In an effort to encourage investment in small Tennessee-based businesses, the Tennessee General Assembly passed legislation at the end of the most recent legislative session offering gross premium tax credits to insurance companies that invest in investment companies certified by the State of Tennessee as "TN Investcos." TN Investcos will be authorized to administer the invested funds which must be invested in certain Tennessee small and start-up businesses. The Tennessee Small Business Investment Company Credit Act, currently awaiting Governor Bredesen's signature, will create $120 million in gross premium tax credits. These tax credits will be allocated among 6 TN Investcos, each having a "proposed investment strategy for achieving transformational economic development outcomes through focused investments of capital in early or seed stage companies with high growth potential." This legislation is modeled after legislation passed in other jurisdictions, such as Alabama and the District of Columbia, and it is the hope of the administration that the program will be helpful in encouraging investment in healthcare and other technology-related start-ups in Tennessee.
If Alabama's experience is anything to draw upon, these public-private partnerships between venture capital companies, insurance companies and state governments (more commonly known as "CAPCOs") will effectively stimulate investment and job creation. The Alabama CAPCO Administrator recently reported that the initial $100 million program launched in 2004 generated total investment of $68 million for Alabama Qualified Technology Businesses. That investment created 781 jobs bearing an average annual wage of $40,628. The second $100 million program launched in 2007 has already generated $6.8 million of investment and created 121 jobs bearing an average annual wage of $64,750. In total, Alabama's CAPCO Program has already generated more than $32 million in new annual payroll for the state.
To qualify as a TN Investco, interested investment companies must have equity capitalization in excess of $500,000 and at least one principal located in Tennessee who has at least 5 years of money management experience in the small business investment industry. An insurance company or its affiliate may not manage, control, or beneficially own more than 15% of a TN Investco. In an accelerated pace for implementation, interested firms must apply to the Tennessee Department of Economic and Community Development (TDECD) for certification between August 1, 2009 and October 1, 2009. Irrevocable commitments equal to the requested tax credit allocation must be submitted to TDECD from participating insurance companies and investors by no later than November 30, 2009. Investment firms certified as TN Investcos will have to apply for investment tax credits. Utilizing standardized criteria, TDECD and the Tennessee Department of Revenue, in conjunction with the Tennessee Technology Department Corporation, will award the credits to eligible investment companies in $20 million credit allocations no later than December 31, 2009. No more than 2 credit allocations may be issued to a single TN Investco. Upon certification as a TN Investco, the TN Investco will issue bonds to investing insurance companies responsible for paying the gross premium tax, and the payment of the bonds will be in the form of investment tax credits beginning in 2012.
To qualify for investment proceeds from TN Investcos, a business must be independently owned and operated and headquartered in Tennessee, must conduct its principal business operations in Tennessee, and have at least 60% of its employees located within Tennessee. In addition, businesses must have no more than 100 employees and must not be principally engaged in professional accounting, medical, or legal services; banking or lending; real estate development; insurance; oil and gas exploration; or direct gambling services. Once a business qualifies to receive investment proceeds, it may continue receiving proceeds so long as it continues to be headquartered and principally operated in Tennessee with at least 60% of its employees being located in Tennessee. Qualified investments by TN Investcos can take the form of debt, equity or a hybrid of the two. Demonstration of a high-growth potential will be an important qualification for receipt of funding.
Participating insurance companies will earn investment tax credits against premium tax liability equal to the total amount of investment tax credits allocated to them through their investment in investment companies certified as TN Investcos. Credits will vest on the date of investment. However, no insurance company, including affiliates, may receive a combined total of more than 25% of the maximum amount of investment authorized under the statute, regardless of the number of investments made in investment companies certified as TN Investcos. Beginning with tax year 2012 and continuing through 2015, insurance companies may claim yearly credit amounts equal to 15% of the allocated investment tax credit. For tax years 2016 through 2019, participating investors may claim yearly credit amounts equal to 10% of the allocated investment tax credit. The plan has some flexibility allowing the participating insurance companies to transfer credits to affiliates, and credit amounts exceeding the amount of premium tax liability may be carried over indefinitely. In the event Tennessee's premium tax is repealed, credits generated under the Act may be applied against any other tax imposed on insurance companies by the State of Tennessee, this was intended to address criticism of similar programs enacted in other jurisdictions, including the District of Columbia.
While tax credits are currently available for investments in Tennessee securities pursuant to Tenn. Code Ann. § 56-4-210, the existing credit does not typically offset the full amount of the gross premium tax. The new credit may be particularly attractive to HMOs who will experience a 3.5% increase in their gross premium tax this year. (See Tenn. Code Ann. § 66-32-124) Another consideration should be whether these investments will be considered "admitted assets" for purposes of insurance regulators.
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