For ‘Angel’ Investors, Tax Credit Program Has Been Hellish

Source: Boston Globe, Jonathan Saltzman
Photo: Dr. Michael Singer and other so-called “angel investors” of fledgling startups want to get a tax break that the state passed in 2016. (DAVID L. RYAN/GLOBE STAFF)

Two years after the state approved a tax break for investors in early-stage startups, no one has gotten it.

John Stempeck estimates that he invests about $100,000 a year in Massachusetts life sciences and tech startups. So when the state approved a tax break in 2016 of up to $50,000 annually to early backers of such risky ventures, he was delighted.

Eager to lower his tax bill, the retired Reading management consultant got his accountant to e-mail state officials in 2018 to find out how to apply for the so-called angel investor tax credit. That’s when he learned that the program hadn’t started yet.

Two years later it still hasn’t, and Stempeck is among a growing number of investors, accountants, and lawyers with the same question: How can a bill pass the Legislature, be signed into law by Governor Charlie Baker, and never go into effect?

“This seems to be smoke and mirrors,” said Stempeck, 71, who belongs to an investment group called Boston Harbor Angels.

Charles Ball, 66, a Worcester real estate lawyer who also often invests early in startups, had a similar reaction. “You’ve got this tax credit in your tax code, but people can’t have it,” he said. “How crazy is that?”

The Massachusetts Life Sciences Center, a quasi-public agency that helps direct investment in the state’s booming biotech industry, was supposed to set up the program, along with the state Department of Revenue and the Executive Office of Housing and Economic Development. The measure was part of a $1 billion economic development bill signed by Baker.

But Travis McCready, who stepped down last month as chief executive officer of the life sciences center after about 4 1/2 years in the job, said the state never set aside the $1 million to $2 million a year in funding his agency needed to provide the credit.

McCready also admitted he never liked the tax break. It wouldn’t necessarily spur investing in life sciences firms, he said, because angel investors in tech startups also were eligible. In addition, it would go to investors, not the firms themselves, he said, unlike 10 other tax breaks that his former agency provides. Lawmakers approved the incentive without data to support it, he said, then handed the matter over to the agency — he sarcastically called it “an early Christmas gift.”

McCready said there was enough wiggle room in the law for him to conclude that providing the break was optional.

“I would have to read the language again, but there is no ‘thou shalt, thou must,’” said McCready, who left the agency to join a private health care startup that he hasn’t publicly identified.

But state Representative Claire Cronin, the Easton Democrat who sponsored the bill in the House, said there was nothing optional about it.

Cronin pointed to a section of the law that unambiguously says the life sciences center, consulting with the two state agencies, “shall authorize, administer, and determine eligibility for this tax credit.”

She said she was stunned to learn last month from a frustrated angel investor that no one had ever gotten the break.

“I’m extremely disturbed by the fact that the Massachusetts Life Sciences Center has abdicated its responsibility,” Cronin said. “It’s not their prerogative to pick and choose which aspects of the law that they want to implement.”

The Department of Revenue referred questions to the Executive Office of Administration and Finance. Patrick Marvin, a spokesman for the latter agency, said the life sciences center oversees the tax break and “is responsible for the prioritization of its tax credit programs.”

It’s not unheard of for the state to pass a law and fail to carry it out, or see to it that someone does.

In one notable case, the Legislature in 1993 approved a $160 million arena for the Boston Celtics and Boston Bruins in exchange for a promise by the facility’s owner, Delaware North, to hold three fund-raisers a year to benefit the city’s recreational facilities. In 2017, a group of resourceful teenagers from Hyde Square researched the law and discovered that Delaware North never held a charity event.

The angel investor tax credit passed the House unanimously, and an identical version was overwhelmingly approved by the Senate, Cronin said. Baker signed it into law in August 2016.

Proponents included the powerful Massachusetts Competitive Partnership, a group of chief executives at some of the state’s largest employers. The tax break was intended to spur investments in fledgling digital health companies, said a former partnership employee, but it was broadened to include early investors in information technology and health care startups.

To qualify, angel investors had to put their money in Massachusetts companies with no more than 20 employees and with annual revenue of $500,000 or less. The tax credit would equal 20 percent of the investment, with each taxpayer limited to getting $50,000 a year.

Among the angel investors pleased to hear about the tax break was Michael Singer, of Newton. A physician by training, Singer is chief medical officer of Neutrolis, a biotech startup in Cambridge, and chief scientific officer of Cartesian Therapeutics, a biotech in Gaithersburg, Md. He also makes substantial early investments in startups.

https://www.bostonglobe.com/2020/02/18/business/angel-investors-tax-credit-program-has-been-hellish