Yesterday, Connecticut’s Auditors of Public Accounts released a scathing assessment of the state’s Angel Investor Tax Credit program. The tax credit was first implemented in 2010 and has since been administered by Connecticut Innovations (CI), the state’s quasi-public venture capital organization.
“CI did not have clear objectives, goals, or performance measures for the Angel Investor Tax Credit, and none were included in its enabling legislation,” reads the audit. “CI, legislators, and stakeholders could not fully evaluate the effectiveness of the Angel Investor Tax Credit without the ability to measure against clear goals and objectives.”
The audit blamed lawmakers for the program’s lack of legal guidance, purpose and reporting requirements, and also questioned the credit’s competitiveness and efficacy. The audit also levied blame at CI staff and leadership for failing to track data, collect feedback, or communicate programmatic requirements to participating businesses and investors.
The tax credit allows angel investors, or wealthy individuals who invest in startups, to receive an income tax credit equal to 25% of any qualifying investment. Investors must invest at least $25,000 in a qualified business to receive the credit, and can receive up to $500,000 in tax deferments for investments of up to $2 million. The state provides up to $5 million in total tax credits every year. To administer the tax credit, CI determines which businesses qualify as eligible investment targets and approves tax credits for eligible investors. Additionally, CI works to connect prospective investors with qualified businesses.
“To be effective, state tax credits need to be competitive with other states to attract investors and offer incentives that meet the needs of investors, businesses, and the state,” wrote the auditors. “Connecticut’s Angel Investor Tax Credit Program offers lower benefits and more restrictive eligibility requirements than other states.”
The auditors noted that both the 25% credit percentage, and $5 million annual cap, is lower than that of equivalent programs in other states. For example, the states of North Dakota, Tennessee and Virginia all offer tax credits equal to 50% of investment, while New Jersey offers $35 million in tax credits per year. The auditors also found Connecticut’s requirements for angel investor and business eligibility to be more prohibitive than those of other states.
“There is increased risk that Connecticut lost investments to other states with more appealing benefits,” wrote the auditors. “There is also increased risk that investors and businesses found the Connecticut credit structure prohibitive or insufficient to motivate investment.”
The audit recommended lawmakers to review the credit’s economic competitiveness, and recommended CI to collect regular feedback from businesses and investors. CI said it was willing to comply with any future amendments made to the program, and “would also share with the CT General Assembly a report from a contracted research firm, which shows the success” of the program “under the current guidelines.”
The auditors noted that other states with angel investor tax credits, such as Maine, Louisiana, Colorado and Kansas, outlined their credits’ purpose, objectives and performance measures in law, while Connecticut does not. The auditors pointed to other Connecticut tax credits, such as its Film Production Tax Credit, as examples of credits that had clearly defined goals and performance metrics written into the laws that implemented them.
“Effective management requires goals and objectives that establish criteria to measure performance,” wrote the auditors. “The enabling legislation did not establish objectives or priorities. CI did not consider establishing goals and performance measures as part of its role.”
The auditors also highlighted the fact that the tax credit does not specifically target investment to businesses in economically distressed or underdeveloped parts of the state. The auditors used several state programs, such as Connecticut’s Small-Town Economic Assistance Program (STEAP), as examples of other state initiatives that target a specific economic area or problem.
“Many states align their tax credits with other economic development and equity priorities in their state,” wrote the auditors. “A strategically designed state economic development approach should align incentives to deliver the maximum impact to better achieve economic and other development priorities.”
From 2010 to 2023, CI invested a total of $157,627,535 in 246 businesses across the state. The auditors determined that only 5% of investments went to businesses in rural towns, 39% of investments went to businesses in federal Opportunity Zones (cities recognized by the federal government as economically distressed) and only 6% of investments went to businesses in distressed towns. While the auditors found that 60% of investments went to businesses in STEAP towns, it noted that 68% of Connecticut’s towns are considered STEAP towns.
“The Angel Investor Tax Credit may not align with or enhance other economic development priorities,” wrote the auditors.
When comparing Connecticut’s laws to those of other states’ with similar tax credits, the auditors deduced that CI had relatively lax reporting requirements, leading to an inability to track key performance metrics.
“To make informed decisions, legislators and other stakeholders should have a comprehensive understanding of the Angel Investor Tax Credit’s performance, output, and impact,” wrote the auditors. “There is increased risk that stakeholders and decision makers did not receive sufficient details to effectively evaluate the credit’s effectiveness and determine the credit’s continuing value to the state.”
Some of the indicators the auditors recommended CI to “consider including” in its reports were the geographic distribution of its investments, any economic returns on investment, tax credit and employment trends, the number of jobs preserved by investments and the number of qualified businesses yet to receive any investments.
“CI fully complied with its reporting requirements as outlined by the CT General Statutes,” said CI. “CI would support the recommendations made by State Auditors for the CT General Assembly to consider.”
The auditors also found a lack of legal framework for CI to incentivize credits to businesses owned by veterans, women, minorities and disabled persons. Current laws stipulate that after April 1, the end of the fiscal year, CI should prioritize giving any leftover tax credits to such businesses. The auditors found that CI “did not actively prioritize credit reservations” for these businesses and concluded that current state law does not provide adequate guidance on how CI should do so.
“The General Statutes does not provide a structure that would allow for the statutory prioritization of investment in businesses owned by veterans, women, minorities, and individuals with disabilities,” wrote the auditors. “Without a differential incentivization or other prioritization structure, it is not clear whether such prioritization of investment is possible.”
CI officials responded by saying it does prioritize such businesses, and “at no time” have any such businesses been denied a reservation due to a lack of program availability.
“CI will work with and would comply with any amendments made by the CT General Assembly to the current legislation,” said CI.
While the audit found several legal ambiguities holding the tax credit back, and recommended lawmakers consider fine-tuning the program, auditors also found several shortcomings in CI’s administration of the tax credit. The auditors found CI failed to properly track its compliance with the statutory requirement that only 75% of its annual investments be reserved to tech businesses, and recommended CI “develop internal controls” to ensure compliance. CI asserted that it “fully complied” with the 75% cap, but agreed to “upgrade its internal reporting on the issue.”
Lastly, the auditors found CI to be insufficient at connecting qualified businesses to investors, and that its website lacked a general FAQ page as well as links to necessary forms, programmatic guidelines and instructions. The auditors surveyed several businesses and angel investors who reported confusion regarding various aspects of the program. CI was recommended to update its website, develop additional resources and information for investors looking to sell or transfer their credit, and to gather participant feedback going forward.
“CI’s website does show legislative references for the program and has help line phone numbers available for any questions that may arise,” said CI. “CI will review if expanding the website to include legal language and tax language would be beneficial to the process.”
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