H.B. 466 Utah Rural Jobs Act Modifications: transcript

Thank you. I'm excited about that. I'll invite Alex step to come up and sit next to me. Um, okay. So one of the things we hear frequently from our constituents is that wage growth isn't keeping up with inflation, and that housing costs are too high. And this bill tackles both of those issues by creating high paying jobs off the Wasatch front. And so what this bill is, is in 2017, we set up a program where investors can invest in businesses off the Wasatch front. If they create high paying jobs that stay for a long time, um, they can get a tax credit. And so it incentivizes that behavior. I'll turn the time over to Mr. Stepak to explain the rest.

Thank you representative. Uh, as he mentioned, my name's Alex Nik. I work for a company called Vantage Capital. We've been participating in this program since its inception in 2017. Uh, program has one goal, as representative mentioned, it is to drive capital to the two rural areas to make sure that small businesses have what they need from a capital standpoint when they want to grow. Um, this program has supported 41 small businesses that needed between one and $5 million in capital, which was true in 2017, and is true today that it is still the hardest, uh, type of capital to get. Um, and I'll tell you a quick story of one of those companies. It's a company called Farmstead Manufacturing. If you're from the southwest corner of the state, you might notice Farmstead Bakery. They were a single bakery, uh, shop and decided they wanted to expand from there. And when they wanted to do that, they needed about two and a half million dollars to expand their business and move into a manufacturing facility and do commercial baking. Uh, that was hard money to find. They got it through this program. They then were able to expand to another location, and they have plans to expand to another four locations after that, adding 20 or 30 jobs at a time. So right now, I'll close with this. Uh, right now is the best time to pass this from a perspective that in 12 days, the money that you most recently authorized is going to be fully invested in at work in the state. Uh, and by passing this program this year, you're gonna make sure that the $25 million that just our firm has in pipeline, uh, in businesses that have this need are gonna be able to fill it. So with that, I'll take any questions. So just real quick, I do have a handout I can hand out. It just kind of shows the timeline of the program. And then, um, I just wanted to emphasize this is not a new program, and I think that's obvious from what Mr. Stanic said. This is just a continuing continuation of an existing program. So is it all right if I hand out these flyers?

And, and then I have, uh, we'll see if we have some questions for you.

Yeah, so very quickly, the way that the program's gonna work is and has worked, um, very beginning day one, groups like Advantage and others that participate raise $42 million private capital collectively. Then the, we keep invest all that money within three years, keep it invested for seven years. First tax credit, $6 million in change is going to hit in year four, and then year again in year five, six, and seven. So that's the way the program has worked in the last two iterations. Those tax credits, uh, allow an insurance company or a corporate, uh, entity, a company to invest in the fund on day one. And then when those tax credits come online, they get the benefit tax credits are a funding vehicle to make sure that we can raise the money on day one and then go start putting it to work in the small businesses that need it.

Yeah. So right now they're business income tax credits. Uh, there is a, an amendment in just this version of the bill that would include insurance, premium tax credits as well to broaden the investor base. Yeah, That's right. That's in sub one, which we'd like to adopt.

Yeah, of course. You're fine with me doing that. Yeah, go ahead. Uh, so insurance premium credits, uh, your insurance companies are taxed on their top line receipts. So when you pay your car insurance, that's what they're getting taxed on. And so they can pretty reliably forecast that they're going to have tax liability seven years from now because, and less everyone stops paying their car insurance all at once. Uh, they know that they're gonna have tax liability in the state. They feel comfortable investing in the fund today to make sure that they're getting the full benefit, um, long term. So with that, uh, including the insurance companies and their ability to invest makes for a more efficient credit for the state. The, they can invest at a rate that is higher, that ultimately flows down to us being able to make more favorable terms and, uh, loans for these small businesses.

