Michigan residents could claim a state tax credit for investing in small businesses under legislation proposed in Lansing.
A bill backed by Democratic lawmakers would allow individuals to apply for a credit on the state income tax for 50% of the value of their investment, up to $3,000 annually per investment and up to $3,000 per taxpayer for each qualified business in which they invest.
Proponents of House Bill 4691 argue that restoring an investor tax credit similar to what was in effect from 2010 to 2012 would add to the flow of capital for people starting a small business in Michigan, as well as allow individuals to support locally owned businesses through direct investments.
“It’s really a way to make sure Michigan residents are investing in Michigan businesses,” Rep. Abraham Aiyash, a Hamtramck Democrat and House majority floor leader, told the House Tax Policy Committee in recent testimony during a legislative hearing in Lansing.
“This will be a truly innovative piece of policy that we can implement right here in the state of Michigan,” Aiyash said. “This is an incredible opportunity for us to allow small businesses to accelerate their investment. It increases opportunity for folks in our communities to put skin in the game while also supporting their actual communities.”
Individuals could seek the tax credit for up to 10 years after their investment.
Qualifying small businesses receiving debt or equity investments would need to get certified by the Michigan Strategic Fund for their investors to receive a tax credit. H.B. 4691 would not allow a tax credit for investments by family members of small business owners.
State lawmakers considered similar legislation in 2022. That billed cleared committee on a bipartisan vote but did not move further in the state Legislature.
In H.B. 4691, “we have taken the baton to continue this work,” Aiyash said. In an example of how the tax credit would work, he cites a neighbor who wants to open a coffee shop. Friends and neighbors who are not federally accredited investors could invest in their business and seek a tax credit, he said.
“This is one of the best ways — and we’ve talked a lot this term about allowing our state to spur small business growth — to incentivize young entrepreneurs and old entrepreneurs alike to invest in their communities, and this would actually set that up,” Aiyash said.
The Tax Policy Committee did not vote on H.B. 4691 after hearing testimony earlier this month. Further consideration of the bill will have to wait until next year, since the Legislature has recessed for the year.
The committee’s chair, Rep. Cynthia Neeley, a Democrat from Flint, indicated at this month’s committee hearing that the bill has support from the Small Business Association of Michigan, Michigan Manufacturers Association and the Michigan Municipal League. The Mackinac Center for Public Policy indicated opposition to the bill, Neeley said.
In testifying in favor of the bill, Chris Miller of Adrian, chairman of the nonprofit National Coalition for Community Capital, cited a 2019 study in Nova Scotia, Canada that found a 30% tax credit for people who invested in a $2 million fund for small businesses helped to generate 1,200 jobs at 116 small business that paid $52 million in wages and more than $24 million in tax revenue. The tax credit costs the province $700,000 in revenue, he said.
“I don’t think we have anything that’s quite that efficient anyplace else,” said Miller, who believes that an investment tax credit would help underserved entrepreneurs in distressed communities or who lack access to conventional bank credit to start small businesses.
“One of the things we’ve figured out in the last few years is that we need a way to strengthen our local economies. They’re having a tough time for a variety of reasons, and this is a method to do that,” he said.
Rep. Karen Whitsett, a Democrat from Detroit, cited how legislators have created tax incentives for corporations making major business investments in the state.
“We love to give tax breaks to corporations. For once, let’s give tax breaks to our own people who are actually in our community,” she said.
H.B. 4691 would require the Michigan Strategic Fund Board to create an application and approval process to certify investments eligible for a tax credit and to adopt parameters and criteria to use in approving investments.
Investments eligible for a tax credit would have to go to small businesses that are headquartered or domiciled in Michigan and have majority of employees working in the state, receive at least 80% of gross revenues from business in Michigan and have at least 80% of its assets here.
The legislation includes language to require the state Legislature to annually appropriate “sufficient funds” to the state School Aid Fund to offset any lost revenue because of the tax credit.
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