Encouraging investments in early-stage technology startups is essential for states to stay competitive and spur job creation. Many states use a variety of policy tools with this aim in mind, but a policy that has seen significant success is a Technology Investment Tax Credit. A properly designed incentive tax credit can influence investment decisions and boost demand for investments in early-stage technology companies.

In 1996, Ohio pioneered a Technology Investment Tax Credit, a temporary tax credit with a $30 million cap. The program was so popular that  venture capitalists are now calling for its return after the cap was hit in 2013. Ohio’s program provided taxpayers who invested in early-stage, pre-approved technology companies in the state to claim a credit worth 25% of the investment up to a maximum of $250,000 per company. Over the credit’s life of six years, 3,500 Ohioans invested approximately $180 million into more than 665 companies through the program.

In 2014, Kentucky followed Ohio’s lead and established a similar credit but increased the tax credit to 40% of qualified investors in small startups. Kentucky also limits the amount claimed in any year is limited to 50% of an individual’s total credits and allows a carry over for 15 years. Kentucky’s credit increases to 50%, from 40%, for investments in businesses in “enhanced incentive counties,” counties that have been deemed by the state to have exceptionally high unemployment rates or to be among the most distressed counties in the state.

States should consider offering a technology investment tax credit. By creating a significant incentive, states can help to funnel desperately needed investment capital into early-stage technology companies that will innovate and at least partially recoup lost revenue from the credit through increased revenue from new jobs and economic activity. An additional consideration is to provide an increased incentive for qualified businesses, as Kentucky does. States could provide a standard investment credit and then 10% higher credit for advanced energy companies and/or companies in economically distressed areas. A targeted enhanced credit for advanced energy would help spur investment in advanced energy clusters.