Yeah, absolutely. Um, so one is that farmstead manufacturing. One thing we see all the time is that you have a manufacturer who is, uh, moved out of their first space and now they're trying to go into their second space. And that's very capital intensive. So we see manufacturers, transportation, um, warehousing, utilities, uh, a lot of these companies that as they grow, are need a lot of money. And when they go to their local bank, their bank says, we've known you forever and you need $5 million, but based on what your current assets available are, we can only loan you 1.5. And so this program is coming in and filling that gap and making sure that they have access to the last three and a half million that gets 'em through what's often called the entrepreneurial valley of death. Because once you, you can find capital at the front end, and once you're big and grown, you can find capital like crazy at $10 million plus, but everything in the middle gets really difficult. So capital intensive manufacturing, aerospace.

Thank you, Mr. Chair. So I'm, I'm trying to follow the, the money here a little bit. Um, so if, if you were to offer tax ex incentives to businesses and finance, who, who gets the write off?

The tax credit goes to the insurance company or the, uh, corporation that invests in the fund. So it's an investor tax credit, and then the benefit flows to the business when we make a loan that is below market rate with a lot of flexible terms that let them get the money in the door and begin to use it.

So let, let's say that a business wants to expand and, and grow, and they come to you for, for a loan. Mm-hmm. And let's say they're going to borrow a million and a half dollars, they will be taxed as if they receive that million and a half dollars, will they also be able to deduct that million and a half dollars? Or does the insurance company take that deduction and the business has to pay the tax on that?

Uh, the business would still be able to deduct that. That is, this would operate just as any other loan that they would get from a bank. The goal with this program is to be able to utilize, uh, make this as easy as possible on the business to get the money in the door. So all of that flows to them. The insurance company is just getting the benefit of the tax credit when they make the investment, when they come online.

So they get the tax credit and then the, uh, and then the business can still do a traditional depreciation write off?

I, I believe that to be true, yes. The, the business is going to receive, you know, that say $1.5 million in your case, and they're gonna use those proceeds to then buy new equipment and that equipment is in the door. So they would be depreciating that equipment over time, but they're still paying on the loan. And the same way they would get a loan from a, their, their bank.

Okay. Thank you. Yeah,

Um, I'm not an economist and so I, I kind of need to boil things down a little bit. Um, so based on this handout, I'm, I'm looking at, uh, um, you know, $42 million of, of investments in, uh, in, in rural Utah businesses, which is a great thing. But, but, but why does, why, why the $6 million tax credit backstop? Like, how, how does that directly impact if there's already $42 million in economic activity? Like, what, why do we need to invest 6 million from the state coffers? So that 42 million is only made possible by authorizing the $6 million in tax credits?

So what that does, it allows us to raise the fund. So when they invest your, you know, it's $24 million, say they invest $21 million today, that flexibility allows us to go make a below market rate loan with flexible terms to that business. There's a business that I ran into in another state recently, and then we've been seeing more often, unfortunately, is that if this isn't there, this type of program, right? They go to their bank and they say, we need $5 million, they get 'em three. Well, now they're trying to grow. And their only other option is something like a merchant cash advance, which is a payday loan for a business. I ran into a business recently that is paying a 40% interest rate on that, which is astronomical. It's predatory. And so these programs make sure that those businesses can come in and when you get financing through this, you are able to get it in at below market rates and you're able to actually breathe. And so the benefit of the credit is really to make sure that when a business is trying to grow, they don't get completely choked by a crazy interest rate because they have no other options. So that's where the tax credit is driving the, uh, the total amount that, that allows us to raise the fund at the beginning. But it also allows us to make sure that these businesses, when they get the money in the door of room to breathe.

I appreciate that. Thank you. Thank

You. Can I just add one thing to that? If you look at on this, uh, five and six, these credits are tied to actual performance. So if the jobs aren't created and maintained, then the credits disappear. And in fact, there's penalties to be paid. And so from the state's perspective, we actually receive more income from, or revenue, I guess I should say, from the taxes being paid by employees, by the business, et cetera, than the credits we give out, if that makes sense.

