Bills aim to foster start-up firms in Louisiana
Posted by Kate Moran
The Times-Picayune
April 25, 2009 2:00PM
To address the dearth of venture capital for small businesses across Louisiana, a state senator and representative have filed companion bills that would give insurance companies a tax credit in exchange for investing in the state's entrepreneurs.
The business community has quickly rallied around the legislation, which could unleash as much as $200 million to promote entrepreneurship at a time when credit markets remain lockjawed. Business leaders said the bills would both armor the state against recession in the short term and create a window for growth once the nation's economy had recovered.
Unlike the federal government, most states cannot turn to deficit spending to buoy the economy in troubled times. Michael Johnson, managing director of Advantage Capital Partners, one of a handful of venture capital firms in Louisiana, said states must instead assemble a pool of private capital they can steer to fledging businesses.
The companion bills before the Legislature, which goes into session Monday, would reduce the tax insurance companies have to pay on the premiums they write in Louisiana. In exchange, the companies would have to invest in small businesses that have at least 80 percent of their employees based in this state.
"Insurance companies have massive amounts of capital they deploy in the fixed-income world, in Treasuries and corporate bonds, and this is a way to attract a portion of that capital and use it to make investments the companies would not otherwise make," Johnson said.
The state has run into fiscal trouble as its oil and gas revenues have declined, and the Legislature is expected to make cuts this year in health care and higher education spending. While offering tax credits to insurers would likely be a nonstarter in the current fiscal climate, the authors of the companion venture capital bills have devised a way to limit their impact on the public fisc until at least 2013.
Insurance companies cannot make investments through the Louisiana Entrepreneurial Assistance and Development Program before 2010, and they cannot avail themselves of the tax credit until at least three years after the initial investment -- delaying the impact to the state until 2013 and beyond. By that time, some of the startups that received a grubstake through the program would presumably have expanded their payroll and started generating taxes for the state.
Insurers make ideal private partners for the state because they value of the premiums they write is relatively stable, Johnson said. Other investors might be less enticed by the prospect of a tax credit if their income in three years is likely to prove more volatile.
It was not known last week whether the governor and his economic development secretary, Stephen Moret, might endorse the insurance tax credits as a way to attract venture and expansion capital to Louisiana. Moret's office did not respond to a request for comment.
Rep. Hunter Greene, a Baton Rouge Republican and the sponsor of the House bill, cautioned that it would compete with a welter of other bills that also propose some form of tax cut to stimulate some segment of the economy.
"This is a bill that is going to compete for very limited capacity in the budget for tax credits, tax deductions, tax exemptions, phaseouts or whatever it may be," Greene said.
Tim Williamson, president of the Idea Village, a New Orleans nonprofit that nurtures entrepreneurship, said the program would send a strong signal to the small entrepreneurial community that has started flowering in the city. A number of these homegrown businesses, such as iSeatz.com and TurboSquid.com, just moved their offices into The I.P., a building on Magazine Street that aims to foster a freewheeling, mini-Silicon Valley atmosphere in New Orleans.
A new pool of venture capital could help attract business professionals to Louisiana who have been laid off from jobs on Wall Street and might be looking to strike out on their own, Williamson said.
"That type of legislation is really critical to sending the message to talent here and talent around the country that Louisiana is a center of talent, innovation and entrepreneurship," he said.
Scott Kirkpatrick, president of the Louisiana Coalition for Capital, said the state ranks poorly in the access its businesses have to venture capital. While the legislation would not benefit new businesses engaged in real estate development, banking, lending, gambling and insurance, it could provide a lift to countless other industries.
"This bill really stands out because it is putting $200 million on the street in the coming years for small businesses, entrepreneurs and tech companies that are all critical not only to our current economic needs, but also to the future," Kirkpatrick said.
Greene's bill is No. 732 in the House. Its companion, Senate Bill No. 274, was sponsored by Sen. Robert Adley, R-Benton. The text of both bills says the state should incubate small and medium-size businesses because they create the majority of new jobs.
"States realize they need to stay competitive not only in the big elephant hunt, where they are trying to lure a car plant, for example, but also in growing and retaining entrepreneurial businesses that might turn into a future large employer," said Johnson, the managing director of Advantage Capital Partners. "States are fast realizing the value of those types of companies."