State Aid

Joseph W. Bartlett, Special Counsel, McCarter & English LLP, Co-Founder of VCExperts

McCarter & English LLP


The states are trying a number of devices to incubate technologically oriented industry. The bottom line is a multitude of programs offering "hard" inducements, for example, loans and investments from a state-affiliated fund, plus "soft" dollars in the form of low-cost facilities and services, and "backdoor" financing in the form of state tax deductions and credits. Such programs are usually administered in conjunction with a local college or university. A state agency will put up a modest amount of actual cash for grants, equity and debt investment. Then the pot is sweetened with such benefits as government procurement set-asides; technical assistance; state tax credits; and "incubator" space. "Incubator space" is subsidized, low-cost laboratory and office space reinforced with tenant amenities, such as computer access, telephone answering, conference facilities, and word processing.

In conjunction with direct assistance, several states attempt to "pump prime" by establishing focused research centers. These are established by fiat on campus, each center representing a consortium of universities, private firms, and area economic-development organizations, usually organized around a specific scientific discipline. Whether such centers will actually give birth to a significant quantum of research which would not otherwise have found its way into the open air remains unclear.

Programs such as these are available, to varying degrees, in almost every state. However, the financial impact of the programs is not of the make-or-break variety. Moreover, once having accepted government assistance, a firm is subject to conditions both special (i.e., locate in a given area, hire local residents) and general (e.g., affirmative action, union wages). If management finds it wants to move the plant to Taiwan to stay competitive, it may not be free to do so because of restrictions in loan agreements, which may survive even after the loan is repaid. Nonetheless, despite the popular joke (Q: "Name one of the three biggest lies in the world." A: "I'm from the government and I'm here to help you"), the advantages of government-sponsored aid should not be sneezed at. Once a loan has been made, for example, the risks of a bureaucrat pulling the plug are not as formidable as in the private sector, since loss ratios are not an index of great significance in a public agency. An interesting anomaly in government-loan administration is that the proceeds from repayment are ordinarily credited to the general treasury rather than to the accounts of the agency concerned. Consequently, the people in charge are often indifferent to the issue of repayment, since the money is not "theirs".

A survey and table of State Tax Aid is available from the Community Development Venture Capital Alliance: State Tax Credit Survey, July 2004.


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