State Rep. Bronna Kahle testified before the House Tax Policy Committee on her plan to encourage Michigan residents to make direct financial investments in new or existing qualified Michigan businesses.

Kahle stated that as small businesses emerge from the challenges of the COVID-19 pandemic and startup businesses look for financial assistance, a tax credit for investing in businesses would help spur economic growth in the state by helping new businesses become established and allowing existing businesses to continuing operating or expand their operation.

“In a time when the government’s response to COVID has been uniquely hard for many businesses – small businesses in particular – local capital sourced from members of the community can be a real game-changer and win-win for everyone,” Kahle said.

The bill provides a first-in-the-nation state income tax credit equal to 50 percent of an investment made by a Michigan resident into a Michigan business.

This new type of investment opportunity has been made possible by the adoption of recent state and federal legislation that empowers all community members to become investors in their own communities.

From 1933 until the passage of the Jobs Act in 2012, it was nearly impossible for most citizens to make legal direct investments in businesses. Shortly after the establishment of the federal Securities and Exchange Commission (SEC) during the Great Depression, the commission divided the investment world into accredited investors, the very wealthy and non-accredited investors, which represents the majority of residents. That division persists until today with over 90 percent of the U.S. population falling into the non-accredited investor category.

Today, Regulation Crowdfunding on a federal level, and state-based legislation like Michigan’s Michigan Invests Locally Exemption Act, provide opportunities for all investors to make financial investments in local businesses. This legislative change has been aided by technology, where management of deals that have included large numbers of investors has been automated and supported by hardware and software, rendering it possible to manage capital raises and meet reporting requirements in a cost-effective manner. At present, more than 50 websites are in place across the country that facilitate and manage these kinds of capital raises.

Kahle said this kind of investing is uniquely and powerfully beneficial to local communities, residents, local and state governments, and startup and existing businesses.

The legislator’s proposal provides an opportunity to accelerate this local investing movement, further encouraging Michigan citizens to invest in Michigan businesses. It would allow for a tax credit of up to 50 percent of the qualified investment made during a tax year. To qualify for the credit, taxpayers would need to request certification with Michigan Strategic Fund within 60 days of the investment. Without certification, a tax credit would not be granted.

The plan also provides a carry-forward feature that gives investors 10 years to carry the state income tax credit forward if an investor does not have a state income tax liability equal to the amount of the incentive.

“It’s sound financial sense to encourage investments in Michigan businesses,” Kahle said. “They build the local and state property tax base, contribute resources to our schools, enlarge our sales tax base, create and sustain healthy employment, and help us build unique local communities that could attract more people to our state.”

House Bill 4116 remains under consideration by the committee.