I was actually working on this story yesterday and this morning, but I see Mike Nowatzki has beat me to the punch, so I’ll just add in what I’ve gathered.
An angel fund tax credit created by the Legislature years ago has come under scrutiny recently because lawmakers are unable to determine the benefit to North Dakota of a lot of the subsidized investments. There are few reporting requirements, and the way things look now North Dakota taxpayers have been subsidizing a lot of investment out of the state.
The justification for the tax credit was, originally, that it would help make capital available for economic development inside North Dakota. But if the investments are going out of state the only thing we seem to be doing is subsidizing the investments of a bunch of rich people.
And rich people, I think most of us can agree, don’t need subsidies.
More interesting is that one of the rich people getting subsidies is currently running for governor. According to a document prepared for the Legislature by the Commerce Department (see here), Arthur Ventures funds collected over $668,000 in subsidies for investments between January 1, 2011 and December 22, 2015.
One of the partners in Arthur Ventures, as you can see on their website, is Doug Burgum.
Those subsidies went to a total of 17 ventures, with 13 of them located out of state. According to a document compiled by Legislative Council, based on what little information is required to be reported to the Tax Department to qualify for the tax credits, 11 of those businesses had “no identifiable connection or benefit to this state.”
Remember back when Doug Burgum was making a big deal out of declining his salary if he’s elected governor? Maybe he thought that was the least he could do since North Dakota taxpayers were paying him to invest out of state.
Again, if the tax credits were going to investments in businesses providing jobs or services to North Dakota then this is defensible. But to subsidize investments into companies which have no ties to the state? That’s something entirely different.
What’s more, Arthur Ventures doesn’t seem very apologetic about this. In testimony submitted to the legislative committee reviewing the angel fund subsidies James Burgum, another of the Arthur Ventures partners, argued that the intent was never about investment in North Dakota (read in full below):
Burgum seems to be arguing that the intent of this legislation was to subsidize investors so that they could get richer and then maybe deploy some of that capital in North Dakota in the future.
Which sounds like a good deal for the investors and all, but the benefits for the taxpayers are less clear.
James Burgum told Nowatzki that he felt the scrutiny on the angel funds was politically motivated:
Asked if the firm would open its books to lawmakers, James Burgum said he sees no problem with angel funds reporting the dollars they have at work in each company. But the firm won’t disclose its investors’ names, he said.
“These are all individual private citizens,” he said.
James Burgum said the scrutiny “feels a little politically motivated,” but he understands lawmakers’ interest if they believe the intent was to drive investment in North Dakota.
“I really hope politics isn’t behind the play here, because it is a good policy,” he said.
To be clear, the legislature passed a study to review the angel funds subsidies during their 2015 session, long before anyone was talking about Doug Burgum running for governor.
The Stenehjem campaign is now making a stink about this, but why wouldn’t they? This looks terrible for Burgum who has been campaigning against the “good old boy’s club” and crony capitalism, while touting his business acumen and entrepreneurial background, and here we have evidence that his venture capital fund has been getting paid by North Dakota taxpayers to invest out of state.
UPDATE: Here’s a statement from Doug Burgum on the angel funds issue:
“I believe strongly in the Angel Fund goals. To diversify our economy, we need to support innovators in North Dakota, and what innovators need is access to risk capital. Our state currently ranks 47th out of 50 states in venture capital investments, and our lack of capital stifles new ideas and entrepreneurs. The Angel Fund Investment Tax Credit, created by North Dakota Republicans, provides support for those working to create capital formation in North Dakota, the innovators working to diversify our economy, and those interested in investing in North Dakota.
Like many state programs, Angel Fund incentives have room for improvement, and I support making adjustments to provide more focus on in-state investments.
For mature industries in North Dakota, I believe the best policies are low and fair taxation and a stable and predictable, pro-business regulatory environment. Ultimately, the goal of Angel Fund Investment Tax Credit should be to provide a positive return for North Dakota, helping to create great jobs, and diversifying our economy and making us less dependent on commodity prices that we cannot control.”
This is in direct contradiction to what James Burgum said to the Legislature in his written testimony which I quoted above and you can read in full below. He wrote that the intent of subsidies was not investment in North Dakota.
Meanwhile, here’s a letter from from Paul Lucy at the Department of Commerce to James Burgum letting them know that their fund has shown no evidence of fulfilling the purpose of the angel fund subsidies which is investment in North Dakota (click for a larger view):
Here’s James Burgum’s full testimony to the Legislature.
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