New Jersey Should Tighten Its Angel Investor Credit Eligibility

New Jersey appears set to boost its angel investor tax credit, increasing the subsidy for investments in qualifying technology startups from 20% to 35% of costs, with an annual cap of $35 million. Given that the allocated funds are finite and relatively low, it’s critical that the credit is precisely targeted.

Unfortunately, the New Jersey bill’s inclusion of “carbon footprint reduction technology” in the definition of eligible emerging technology businesses runs counter to science and good policy. Carbon capture, which would appear to qualify for the AITC, is neither an emerging technology nor a proven solution to reducing atmospheric carbon—it’s an expensive and inefficient industry stopgap.

Instead of subsidizing costly, ineffective technologies that are more a lifeline for fossil fuel companies than a legitimate decarbonization tool, public funds should be directed toward emerging industries and solutions that cut emissions at the source: renewables, energy storage, and efficiency improvements.

As the ongoing availability of comparable federal incentives remains anything but certain, state startup incentives such as the AITC must be made as effective as possible.

Carbon capture remains an expensive, inefficient, and unproven technology at scale. After decades of research and billions in public subsidies, it still hasn’t demonstrated cost-effective results or scalability. Worse, most carbon captured today is used for enhanced oil recovery, a process that extracts more fossil fuels from the ground—negating potential climate benefits. Through this process, carbon capture extends the marketability of fossil fuels, enabling their continued extraction and use under the guise of sustainability.

Even from a technical perspective, carbon capture is flawed. The energy-intensive nature of the capturing process undermines its own efficacy, as many carbon capture facilities require so much power they have to first offset their own emissions.

Including this class of technologies in the AITC through an expansive definition of “emerging technology” would be using public funds to subsidize a remedial practice that zeros out its own emissions at best. At worst, it would delay real climate action or investment in viable technologies while prolonging reliance on fossil fuels.

A carbon capture and storage facility near Edmonton, Alberta, Canada.

Photographer: Jason Franson/Bloomberg via Getty Images

With only $35 million in total annual funding available through the Garden State’s AITC program, emerging technology tax credits must be used strategically. Every dollar invested in a questionable technology is one not invested in truly innovative fields—from robotics and machine learning to telecommunications infrastructure—or proven decarbonization strategies that prevent emissions at the source.

New Jersey must ensure its state tax credits have maximal impact. Carbon capture falls short of that standard and diverts resources away from solutions that deliver emissions reductions.

But the state has an opportunity to avoid spreading incentives too thin. Refining the statutory definition of “carbon footprint reduction technology” to exclude carbon capture and enumerate included technologies—renewables and energy storage, for example—would ensure the AITC is targeted where it has the greatest climate and economic return.

Investment in renewable energy projects (such as wind and solar) and energy storage and efficiency upgrades offer higher returns by directly cutting emissions. This reduces long-term energy costs and creates sustainable jobs.

Solar and wind power continues to fall in cost, battery energy storage continues to improve, and energy efficiency is a proxy for reduced power consumption. These technologies don’t require endless subsidies on the promise of speculative technological advancement—they already have provided energy cost savings and can keep scaling up.

By tightening the AITC eligibility criteria, New Jersey could ensure its tax credit program supports tangible, visible progress. States often serve as testing grounds for policy innovations, and a well-designed startup incentive in a densely populated state can create a blueprint for others looking to maximize the impact of their public investments. States that take the lead on effective tax and energy policy now will be best positioned to attract investment, create jobs, and reduce emissions.

Instead of passively reacting to shifting federal incentives, states can dictate the future terms of public fund investments and set standards for how tax credits should be structured—driving investment away from ineffective projects. Those that get it right will be the ones drawing the next generation of startups, renewable energy developers, and advanced energy manufacturing. Others that throw money at anything that can plausibly be defined as emerging technology will be left behind.

As federal climate funding fluctuates, or perhaps even evaporates, forward-thinking state policies will determine where capital flows in the coming years. Refining the AITC to prioritize proven technologies—beginning with explicitly excluding those that have fallen short—would make New Jersey a national model for how states can use targeted financial incentives to accelerate investment during periods of federal retraction and beyond.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and practice professor at Drexel Kline School of Law. Follow him on Mastodon at @[email protected]

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