senator Richard Hilderbrand, (R-Baxter Springs), who sits on the Special Committee on Economic Recovery, found the results troubling.
“Only 39% of those businesses lasted 3 years, and only 28% lasted 5 years,” Hilderbrand said in an email. “While 53% of the companies that did not participate in the program during the same time period lasted 3 years, and 38% lasted 5 years. Based off these numbers it appears that businesses that did not receive any governmental aid out-performed those that did.
“As with any economic program that the state operates, the legislature has to make sure that we are not picking winners and losers, and avoid crony capitalism … that doesn’t appear to be the case. While 78 startup companies received $20.2 million in Income Tax credits, they showed no evidence of job growth, or even the ability to stay in business.”
Hilderbrand also noted that at least three businesses left the state before completing the required 10 years to receive the full benefits of the credit — at a cost to taxpayers of $340,000 in revenue that was not “clawed back” by the Kansas Department of Commerce.
Recommendations
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 angel investor tax credit program’s goals. This might include specific benchmarks for program success.
Response from Commerce
Kansas Secretary of Commerce David Toland thinks the fact that businesses that received Angel Investment credits performed worse than firms that did not, is evidence of success.
“We believe that this audit clearly shows the value of the Angel Investor Tax Credit Program to the State,” Toland wrote to LPA in response. “The program is meant to assist innovative Kansas companies so they can compete with companies that have easier access to angel investors/early stage capital. In the report’s control group study, angel investor companies performed similarly to companies not participating in the program. This clearly points to the success the Angel Investor program is having and the value this program has to innovative entrepreneurs in our State.
“As one of the few programs in our State focused on innovative entrepreneurship, we must continue to support this crucial program.”
