Editor’s note: Thomas Hefty, a former chief executive officer of Cobalt Corp. who has served on economic development commissions for both Republican and Democratic governors in Wisconsin, recently submitted the following analysis of Gov. Scott Walker’s Jobs Now Fund, a proposal for a new “CAPCO” program, to the state Legislature. Hefty is opposed to Assembly Bill 129 and Senate Bill 94.
The Jobs Now Fund proposal is the largest special interest Wisconsin tax cut in history masquerading as an economic development initiative. It is a $200 million tax cut at a time when the Wisconsin budget requires cuts in many important programs. It worsens the structural deficit that the governor and legislature have been seeking to eliminate.
The Jobs Now Fund is a cute name for a CAPCO fund, most frequently described by independent national experts as a “scam.” CAPCO’s are not cost effective for job creation or for leveraging venture capital dollars. A CAPCO was tried and failed in Wisconsin in 1998 and similar proposals have been rejected in neighboring states. The proposal discriminates in favor of large corporate investors at the expense of entrepreneurs and angel investors. The legislation also disadvantages the largest jobs sector in the Wisconsin insurance industry, while favoring a handful of life insurers and out-of state insurance companies.
CAPCO’s were tried and failed in Wisconsin.
In 1998 the Wisconsin legislature adopted a $50 million CAPCO, one of the first in the country. It was intended to stimulate venture capital and job growth. Although there were a few individual investments which were successful, which the proponents talk about repeatedly, the overall program was a failure. A simple review of Wisconsin’s ranking on venture capital shows that the $50 million 1998 CAPCO tax cut was wasted. There was no long term change in the national rankings following the CAPCO tax cut. The Wisconsin Legislative Audit Bureau reviewed and criticized the program. The extension of the CAPCO program in 2004 was blocked by Governor Doyle and a bi-partisan group of legislators.
In 2010, the Minnesota legislature conducted a comprehensive study, “Tax Incentives and Venture Capital.” The study concluded, “The Wisconsin CAPCO credit had little or no effect, likely displacing venture capital financing that would otherwise have occurred.” Even the CAPCO industry’s own self-promoting study found that CAPCO’s were not cost effective for job creation — costing $40,000 in lost taxes for each job created after ten years. That study looked at data on only two of the three Wisconsin’s CAPCO’s. The third failed Wisconsin CAPCO manager refused to provide data for the study.
Studies of CAPCO’s in other states, using comprehensive data measured on the standard three to five year time horizon for job creation, continue to find CAPCO costs to the taxpayer of $100,000 to $200,000 per job created. That is far more costly than traditional successful economic development strategies.
The best thing that has been said about CAPCO’s was reported by the State Science and Technology Institute. It called CAPCO’s “a complicated and controversial tool.” Despite the complexity and controversy, this legislature is proposing to rush the legislation thru quickly.
CAPCO’S have been rejected by the LAB, neighboring states, and bi-partisan Wisconsin legislators.
The same companies and lobbyists advocating for 2011 CAPCO’s have a track record which deserves careful examination. They pushed for the 1998 $50 million CAPCO tax cut. That program was correctly criticized by the Legislative Audit Bureau report in 2006 — eight years after the original CAPCO plan. CAPCO proponents now say that the new complex proposal cures the original failures. Those same CAPCO’s have never disclosed the identity of the companies which were the ultimate beneficiaries of the 1998 $50 million tax cut, nor have they disclosed the fees charged for administering the multi-layered CAPCO program.
CAPCO’s have consistently been rejected in neighboring states. Recognizing the CAPCO failures, the Iowa governor vetoed a similar CAPCO program which was lobbied thru the Iowa legislature. The Minnesota legislature rejected a CAPCO program in 2010 following a comprehensive study. Both Iowa and Minnesota are recognized as having strong economic development programs, and both states without CAPCO’s achieved higher job growth and better per capita income growth than Wisconsin.
