Kentucky's 'Angel Investor' Tax Breaks Are Popular — And Secretive
In a single day last month, “angel investors” committed to invest $7.5 million in Kentucky small businesses — and snatched up $3 million in tax breaks.
Kentucky’s angel investor tax incentive program is among the nation’s most generous, and it has grown so rapidly that legislators are considering increasing the program’s cap. Business leaders and the Kentucky Cabinet for Economic Development say the incentives are a small price to pay for investors to infuse high-tech startups and small businesses with capital.
But the cabinet refused to make public most records about the investors or the businesses, citing their privacy and fear that they’d release “proprietary” information that would damage the businesses.
The documents include names of owners, the number of employees and whether the net worth of the business is less than $10 million as required by law.
The state’s Finance and Administration Cabinet also won’t turn over documents that would show who actually cashes in on the tax breaks, which are transferable and can be carried forward for up to 15 years. Finance and Administration Cabinet spokeswoman Pamela Trautner didn’t respond to requests for comment after the records request was denied.
Jack Mazurak, spokesman for the Kentucky Cabinet for Economic Development, said companies are entitled to some privacy, and that what people pay in taxes -- and whether they pay taxes at all -- is a private matter.
He describes the state’s role as a third party, neither asking anyone to invest in a particular company nor making the investment itself. And the incentive itself is more of a coupon than a check from the state, Mazurak said.
“We want to create the most jobs and incentivize companies that are going to grow, do well and create tax revenue and jobs in Kentucky,” Mazurak said.
Tax Credits Popular Outside Kentucky
The incentive first launched in 2015 and is available to investors who put at least $10,000 into a qualified small business in the program. In return, investors get 40 percent back as a tax break. The incentive rises to 50 percent if the business is located in one of 71 counties considered economically depressed.
Companies must certify they have less than $10 million in assets and fewer than 100 employees. The state makes no requirement for numbers of jobs created.
The state doesn’t screen the finances of the investors, or companies, aside from ensuring they meet the qualifications for the program. Tax credits are first-come, first-served, so investors are awarded in the order they apply for the credit, Mazurak said.
The Kentucky Cabinet for Economic Development publishes the names, addresses and websites of the companies receiving investments, but shares no information about the owners or number of employees. The cabinet publishes only the names of investors who get tax breaks.
Almost 430 investors have signed up for the program. The cabinet says that 28 percent of the investors are from outside Kentucky -- people who otherwise may not have cause to put their money into the commonwealth.
Out-of-state investors may not have use for the tax credit, but they can benefit from selling it to a Kentuckian. When asked how taxpayers could find out who the investors might be selling their tax credits to, Mazurak suggested asking the investors.
Jennifer Bird-Pollan, an associate professor of law at the University of Kentucky and a former tax lawyer, scoffed at that suggestion.
“Why do you publish the names of the investors, but you're not going to publish the names of the beneficiaries?” Bird-Pollan asked. “The investors at that point are really secondary.”
She also worries about how much of the tax benefits are going to people who aren’t actually investors.
“If people understood that the benefits are being felt by people who aren't making the investments at all, I think there would be more explicit criticism of the program,” Bird-Pollan said.
Recipients Not Just High-Tech Startups
Liberate Medical is precisely the sort of company one might expect to see in an angel investor program.
The company makes a medical device that its developers hope will help patients with breathing atrophy get out of intensive care faster than other methods. Angus McLachlan, the company’s founder and CEO, said initial research is promising, but the device still needs to clear trials in the European Union and then the FDA before it hits the market.
Liberate received $125,000 last year from two investors who claimed the tax credit. McLachlan doesn’t believe the tax credit was a deciding factor for either; but other potential investors admitted being on the fence when they were put on the waiting list for a tax credit. When the breaks didn’t materialize, they walked away.
“If you’re raising money at that time of the year, it’s extremely helpful, and that was our situation,” McLachlan said. “If we wanted to raise money in June or July, the investors we worked with wouldn't be able to benefit from the program.”
But the law doesn’t actually require companies to be high-tech, or even startups.
The companies need only fit in one of a handful of broad categories -- one of which is “other new economy knowledge-based activity.”
“Who is the state to say, ‘Well, this industry can and this industry can't?’” Mazurak said. “That's not our role.”
Louisville-based Comfy Cow has received investments through the program, though it’s been around for nearly than a decade. Mazurak said that’s because the company branched out into manufacturing when it announced plans in 2015 to sell to grocery stores nationwide. The state awarded $200,000 in tax credits to investors.
Local production was shuttered last summer, and the company is no longer qualified for the tax credit. Owner Tim Koons-McGee declined to comment.
Cuddle Clones makes custom stuffed animal versions of pets for upwards of $200. It’s in the program as an “other new economy knowledge-based activity.” The plush toys are manufactured in China, and shipped to customers from an office in Louisville. For $200,000 in investments in Cuddle Clones, the state will award $80,000 in tax breaks.
Founder Jennifer Williams described qualifying as an easy process that required certifying how many employees she had and other details.
Williams said she is using the investment through the tax credits to add some new products and for marketing.
“We are going to build our engagement a little bit more through a community on our website,” Williams said. “They’re all crazy about their pets, and they want to talk and share pictures.”
The beneficiaries also includes bourbon producers such as Patriot Brands LLC, the company behind the Six Mile Creek Distillery, a visitors center and a history park opening soon in Henry County.
The facility falls under “advanced manufacturing.” The state gave $380,000 in tax credits to the bourbon park’s investors last year and is on track to give out $420,000 more in 2018.
Chip Hamm, an attorney who represents Patriot Brands, said the public may not realize how high-tech bourbon production has become. The tax incentive programs have been a big help in getting the tourist attraction, and associated new jobs, off the ground, Hamm said.
“If we hadn’t had the angel investment tax credit, we would have added several months to this,” Hamm said.
He noted that having a list of people that are shopping for investment opportunities also helps businesses find support faster.
Both the bourbon park and Cuddle Clones are already part of another tax incentive program: the performance-based Kentucky Business Investment program.
The state announced last week that Cuddle Clones was earning incentives through another program: up to $500,000 in tax incentives for relocating into a bigger Louisville facility. Patriot Brands is eligible through the same program for up to $200,000 in tax incentives -- and another $200,000 through the Kentucky Enterprise Initiative Act.
Mazurak described the cabinet’s tax incentives as a “buffet” where businesses might be eligible for a number of different programs.
Legislators Considering Changes
The program could look a little different next year if a bill co-sponsored by state Rep. Ken Fleming passes.
Incentives for investors in less economically depressed counties such as Jefferson and Oldham would be reduced, from 40 percent to 25 percent. The overall program cap would increase from $3 million to $5 million. If passed, the Kentucky Cabinet for Economic Development would also have to track more closely the results the program is producing.
"We wanted to make sure we look at each tax credit and see if the taxpayers are getting the return on having these initiatives," said Fleming, a Republican who represents part of Jefferson and Oldham counties. "We're really being more accountable and responsible in making sure these things are producing what they are supposed to produce."
Fleming said he had not thought about whether more information on the companies and the names of the people who ultimately use the tax credits should be made public.
“At the end of the day, you probably should know,” Fleming said. “But I don't know what the ramifications are, pro and con. I’d have to think about it.”
This story was reported jointly with WAVE 3 News.
Kate Howard can be reached at firstname.lastname@example.org and (502) 814.6546.