Some small business owners want lawmakers to approve a controversial — and possibly illegal — plan to have state taxpayers guarantee loans they get from venture capitalists.
The proposal made Monday to key lawmakers is designed to generate needed expansion cash for companies who have found that traditional lines of credit, including banks and private investors, have dried up. John Adam Kowalski, former chairman of the Arizona Small Business Association, said that cash is absolutely necessary if companies are to grow here.
What they want is a system that consists of several layers of investors and funds.
While the mechanism is somewhat complex, the bottom line is that the plan, if approved, is designed to make private venture capital investors more interested in putting money into these firms. That would occur because the state would step in as the ultimate backer for that loan or investment, providing tax credits to compensate if the company could not pay back all or part of the money.
At this point, the idea is for the state to initially put up $100 million in tax credits, perhaps adding an equal amount every few years.
Kowalski, an unsuccessful Republican candidate for the state House last year, conceded there is some possibility the state could lose money.
“You can never say that there’s absolutely no risk,” he said.
“But investors ... have options of where to put their money,” Kowalski continued. “If somebody can come in and create an incentive that minimizes their downside risk, that is a far more attractive investment than one that does not.”
It is that “downside risk” the state taxpayers might be forced to absorb that could create political opposition.
How big is that risk is unclear.
Jeremy Neilson, who ran a similar guarantee program set up by the state of Utah and hopes to be involved with one here, said his state has never lost a dime. But he said it can sometimes take a decade to see whether an investment pays off and the company can repay the debt.
Sen. Michele Reagan, R-Scottsdale, who chairs the Senate Committee on Economic Development and Jobs Creation, said incentivizing investors to put money into Arizona companies is an idea worth considering, even with that potential risk.
“People are going to go ... where you get the biggest bang for your buck,” she explained. “Venture capitalists are no different.”
And Reagan said Arizona desperately needs that cash.
“Companies aren’t hiring right now,” she said. “They’re not able to grow because they don’t have the funding — funding because banks aren’t lending right now.”
Reagan acknowledged that the plan proposes to have the state guarantee loans that the banks are unwilling to make.
“The banks aren’t investing in very much right now,” Reagan responded. “Individuals are.”
The goal, she said, is to get those dollars invested in Arizona.
“What kind of incentives do they need?” she said.
“We’re losing out on a lot of money that could be infused into our own economy for people that need jobs, for people that are out of work, looking, or for the small businesses that have a great idea and need that capital to expand,” she said. Reagan said the guarantees might be enough to induce venture capitalists in Arizona to invest their cash here rather than in start-up or expansion firms elsewhere.
“We have venture capital that is leaving our state and going to fund businesses in other states,” she said. “That’s not good for Arizona.”
Reagan also said she does not believe the guarantees would run afoul of a constitutional provision that bars the state from lending its credit to any individual, association or corporation.
Neilson said that issue came up in Utah, which he said has a similar provision. He said part of why it took three years to get that state’s program going is they had to get a court ruling concluding such a guarantee plan is legal.
State lawmakers approved a package of tax cuts for business last year that proponents said would create new jobs. Kowalski said that won’t do it — at least for the 97 percent of Arizona firms that are classified as small businesses.
“That’ll help the large corporation that pays an awful lot of money in taxes,” he told lawmakers
“We thank you very much for the additional money in our pocket,” he said. “But it’s not enough to hire people.”
Reagan stressed that just because she wants to explore the idea does not mean she intends to try to sell it to her colleagues — or even if she did, that they would be willing to go along.