It, it does. Do you have the data to reflect that?

That is, that is actually in the bill. Um, it is, uh, the state reimbursement amount we have to create, uh, enough jobs at that would satisfy the amount of the tax credits being created. And so if we're not creating enough jobs, then we owe a penalty back to the state. That's the floor. Um, when we went and looked at our portfolio, and I'd be happy to share this with you, I don't have access to everyone else's, but from our portion of the program, the investments that we've made, I mean, when we had an economist take a look at it and say, can you use the most conservative metrics possible and tell us, is the state getting their money back out of this? They found that the state is getting $2 and 27 cents for every dollar that, that you've put in in tax credits. So I can share that from our perspective, but from a a program perspective, I don't have that. But there is a floor and it's related, it's a requirement in the bill.

And, and, and to clarify, uh, I I, sorry, Mr. Chair, if I could ask another question.

'cause the stuff I don't understand, uh, when you talk about, uh, like a $2, uh, return, more than $2 return for every dollar in return, is that in, in, uh, in economic productivity or, or does that actually come back into the government coffers?

It's state and local tax revenue.

Okay. Oh, that helps. Thank you.

Thank you, Mr. Chair. I'm just looking at the fiscal note Representative Abbott, and maybe you could speak to that for a minute. I, I guess I don't understand the, are you shifting from an ongoing to a one time? Like, could you just explain that? And then also what, what's the scalability of this? If EAC is not up to funding it this year? Like what, uh, is this, I presume it's scalable, but anyway, maybe you could speak to those two questions.

Yeah, and, and, uh, my understanding of the fiscal note, it is a little unusual, but the reason is, is that the tax credits aren't given in years one, two, and three. They're only given after that. And by then the state's collecting excess or extra taxes. And so the fiscal note is, what, $3,900, even though there's mention of a $6 million tax credit, but that's down the line and it's only post performance, But we would be committed to it now.

So is that, is That correct? Well,

so go EEO authorizes the program and says, go ahead and make the investment. They don't get the tax credit for a couple years. If the jobs, if the business fails, the jobs don't last, whatever, they don't get the tax credit. If they've already gotten a partial credit, they'll have to repay it plus a penalty. So it's, it's, there's not a risk to the state, uh, per se, but it is down the line. It's a number of years in the future.

All right. So, so EAC would only need to fund 30, $3,900 this year?

That's my understanding, yeah. Mm-hmm.

Alright, thank you.

17. So it started long before then? Yeah. As a push to support rural Utah? Correct. It was reauthorized once, or this is the first time it's coming up for reauthorization. This Is the third. So we, we renewed in 2022 and now we're renewing again.

or this is the same size? Same. It's the same as 2022. I don't know about 17. Was that the same? It's the same size.

To adopt. First sub

I'll carry on if you choose Mr. Chair. Yes, please. Thank you. Motion to Recommend with a favorable motion to send HB 4 66 to the full house with a favorable recommendation for sub HB 4 66 for sub.

Yes. Thank you for your consideration of this bill. As we mentioned, this is a big boon to rural Utah. Helps them to get investment dollars that they could not otherwise get. And it is monitored by goo, it's guaranteed to repay the state one to one for all tax credits given. Um, but in practice it's been more than that. And so I do appreciate your support.

So the motion before us is to favorably recommend HB 4 66. First. Substitute those in favor. Let's do a roll call. Vote please. Representative Hansen, no. Representative Maga? Yes. Representative Miller? Yes. Representative Owens? Yes. Representative Shallenberger? Yes. Representative Shelley. Chair Cutler? Yes. Thank you.

