Changing Ohio's Technology Investment Tax Credit

An executive from a Northeast Ohio medical device startup is pushing a plan that would expand a popular tax credit in a move he says would lift investment and job creation in the state.

Mike Haritakis, an executive vice president with Solon-based Thermedx, would like to see the state implement several tweaks to the Technology Investment Tax Credit (TITC), a program designed to mitigate the risk of investing in Ohio technology startups. Haritakis’ suggestions wouldn’t do much to change the structure of the TITC. Instead, they’d just build on what the tax credits are already designed to do.

“These changes would open up a tremendous source of funding for small, early-stage companies and create a lot of jobs very quickly,” Haritakis said.

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Before getting to Haritakis’ proposal, we have to examine how the TITC currently works. The first thing to know about the TITC is that it applies only to technology-based companies that have been approved by the state for inclusion in the program. Investors who put money in approved companies are eligible for a tax credit of up to 25 percent (in most cases) of the amount they invest, with a maximum credit of $62,500 per year. If the credit amount exceeds the taxes the investor owes that year, the excess is used as a credit over the subsequent 15 years until the credit amount is reached.

As for tech companies that qualify for the TITC, they can sell up to $1.5 million in equity that qualifies for the tax credit.

Thermedx has maxed out its $1.5 million in equity sold under the program, Haritakis said, calling the TITC “a fantastic program for us.” Thermedx certainly isn’t alone in taking advantage of the TITC. Since the program’s inception in 1996, 564 companies have been approved for inclusion by the state, according to the Ohio Department of Development (ODOD), which administers the program.

Nearly $146 million has been invested in those companies, with $36 million going back to investors as tax credits. More than 3,300 investments have been made.

Haritakis’ first-hand experience with the TITC has convinced him it’s an effective means of incentivizing investment in Ohio startups, so that’s why he’d like to see the program expanded. During his campaign, Ohio Gov. John Kasich floated the possibility of eliminating the state income tax entirely, but Haritakis suggests expanding the TITC program as a better-focused job-creation alternative.

So here’s Haritakis’ plan, in all its simplicity:

Raise the maximum percentage of the tax credit to at least 50 percent (and possibly 100 percent)
Increase the maximum amount of money startups can raise under the program from $1.5 million to $5 million or $10 million
Consider a federal tax credit of around 25 percent to add even more incentives for investors. (A bill introduced in the U.S. House of Representatives in January would establish a federal technology investment tax credit, but hasn’t made it out of committee.)

Haritakis has submitted his plan to the Kasich administration as part of the administration’s “Common Sense Initiative” designed to ease regulatory burdens. He’s also met with staffers representing Rep. Steve LaTourette, a Republican from Northeast Ohio, to discuss the federal component of his proposal.

It’s unclear how the Kasich administration regards the TITC program, and whether it would be open to expanding it. Kasich spokesman Rob Nichols wasn’t available for comment.

The TITC program has been “hugely beneficial” to biomedical companies in Ohio, said Baiju Shah, president of BioEnterprise, a Cleveland-based nonprofit that helps biomedical firms develop their businesses. In particular, the TITC has “helped attract investment from high-net-worth individuals” and been a boon for angel investment funds in the state, such as Northeast Ohio’s North Coast Angel Fund and Columbus’ Ohio TechAngel Fund, Shah said.

Shah supports expanding the amount of capital startups can raise under the TITC, but would slightly alter Haritakis’ proposal. Rather than raising the percentage amount of the tax credit, he’d like to see Ohio make its credits under the program “refundable” to attract out-of-state investors. That would mean that non-Ohio residents who invest in approved companies would file returns with the state, and get checks from Ohio equal to the amount of the tax credit.

Shah points to Minnesota’s recently passed angel investor tax credit, which is refundable and brought $1.3 million to Minnesota companies from out-of-state investors in the first five months that the credit was active.

Opponents of expanding the TITC would likely argue — and certainly with some legitimacy — that doing so would merely funnel more state money to the wealthy, i.e. those who need it the least while the country and state are struggling economically. And with Kasich’s budget proposal earlier this month calling for wide cuts to areas ranging from children’s hospitals to local governments, schools and libraries, is now the time for the state to decrease its revenues?

Further, given that gaps in after-tax income between the richest 1 percent of Americans and the middle and poorest fifths of the country more than tripled between 1979 and 2007, wouldn’t putting more money in the pockets of the wealthy further exacerbate America’s growing economic inequality, which the New York Times’ Nicholas Kristof calls “both economically unhealthy and morally repugnant”?

Maybe so, but in a state that’s desperate for jobs and plagued with lagging population growth, the idea of expanding the Technology Investment Tax Credit — as long as it wouldn’t be too expensive to the state — seems like one that the Kasich administration would be wise to at least explore.

Photo from flickr user John-Morgan