With government budgets tight, Harrisburg is finding new ways to help Pennsylvania tech entrepreneurs — by borrowing against future tax revenue and temporarily funneling money away from the police pension fund.
One expert says the program, called Innovate in PA, amounts to a “shell game,” representing moves by state legislators to find politically palatable ways to invest more tax dollars in early-stage companies.
Gov. Tom Corbett, though, is fan of the program, which he touted while visiting a startup accelerator in Pittsburgh last week.
“We are here to give you that initial boost,” Corbett said of Innovate in PA, “to propel startups from that plan on paper … to a thriving company that embodies the American dream.”
The goal is job creation, a projected 1,850 new jobs statewide, and a spurt of economic growth.
“This is not a partisan issue,” Corbett told startup leaders in Pittsburgh. “We’re working together for you to allow you to grow the economy of Pennsylvania.”
It all starts with $100 million in future tax breaks. The credits will be sold to insurance companies, bringing in a minimum of $75 million. The companies can cash in the credits starting in 2017.
The difference in amounts reflects the cost of borrowing, officials say, and the hope that getting money to invest right now will pay big dividends down the road.
The funding will be pumped into early-stage startups via initiatives of the state-backed Ben Franklin Technology Development Authority.
“When you look at Innovate in PA, it’s a very creative way in which to generate some cash” for existing programs, said Sheri Collins, executive director of the Ben Franklin authority.
“The amount of money that will be returned to the tax rolls through the creation of companies, through the creation of jobs,” Collins said, “makes this a revenue neutral program.”
But, according to the law (see page 106), which was passed amid a flurry of late-session activity in July, the Innovate in PA program will do a complicated fiscal bank shot. It will use money from the state’s general fund to reimburse the police pension fund, which will lose revenue because the sale of tax credits will reduce a levy that feeds the pension fund.
Julia Rubin, a professor at Rutgers University who studies the role of venture capital in state economic development efforts, sees that approach as somewhat problematic.
“Instead of funding the state venture capital funds directly from the state budget, they’re using tax credits — which doesn’t look like spending, because it’s money you never took in, but it really is the same thing,” Rubin said.
Rubin was consulted on a similar program launched in Maryland in 2010, on which Innovate in PA was modeled.
“Investing in very early stage companies is something the state has to do,” Rubin said, “because it’s something that private-sector investors are doing less and less.”
But state venture capital funding — borrowed against future tax revenue, in this instance — still represents a trade-off, Rubin says.
“What doesn’t get funded in exchange for that?” she said.
Others hail Innovate in PA as a creative way to raise funding for proven economic development programs. The four regional Ben Franklin Technology Partners — based at the Philadelphia Navy Yard, Bethlehem, University Park and Pittsburgh — have long been heralded as national models for supporting early-stage, high-growth companies.
“It seems like an interesting way to raise some capital for the growth engines of our economy,” said David Thornburgh, executive director of the University of Pennsylvania’s Fels Institute of Government. “Anything we can do that positions Pennsylvania better in supporting those companies seems like a good idea to me.”
Startups in Philadelphia certainly welcome the new funding stream from Harrisburg.
“I think it’s awesome,” said Bob Moul, president of Philly Startup Leaders.
“The dearth of early- and seed-stage funding is hurting growth,” he added. “Anything that helps to fill that gap is good news for the startup community.”
Moul says that gap is slowly shrinking. With the emergence of a handful of new funds in the Philadelphia region — including the city-backed StartUp PHL, a venture program from Drexel University and First Round Capital’s Dorm Room Fund — entrepreneurs are finding more options for building ideas into companies.
As for the potential trade-offs?
“We want to obviously take care of issues like the [Philly] schools,” Moul said. “But we’ve got to continue to look to the future, and invest in the future — so that when the kids graduate they’ve got jobs to go to. I, again, applaud the initiative.”