Promoting Rural Business Investments

SB 5208 would create a tax credit program to encourage private contributions towards rural businesses. Photo: Dave Bleasdale

Washington State lawmaker testimony proved lively last week on a bill that would establish a tax credit program to incentivize investment in rural businesses. SB 5208 would establish a process for the purpose of creating a rural growth fund that proponents argue could generate $100 million in rural area contributions. However, some key lawmakers aren’t on board with the idea, citing issues with similar programs in other states.

Prime sponsor is Majority Caucus Vice Chair Judy Warnick (R-13). Cosponsors include State Sen. Dean Takko (D-19), Majority Assistant Floor Leader Brad Hawkins (R-12), and Majority Leader Mark Schoesler (R-9).

‘Push Capital to Small, Rural Businesses’

“What’s behind this is something familiar to all of us: it’s the difficult time that small businesses have in raising capital,” Mark Scheffel, Senior Vice President of Advantage Capital Partners, told the Senate Ways and Means Committee during Wednesday, April 19 public testimony.

“You add to that equation rural businesses, it expounds on itself…this is designed to incentivize investment programs that will infuse and push capital to small, rural businesses in the state of Washington,” he added.

Advantage Capital Partners is a venture capital investment firm that would qualify for the program, and would be one of the firms competing for a fund allocation should the bill pass, according to Scheffel.

Ensuring Program Success

SB 5208’s bill report details several provisions related to how the grant program would be set up and how the funds would be allocated under Department of Commerce authority. To summarize:

-tax credits are given to eligible rural or small business investment companies to act as incentives to raise the rural growth fund

-in their application for the grant program, those firms must detail the estimated jobs created or retained by the additional rural contributions and provide proof they have invested at least $100 million in private business located in rural areas, among other requirements

-within two months after Commerce’s approval, those companies must collect capital contributions from tax credit certified taxpayers until it equals the agreed upon investment authority

-Commerce may not approve more than $100 million investment authority in the program, or $60 million in credit-eligible capital contributions

-the tax credits cannot be claimed until the fourth year after the closing date, and may be used for business and occupation (B&O) or insurance premium taxes

The bill would includes strict provisions on revoking tax credits to prevent abuse of the fund, and a number of reporting requirements to ensure Commerce and the firms are in contact throughout the program’s lifetime.

The measure’s companion, HB 1422, has not made progress since moving to the House Finance Committee in March.

During last month’s public testimony, State Rep. Terry Nealey (R-16) told the House Technology and Economic Development Committee, “I think (HB 1422) is another good bill that is going to help our rural areas. It’s a tax credit program, it’s got metrics in it…deals with B&O tax and insurance premiums tax, but it entices…venture capitalists or companies that have financing into rural areas, (and) it has pretty strict rules on how that financing works.”

However, State Sen. Bob Hasegawa (D-11) shared concern for a need for such a program during SB 5208’s April 19 public hearing. “If it’s going to cost us $60 million in total tax credits for $100 million of available capital pushed back into the economy, why would the state choose (the) program over establishing our own revolving loan account, for instance, to support small businesses and possibly even offer tax credits if that’s necessary?”

Scheffel replied that lawmakers “would be getting calls in the middle of the night if you had companies “A”, “B”, and “C” here trying to compete for direct government grants in small businesses…there’d be a line out the door…(and) it would be a very heavy hand of government involved in the private sector.”

Learning From Other States’ Programs

State Sen. Reuven Carlye (D-36) was also skeptical of the program’s success in light of unsuccessful programs in other states. “A pretty simple search shows that state audits or funded audits” across the U.S. “found pretty substantive questions about the efficacy of the program and I was just curious about the language we have in this bill relative to some of those findings.”

In 2012, the Georgia Budget and Policy Institute recommended rejecting a similar investment program for Georgia. The paper cited the stark contrast between a projected 2,573 job creation or retainment from a $120 million investment in New York’s program as one reason for the advice, later found to only create 1,059 jobs after a $400 million investment.

Scheffel identified three main reasons for the failing results of those programs: they were inherently too rich, there was a lack of oversight, or provisions allowed same-day loans, which is expressly prohibited in SB 5208.

Due to the $100 million rural investment requirement for eligibility, Scheffel estimated there would be around 180 companies across the country that could compete for funding from Washington’s program.

“The bill before you is really thought to be the current and most recent iteration of best practices that uses tools available to government that people want, credits against your state taxes to incentivize a fund, and then having done that, government steps back and lets private industry and private markets go to work,” Scheffel said.

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