There is an old management saying, “The wise learn from the mistakes of others, fools learn from their own.” Iowa and Minnesota learned from the CAPCO mistake of Wisconsin. Both states rejected CAPCO’s. With the pending CAPCO legislation, it appears that Wisconsin has failed to learn even from its own mistakes.
The CAPCO legislation discriminates against entrepreneurs and angel investors
Under the proposed bill, a small group of favored corporate investors receive an 80 percent tax credit for CAPCO’s. In comparison, entrepreneurs and angel investors receive only a 25 percent tax credit for their efforts. Entrepreneurs and angel investors make high risk early stage investments. According to the 2010 Minnesota study, Wisconsin CAPCO’s make later stage, and safer investments.
What is the rationale for discriminating against entrepreneurs and angel investors? The 25 percent angel tax credit is widely described as a success. Minnesota copied the Wisconsin angel tax credit. Minnesota rejected the CAPCO idea.
The CAPCO legislation damages employment opportunities in the Wisconsin insurance industry.
Insurance by its nature is complex. Insurance taxes are even more complex. For details on insurance taxation, see the annual Revenue Department summary of tax exemption devices or see “Interstate Variations in Effective Tax Rates for Insurance Premium Taxes “in the papers of the 6th Annual Insurance Tax Conference (p143). The dual Wisconsin insurance tax structure is unique among the 50 states. As a result, CAPCO’s in Wisconsin uniquely jeopardize Wisconsin insurance jobs.
For decades, the Wisconsin insurance tax code was a successful balance of raising revenue and creating Wisconsin jobs. Life insurers and all out of state companies pay a premium tax, the tax which is cut by the CAPCO legislation. Wisconsin auto, homeowners, workers compensation, and health insurers pay a franchise tax — a corporate income tax. That tax structure admittedly provided a small advantage to Wisconsin based insurers and stimulated Wisconsin job growth in the insurance industry for forty years.
Instead of favoring Wisconsin insurers and Wisconsin jobs, the CAPCO legislation benefits a handful of Wisconsin life insurers and all out of state companies. The CAPCO legislation now creates a competitive disadvantage for most Wisconsin based insurers.
The 2010 Deloitte Be Bold study of Wisconsin competitiveness looked in depth at the Wisconsin insurance industry. The Wisconsin industry has declined since 1998, partly due to the growing tax inequity. Since 1998, the year of CAPCO’s adoption, Wisconsin has lost one-half of the major Wisconsin headquartered insurers. Over 5,000 jobs have been lost—all in the portion of the industry disadvantaged by CAPCO’s. There were other regulatory changes which contributed to that job loss, but the CAPCO impact cannot be discounted. Again, by comparison, Iowa, which did not adopt CAPCO tax cuts, gained insurance employment at a time when Wisconsin was losing insurance jobs.
The 1998 CAPCO legislation was a $50 million tax cut. The proposed 2011 tax cut is four times that amount, $200 million. The property and casualty and health insurance companies in Green Bay, Sheboygan, Fond du Lac, Neenah, Appleton, New Berlin, Madison and Stevens Point will receive no benefit from this legislation. Who will receive the CAPCO tax cut – a select number of life insurance companies and all out of state insurance companies. Rather than creating “jobs now,” this legislation will drive additional insurance jobs to other states.
CAPCO’s have been rejected by all independent economic development studies
There is great irony in the naming of the CAPCO legislation as “the jobs now fund.” The legislature in 2009 conducted a number listening sessions on economic development and a comprehensive report was prepared. That 2009 Wisconsin legislative study was called the “jobs now task force report.” The Jobs Now Task Force did not even mention a CAPCO proposal, nor according to the record were CAPCO’s recommended at any of the listening sessions. Similarly, CAPCO’s were not recommended by the Deloitte Be Bold 2010 study or the Wisconsin Prosperity Strategy report.
In comparison to the CAPCO proposal, the bonding proposal in the Badger Jobs Fund received more serious study. The best model for the Badger Jobs Fund is the Ohio Third Frontier Fund. The Ohio model fund has been well studied by independent academic researchers. The voters of Ohio approved the original Third Frontier Fund and in 2010 more than 60% of the Ohio voters approved an expansion of bonding for Ohio economic development.
