As Arizona continues to recover from the economic challenges caused by the pandemic, investment in our innovation sector is an essential component of our state’s current and future growth strategies. Announcements of major new investments in Arizona by global leaders including BD, Exact Sciences, Intel, and TSMC are big news today. Yet, our greatest potential for future growth comes from the young companies that are emerging in our tech and medtech sectors.
As these companies move from the startup phase to the emerging growth phase, they must clear many hurdles including attracting talent, finding facilities to grow into, and, in the case of medtech innovators, they must address all of the FDA regulatory requirements, and navigate the challenging maze of gaining reimbursement before their products and services can help patients.
All of this takes money. Access to the capital that they need to grow can be the highest hurdle of all.
Investment Drives Growth
Without investment, early-stage medtech companies grow slowly or not at all. They rely on friends, family, and angel investors for the dollars that will move them forward faster.
In 2021, Arizona reauthorized its Angel Investment Tax Credit for another 10 years, allocating $25 million for tax credits between July of 2021 and June 30, 2031. This program helps lower the hurdle of capital raising for Arizona-based companies by adding an extra benefit for local investors when they are ready to invest in qualified companies.
At the federal level, there is a provision in America’s Tax Code that has proven effective in supporting startups and early-stage growth companies, especially in the medtech industry. The Qualified Small Business Stock (QSBS) rule limits capital gains taxes for founders, employees, and investors in qualified small businesses. QSBS makes it easier for these small companies to secure critical early-stage investment and to attract and retain talented people, who may otherwise go to larger companies with more stability than higher risk startups.
The QSBS rule is designed to support small businesses and not to line the pockets of Wall Street investors. To ensure that it works as intended, policymakers put constraints in place. The small businesses must have less than $50 million in assets, 80 percent of which are being used for the business, and the stock owners must hold the stock for at least five years. The provision was first passed under President Bill Clinton and expanded under President Barack Obama, marking decades of bipartisan support for the rule.
A Potential Barrier to Building Back Better
While it is clear that we need to support these small and growing innovative companies, we are actually seeing policies proposed that would stifle greater investment and hurt these businesses, many of which develop groundbreaking new medical technologies and treatments.
A provision included in the Biden Administration’s Build Back Better Act would diminish the effectiveness of the QSBS exclusions by, among other things, disincentivizing investments in small businesses and punishing taxpayers who have invested in or earned QSBS shares by altering requirements to the program that introduce uncertainty for investors, businesses, and employees alike. These changes will hurt Arizona’s growing innovation sector.
As Congress looks to encourage economic growth and opportunity for America, supporting small businesses must be the priority. That means supporting founders, employees, and others who want to invest in the innovative work these small businesses are doing.
Arizona’s congressional delegation has been a champion for our innovation sector and the high-quality job opportunities the sector creates for Arizonans. Our Arizona companies are counting on them to lead on this issue and work in a bipartisan fashion to preserve the QSBS exclusion and support innovation throughout our state.
Joan Koerber-Walker is president and CEO of the Arizona Bioindustry Association.