Maine’s Seed Capital Tax Credit Program has seen a dramatic increase in utilization since its redesign, encouraging both in-state and out-of-state funds and individuals to invest in Maine businesses. There is no question that Maine companies benefit from the program, but its rapid growth has meant that the program’s annual cap is being reached earlier each year. This has started to cause disruptions in the state’s startup ecosystem, and if the trend continues could limit access to capital and slow job growth.
The program is designed to encourage investment in Maine startups by offering individuals and venture capital funds a 50 percent tax credit of the cash equity they provide to eligible businesses. The program was initially only available to individuals who pay Maine income tax, but in recent years has become available for both in-state, as well as out-of-state funds. Out-of-state investors receive a refundable tax credit over four years in the form of a check from the State of Maine. The program currently has a total annual cap of $5 million.
The program has seen increased popularity over the past few years, garnering excellent feedback from Boston area angel groups who sometimes pool their capital into investment funds. Funds and angel investors that might not have looked at startups in Maine are taking notice, which was one of the primary goals of the tax incentive. The result has been substantially more capital available to Maine entrepreneurs, which they use to accelerate their growth and increase their hiring.
But the heavier use means the program runs the risk of becoming a victim of its own success. As the program continues to attract new investors from outside the state, Maine investors get squeezed out. As use increases, the date the tax credit ceiling is reached is getting earlier each year. As of the end of February of this year the program had already used $2 million of the available $5 million. Companies may not be able to raise capital during the period each year after the annual $5 million ceiling is reached. Investors may be unwilling to fund companies if there are no credits left during the year.
Clearly it is time for the Legislature to review the program and determine whether an increase in the annual ceiling on the tax credits is merited. Access to venture capital is a critically important element of the state’s strategy to grow innovative businesses and the Seed Capital Tax Credit has attracted millions of dollars of incremental investment. We would love to hear your thoughts on how the program could be altered to ensure its future success and growth of Maine’s innovation economy.