Once in a generation a state enacts a historic piece of legislation that changes the fortunes of its citizens for the better.  In 2004, that state was Kansas and the law was the Kansas Economic Growth Act.  The leadership of Kenny Wilk in the House of Representatives and Nick Jordan in the Senate, combined with the support of Governor Kathleen Sebelius, created overwhelming momentum for the bill and enabled smooth implementation going forward.  For this post, I would like to focus on the section of that law that created Kansas Angel Investor Tax Credits, which were particularly well designed and implemented.

The Kansas Angel Investor Tax Credit statute empowers the Department of Commerce to issue up to $6M per year in state tax credits to individual angel investors in an amount of up to 50% of their investment in certain companies that become qualified with the Department.  Participation in the program is limited to high growth, technology-based businesses based in Kansas.  This makes sense when you review the work over the last several years of Bob Litan and the Kauffman Foundation which shows that these types of companies create most of the new jobs in the American economy.

The Kansas Angel Tax Credit program is a very efficient way for the State to help these companies get through the “valley of death” and on their way to rapid growth and job and wealth creation.  By design, dollars are allocated only to those companies that are successful in attracting private capital.  The state effectively follows the due diligence of private individuals investing their own money in making the public “investment.”  The private investor benefits from a reduction in risk, resulting in greater investment in the types of early stage, high potential companies that could one day grow to become huge sources of jobs and taxes like Cerner, Garmin, and Marion Labs.  In my experience, these credits have been highly motivating for investors and the presence of the program in Kansas is a major reason that so many early stage technology companies have located in the state in the last six years.   

Conversely, direct investment funds run by states require an expensive due diligence operation, which reduces investment efficiency.  Furthermore, the investment managers in these funds do not typically have a financial stake in the outcome and therefore can be influenced by personal or political considerations, which likely contributes to the low returns generally seen with these types of state funds.  

With an angel tax credit program, the state comes in for less criticism as the blame for failure to raise capital is borne by the entrepreneur.  With a state direct investment fund structure, entrepreneurs can blame a decision by the state agency managing the fund for their failure, and unsuccessful individuals can occasionally go to influential friends in government to complain, which can cause program disruption and encourage misallocation of capital.

The Kansas Angel Tax Credit program also allows out-of-state investors who do not owe state taxes in Kansas to sell their credits on an open market for cash.  This has resulted in a flood of capital into Kansas and created an oasis in the state in a capital starved world.  Not bad for government work.

I would like to acknowledge and thank Michael O’Shaughnessy for reviewing this post and providing helpful comments and edits.