On May 6, 2015, VentureOhio President Steve Haynes testified at the Ohio Senate Ways & Means Committee. The following is his Interested Party Testimony for HB 64.
Chairman Peterson, Vice Chairman Beagle, Ranking Member Eklund and members of the Senate Ways and Means Committee, my name is Steve Haynes and I am President and a Founding Member of VentureOhio. I have been active in Ohio’s venture community since the late 1980’s and am the co-founder and managing partner of Glengary, an early-stage venture fund focused on investing in high-growth companies in Ohio.
VentureOhio is the unified voice for investors and other organizations that finance or support high-growth companies based in Ohio. Our primary mission is to make Ohio a preferred location for high potential entrepreneurial activity. I am pleased to be here today to provide our association’s perspective as an interested party on the tax policy proposals contained within HB 64 that we feel affect entrepreneurship in our state.
VentureOhio would like to commend Governor Kasich for his leadership in overhauling Ohio’s tax system to make our state more competitive. Likewise, VentureOhio commends the Ohio General Assembly for your efforts to make Ohio more competitive and friendly to entrepreneurs and risk takers. Collectively, your efforts to support Ohio’s growing but fragile entrepreneurial ecosystem and enhance the chances that recently launched and future high growth businesses will achieve financial returns, job creation and economic vitality are essential to the prosperity of Ohio’s families.
Keeping with the spirit of VentureOhio’s mission, we applaud the legislature and the Kasich Administration’s previous efforts to create the InvestOhio program which is designed to encourage investment in small businesses in Ohio. VentureOhio proposes for the Senate’s consideration a legislative change to help make InvestOhio more robust by creating another option for investors within the current program structure, which appears to be underutilized.
Without increasing the total amount of tax expenditure already allocated to InvestOhio, we propose enhancing the program by allowing an additional investment option for Ohio investors to take a 25% state tax credit, or 30% in distressed counties, to encourage even more investment in small, research and development and technology-oriented firms. Through a similar and attractive tax credit program, known as the Ohio Technology Investment Tax Credit, that was available from 1996-2013, some 3,500 Ohioans invested approximately $180 million into more than 665 companies, and helped attract even more capital for Ohio businesses from angel and other early-stage investors.
Indiana, Kentucky, and Michigan currently offer similar investment incentives. VentureOhio believes Ohio must stay competitive and encourage more early investment in high potential companies by creating a similar investment incentive through the InvestOhio program. This enhancement would incentivize private sector investment into technology-based businesses in Ohio – all without creating a new tax expenditure.
Competitive Tax Policy
As we have reviewed HB 64, we would like to express our support for the efforts of both the Administration and the House to reduce personal income tax rates. Reducing the personal income tax will help all Ohioans, and free up capital for investment, risk taking and job creating.
In addition, we support the efforts of the Administration and the House to effectively reduce taxes for small businesses. All of our entrepreneurial portfolio companies start out as small businesses. By increasing this exemption, you are allowing those fledgling companies to save money and reinvest in their future growth at a critical time.
As such, we urge the Senate to enact a personal income tax cut and tax relief for small businesses.
Next, I would like to highlight some tax policy proposals where our members have significant concerns. As introduced, the increase in the Commercial Activity Tax is problematic because it raises the cost of doing business in Ohio. Even though our member portfolio companies start out as small businesses and not all will be successful, some of them will grow to become large companies and major employers. As they do, any policy that raises their cost of doing business, such as the CAT increase, makes them less competitive. We encourage the Senate to support the House action which removed this provision from the bill.
VentureOhio is also concerned about the proposed increase in the state sales and use tax rate from 5.75% to 6.25% and the associated tax base broadening. Again, increased tax rates take money away from our companies and make it harder for them to attract capital and grow.
We are most troubled by the proposed extension of the sales and use tax to “management consulting services” which include, but is not limited to, financial planning and budgeting, equity and asset management, strategic and organizational planning, new business startup, new product development, etc. The expansion also includes related party transactions such as providing management services to other members of a consolidated group. It would appear that no business-to-business exemption is provided for these services. This expansion would impose a significant new cost to angel funds, early stage venture capital and similar firms that provide just these kinds of services to the funds they manage. This will necessarily reduce the amount of capital available to invest in entrepreneurial companies, impede their growth and make it harder for them to create jobs in Ohio. Again, we encourage the Senate to support the House action which removed this provision from the bill.
Recent studies have found that there is a large and rapidly growing shortage of venture capital for early stage companies in Ohio. Somewhat paradoxically, this shortage is the result of Ohio’s successful efforts to support start-up companies that have resulted in the formation of hundreds of potential high growth companies.
McKinsey & Co. conducted a study for JobsOhio last year that found there are not enough venture capital firms in the state. Specifically, McKinsey noted that while Ohio’s share of Gross National Product is 3%, its share of early venture deals (less than $1 million) is low at 1.1% and Ohio’s share of later stage deals (more than $5 million) is very low at 0.4% of the national totals in these categories. Based on information from US Census Business Dynamics, McKinsey reported that all net new jobs in Ohio are being created by companies that have been in business five or fewer years.
VentureOhio conducted our own study last year and found Ohio early stage companies need $523 million by 2016, but there is no more than $260 million available from Ohio-based or focused venture funds. Even if we assume all available funds are invested in Ohio, which is unlikely, there still exists an early stage capital gap of $263 million.
VentureOhio believes Ohio needs at least one additional Ohio fund-of-funds to meet this market demand. Specifically, we support creating a new private sector and institutionally backed fund-of-funds to invest in Ohio-focused venture funds, similar to the successful Renaissance Venture Capital Fund in Michigan and the Cintrifuse fund-of-funds recently formed in Southwest Ohio.
VentureOhio plans to work with JobsOhio, the Ohio Third Frontier Commission and other public and private entities this year to determine the feasibility of creating a new fund-of-funds to address the growing capital gap.
In conclusion, VentureOhio stands ready to assist members of the General Assembly to help create an environment where abundant capital can be invested through fiscally proved and prudent public programs for the betterment of entrepreneurship in the State of Ohio.
Once again, Chairman Peterson and members of the committee, thank you for allowing me to testify today. At this time I will be happy to answer any questions you may have.