Innovation tax credits finding few takers
By Chris Barrett
PBN Staff Writer
The tax credits were nice, but it was the thought that counted for Dr. Jonathan Elion, the founder of software company ChartWise Medical Systems Inc. Two years ago, ChartWise received $100,000 in credits under Rhode Island’s Innovation and Growth tax-credit program. Elion says that with or without the program, the company would have charged ahead. But the credits sent a clear signal that the Ocean State welcomes entrepreneurs.
“I want Rhode Island to get credit for this because it looks like the company is going to take root,” he said.
South Kingstown-based ChartWise has been one of a dozen companies to receive the credits since 2008, according to the R.I. Division of Taxation. In all, the companies have claimed $1.2 million in credits after pledging to create jobs.
The program is the least costly to the state when stacked against the five other tax-incentive programs that the Division of Taxation has tracked since 2008. The program has never doled out more than $450,000 a year and never awarded more than five companies credits in one year. By way of comparison, the biggest incentive – the Jobs Development Act – has never granted less than $14.1 million since 2008. (CVS Caremark Corp., based in Woonsocket, claims the vast majority of those credits.)
Since 2008, more than 300 businesses have received $144 million in Rhode Island tax credits and incentives.
For the fiscal year ending June 30, the state awarded $200,000 in innovation credits split evenly between Warwick-based Web developer MoFuse and Providence-based Phoenix Medical Technologies. In return, the two companies pledged to create a combined 123 jobs within five years. The companies were the only two to apply for the credits.
MoFuse CEO Annette Tonti said the company is on track to meet its goal of adding 37 jobs by 2013 with an additional 43 spinoff positions. She said that regardless of the credits, the company would have likely grown, but the credits enticed and rewarded investors at a time when the young company desperately needed starting equity.
“It was such a great advantage for us to bring to the table,” she said.
The credits are open to preapproved small businesses that generated less than $1 million in revenue during each of the past two years. The program allows businesses to deduct up to half their investment, or $100,000, whichever is less. Administered by the R.I. Economic Development Corporation, the program is limited to awarding $1 million in credits every two years.
Companies claiming the credits have generally come from the computer-software industry. Many recipients – Lighthouse Computer Service Inc., Creative Circle Advertising, Infusion Resource and Isis Bipolymer – remain in operation and, in some cases, have expanded.
But the program faces criticism from some, who accuse the EDC of focusing too narrowly on certain industries at the expense of others. University of Rhode Island Distinguished Professor of Business Administration Edward Mazze said it was disappointing that in a state where elected officials trumpet building a knowledge economy just two businesses won credits last fiscal year.
“I have seen very little support for small business from the Economic Development Corporation,” he said. “What they generally do is they focus on some industries that they generally select. Whether or not there are businesses to fund in those industries makes no difference.”
Mazze said when a student in his entrepreneurship course emailed him recently about funding sources for her new product he did not suggest the innovation tax credits. He said her idea, while viable, lacked the appeal of a new biotech product that economic officials could brag about.
“I frankly find they overlook a lot of entrepreneurs that really need support,” he said.
The program has also become stricter. EDC spokeswoman Melissa Chambers said lawmakers recently prohibited recipients from applying the tax credit against personal tax liability, which is how many angel investors and small businesses would like the credits.
That makes “it more challenging for companies to utilize the tax credit and meet the criteria,” she said.
The law establishing the program calls for the R.I. Science and Technology Advisory Council to identify “Innovation Industries” that qualify for the program. The EDC then must conduct a detailed analysis of the company, including a review of how awarding the credit would impact the state budget, how the applicant will impact its wider industry and where the applicant plans to draw new employees.
The program started in 2006 with an aim to assist small businesses in getting off the ground, said Saul Kaplan, who at the time served as the executive director of the EDC.
Now the head of the Business Innovation Factory, Kaplan said he still believes the program, which he pushed for, is relevant.
“This is one tool amongst many, all designed to advance innovation and entrepreneurship in Rhode Island,” he said. “No one of these programs alone is going to turn the economy around.”
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