Thank you, Mr. Chair. And I'll invite Alex Nik to come up with me here. So one of the things that we all benefit from in this state is if we can diversify and improve the economy in rural Utah, it benefits everybody. Not only does it benefit rural Utah, but it also benefits those of us who live along the Los Wasatch front. So back in 2017, this legislature passed the Utah Rural Jobs Act, which provided an incentive for investors to invest in high paying in businesses who will provide high paying jobs off the Wasatch Front. And that program has been now running since that time, um, and it's been very successful. And so this is basically an extension of that program. And I'll turn the time over to Mr. Stef to kind of explain this a little bit more. But

Thank you, Representative Abbott. Uh, my name's Alex Nik. I work for a company called Advantage Capital. We're a rural business investor that's participated in this program since the beginning. Um, the program sets out to solve the same problem that existed in 2017 that still exists today. The hardest money to find if you're a small business that's trying to grow is one to $5 million. You move outta your garage into your first space and people are begging to give you money and you're looking for anything 250 K that exists. It's out there. Um, and when you're a big established manufacturing business, uh, you're well leveraged and a bank is willing to, to back you in the middle is this entrepreneurial valley of death. And that is what this program sets out to provide for small businesses and has done since 2017. Um, advantage has been doing this, uh, the entire time of the program. Um, we have seen that, uh, 42 businesses in rural Utah have received this financing. They have grown and the program has a lot of guardrails set to make sure that, uh, jobs are being created and values being generated for the state. Uh, if a, uh, if the businesses that receive investment do not, uh, create a certain number of jobs, uh, the investors that participate in the program advantage and others, uh, have to pay a penalty back to the state. And on top of that, uh, when we had an economist look at our portfolio and tell us, Hey, is this working? Is the state getting their money, money back? They found that the state was getting $2 and 27 cents for every dollar that they put in in tax credits. And that's back to, uh, state and local tax revenue. I've got a million stories I could tell you about businesses that have benefited, but, uh, we're running long. So I will, uh, yield the rest of that time back to Representative Abbott. Thank you. That concludes our presentation. We're happy to take any questions.

Seeing no questions from the rest of the committee, since the Rural Jobs Act, uh, exists already and we're expanding this tax credit, do we have reporting or information as to how it is currently being used

and its success and those types of things? Yes, we Do. So lemme just clarify one thing. So when we, when we authorized this in 2017, we said it can go up to $42 million of an investment that was exhausted. We renewed it, uh, the last time we renewed it was 2022. So we've exhausted the money that we authorized in 2022, or at least I think within a month or something that will be exhausted. But the second part of your question, how has the, those investments actually performed? And I'll let Mr. Stefana answer that.

Yeah. Uh, to the long and short of the answer is that the program is performing as it is intended to, uh, the, you have about 1600 jobs have to be created for, uh, the investment to hit that threshold where the no penalty is required to pay back. It's about $15,000 per job against what the state would put up in tax credits. And throughout the first program, those numbers were, were hit, and, uh, now you know that, uh, as Representative Abbott mentioned, all of the 42 million in the last round, uh, was at work as of two days ago. So that money is out now and is tracking to meet that metric again.

Okay, So my understanding, and correct me if I'm wrong, if you look at, you know, how did, we gave so much in tax credits, basically $6 million in tax credits, what was the revenue received to the state from that $6 million? And my understanding is during the last round it was about 2.5, or at least your company generated about 2.5 to one. We're guaranteeing the way go EEO does it. They set it up so it to at least be one to one. But I understand that you guys exceeded that and you did about 2.5 to one, is that

Right? Two 2.27. Yep. And I can provide you with that report on that as well.

Okay. Yeah. Okay. Thank you. Um, okay. Appreciate that. Uh, on the 2.5 to one, how much of that Uintah an incentive to the company? Just trying to, it was only the, was it 2.5 or was it less?

It is. So it's 80, it's $84 million across both programs that has been invested into small businesses. So all of that's going to them. The economic activity they've generated through, um, the tax revenue they've generated from creating jobs and growing their businesses has resulted in that 2.27, uh, dollars in general revenue created local, state, and local tax revenue created for every dollar the state's put in. So it's $84 million at work to lead to that number.