In 2010 representatives of the Ohio Third Frontier Fund made presentations to the Greater Milwaukee Committee, the UW sponsored 2010 Economic Summits, and to the Milwaukee 7 regional economic development group. The Third Frontier Fund representatives also appeared before the editorial board of the Milwaukee Journal Sentinel. The CAPCO proponents failed to offer any similar public debate or present any data to support the $200 million tax cut. CAPCO’s have never been subject to voter approval in any state. The CAPCO proponents prefer back room lobbying; quick public hearings; and a rushed legislative agenda to careful public analysis and debate.
Despite the lack of serious study, the legislative sponsors introduced CAPCO legislation and hurriedly scheduled a hearing on the proposal. This is a classic
sign of poor public policy – a hastily scheduled hearing; a cute fancy name for the legislation; and tying the CAPCO scam to the stronger proposal for bonding for economic development — as if the two were an integrated package…
The proposed legislation creates an unneeded fourth economic development agency.
The one consistent conclusion from all of the economic development studies has been the need to simplify and streamline the economic development efforts and the tax code. The Legislative Audit Bureau recommended consolidating and focusing the 154 different economic development programs administered by 23 different agencies and commissions. The Jobs Now Legislative Task Force said “simplify and streamline the tax code.” The Be Bold Wisconsin Prosperity Strategy report called for the creation of a streamlined Economic Development Corporation, which was authorized in the special session on jobs called by Governor Walker.
Wisconsin already has two economic development authorities with the power to do bonding. The Wisconsin Housing and Economic Development Authority was created first. In 2010 the legislature created another economic development authority, named the Public Finance Authority. Now in 2011 these bills propose to create a fourth economic development agency. This is contrary to common sense; to the recommendation of every economic development study; and to the very purpose of the Wisconsin Economic Development Corporation, created only three months ago.
There are many other cost effective ways to create venture capital.
Bonding for economic development is a cost effective way to enhance venture capital and create jobs. The 25% angel tax credit is three times as cost effective as the proposed 80% tax credit for corporate CAPCO sponsors.
There are other cost effective alternatives. The Wisconsin Strategic Development Commission Report recommended one simple solution — a targeted tax credit for the State of Wisconsin Investment Board (SWIB). The SWIB pension fund is one of the largest in America with over $80 billion in assets. Yet its allocation to venture capital investing is among the lowest in America among public pension funds. The reason given is the potential risk in venture capital investing. Rather than give a corporate tax cut of $200 million – calculated as an 80% credit, why not consider a much smaller credit for SWIB. That would cost the taxpayers far less; create the same venture capital; and provide added security for the public pension program. It should be noted that CAPCO’s are supported by well financed lobbying. There is, unfortunately, no similar lobbying for cost effective SWIB programs — or apparently for saving vital public programs which will be jeopardized by the $200 million CAPCO tax cut.
Conclusion
The CAPCO proposal contained in recently published AB 129 and SB 94 is the largest special purpose corporate tax cut in Wisconsin history. It is a tax cut benefiting only a few companies, but it is camouflaged as an economic development program.
A 2009 article, which I co-authored, was titled “Wisconsin Flunks Its Economic Test.” That conclusion reflected Wisconsin’s bottom quartile ranking in job growth and personal income growth during the past decade. This bill not only flunks an economic development test, it reflects a legislature which has not even bothered to do its homework.
In commenting on the 2009 economic development article, then candidate Scott Walker made an important statement, “Voters know that Wisconsin is going in the wrong direction…..They want a government that puts the needs of citizens first and places public safety and the education of its children above the needs of special interests.”
The failed economic policy of the past decade included CAPCO’s. Now CAPCO’s are back, pushed again by special interests. Wisconsin doesn’t need a $200 million CAPCO corporate tax cuts intended for only a few companies at a time when vital public programs are being cut.
The two bills, AB 129 and SB 94, should be rejected.
