It depends on what outcome you hope they achieve.
A research paper released this summer found that, yes, angel investor tax credits do increase angel investment. But, no, they do not have a significant effect on entrepreneurial activity or the local economy.
This finding is consistent with our own review of the research on angel investor tax credits that we conducted while examining the landscape of incentives for entrepreneurial firms.
Our takeaway was that angel investor tax credits appear to have a positive but very limited firm and community impact. This makes sense given the small number of companies that actually receive angel investment supported by tax credits in any given state. Of course, many of these entrepreneurial ventures do not succeed, further blunting impact. Community-level benefits would not be widely felt except in the unusual case of a breakout company success.
Conceptually, the tax credit is intended to address the regional disparity in private equity investment and help close the funding gap faced by entrepreneurs by incentivizing more private investment. Angel investors are considered valuable because they are often sophisticated, active and effective investors with good local connections and access to outside capital. It is understandable that states want to incentivize this activity.
However, the recent research found that the tax credits encourage inexperienced local investors rather than attracting experienced outside investors. The local investors may be less rigorous when making their investment decisions, and they may not invest in the startups that policymakers target. Most new investments were found to go to low-growth firms. Further, program rules in some states allow the tax credits to disproportionately or unintentionally go to company insiders – not the investors the tax credit is intended to motivate.
To learn more about this research, see Investor Tax Credits and Entrepreneurship: Evidence from U.S. States.