Yeah. Okay. Okay. That's helpful. Okay.

I'll, I'll make a motion that we favorably recommend the bill.

Uh, I think the spon sponsor's done well.

I'll waive. Okay.

Motion. Motion to adjourn? All in favor, please say aye.

Thank you Mr. Speaker Pro Tem, HB 4 66 continues the Utah Rural Jobs Act program, which has been in place for over a decade. Um, so the purpose of this pro program is to incentivize investors to invest in businesses in rural Utah. If those businesses pay above market wages, the, the hope and what we've actually seen over the past decade is that it does work. We've had a million or tens of millions of dollars invested in rural job or in rural businesses that have produced high, uh, paying wages. And it helps to drive population off of the Wasatch front. One of the things we struggle with in this, uh, state is the affordability of housing. And one of the problems we have is, is we are property or land constrained here, right on the Wasatch front is we develop more high paying jobs off the Wasatch front. That helps everybody. And so I encourage a yes vote on this in that it continues at existing program, um, and encourages investors to invest off the Wasatch front. Um, that concludes my presentation and I'm happy to take any questions.

Thank you, Mr. Speaker ProAm. Will the, uh, sponsor yield to us, uh, question Sponsor yield? Yes, Go ahead. I like the concept that, uh, that this creates a tax deduction for people who want to invest in, in, uh, rural jobs, but I'm having a hard time understanding what the physical note and how that ties in with private investment.

Yes. So what happens is, if a business wants to qualify for this program, they apply to go EO and go EO says, we will authorize this investment under certain circumstances. And so they set up metrics. Basically, you have to have so many jobs at at least this salary for this many years. And then for years, one, two, and three, the business, the investments made, the business starts. There's no tax deduction or credit that's given during years, one, two, or three. Meanwhile, go e watches the business and make sure that they meet all of the, the thresholds that were set at the beginning. And as long as they're meeting those metrics at the end of the third year, then the tax credits become available. The net cost to the state is actually zero because the increased salaries more than paid for the tax credits that are given in years 4, 5, 6, and seven. If the business fails in years five, six or seven, um, or the jobs don't persist, then the investors have to pay back any tax credits that they were given.

Uh, so if Goo actually pays money into this, does that become a loan or is that some kind of a gift? Goo does not pay any money into it. Private investors pay all of the money. Goo merely sets up the metrics, the goals that they have to meet and then monitors that to make sure that they actually meet those metrics and then they certify that to the Utah State Tax Commission. So simply a tax incentive. No financial, no, no actual money exchange. Correct? That's exactly right.

Thank you Mr. Speaker Pro tem. I rise in strong support of this bill. This goes back a number of years to Senator John Valentine and representative Brad Wilson In 2014 is when it was instigated and then it was reauthorized, uh, by Senator Erland and Speaker Wilson in 2017. Uh, since that time, it's established 41 companies all throughout rural Utah. I'll give you a couple examples down in my area. Aerospace, Christianson Norms, norms, great example, doubled their workforce. May maybe a lot of you have bought rifles from them, but they provide a lot of aerospace stuff as well. Uh, LS Electric in Enoch, Utah, they, uh, were just merged with a South Korean firm. I Uintah their groundbreaking the other day for a great big building. Um, they've, they've hired 150 people and expect to go to 250. So it's all based on past performance. And as the good sponsor from Utah County has said, if they don't perform, then they have to pay the money back. That's a win-win for rural Utah and the state of Utah. And I urge you all to support it. Thank you.

Yes, thank you. It's difficult for businesses off of the Wasatch front to find investors willing to invest. And so this provides a tax incentive that encourages those investors to invest in rural businesses at below market rates. And that's good for rural Utah. It's good for people on the Wasatch front. And so I encourage a yes vote on this bill.