Capital Subsidy Bill Raked
$75 million deal 'scam,' says Colorado critic
Milwaukee Journal Sentinel, 12/21/2003
Critics from across the country are assailing the state Legislature's proposed bill to provide $75 million in tax subsidies to venture capital investment firms.
"It's a crummy deal for the taxpayers," said Julia Sass Rubin, a Rutgers University professor of public policy, who has spent five years researching these kind of subsidies and helped defeat a similar proposal in Rhode Island.
"It's a scam," said Colorado state Treasurer Mike Coffman, speaking of a similar bill passed in Colorado. "I don't think there's anyone who thinks this is a good deal for Colorado, with the exception of those companies who lined their own pockets."
George Lipper, who studied similar legislation for the Iowa Department of Economic Development and helped defeat the bill there, called it a "raid on state treasuries."
The certified capital companies that have benefited - called CAPCOs - have gained more than $1.6 billion in subsidies from seven states, including Wisconsin, whose 1998 law provided them with $50 million in tax credits. The new bill would add another $75 million in funding.
State Sen. Ted Kanavas (R-Brookfield), one of the bill's sponsors, admitted the name had been changed to the Wisconsin Capital Companies Program, or WISCAP, because of the national controversy surrounding the capital firms. Studies done in other states have offered very negative assessments of the capital programs.
Kanavas and Commerce Secretary Cory Nettles, who worked closely to craft the legislation, both said they opposed the original venture capital firms and have greatly modified and improved the concept behind Wisconsin's 1998 law.
But Rubin, who reviewed the Wisconsin bill, scoffed at this.
"It's very minimally changed, only cosmetically," she said.
Low rate of return
Normally, experts say, a venture capital fund attracts money from investors and then returns the principal plus 70% to 80% of the profits to the investors. Under that model, Wisconsin would get back its entire $50 million investment plus most of the profits from its 1998 allocation. Instead, the state got none of the principal or profits.
Under the new bill, Wisconsin would still lose all the principal it invests but would get a maximum of 30% of any profits earned.
Rubin estimated that over 10 years, the venture capital companies could take the $75 million tax subsidy and build it into a fund valued at $150 million. They could pocket $127.5 million, while the state would get back a maximum of $22.5 million, effectively suffering a huge loss on its investment, she said.
Department of Commerce spokesman Tony Hozeny disputed this. He said the profits would likely be much lower, meaning the venture capital companies would pocket only about $92.5 million, while the state would get $7.5 million. Under that scenario, however, the state would lose even more money on its investment.
" Rubin said either scenario completely distorts the normal market model, essentially handing a gift of "pure profit" to venture capital companies.
Rep. David Ward (R-Fort Atkinson), a co-sponsor of the legislation, said venture capital firms need such a subsidy because they would be required to invest only in Wisconsin companies, which could lower the return. John Neis of Venture Investors, which manages the state allocation received by Advantage Capital, said there is considerable risk for his company.
But Rubin said many venture capital companies would be "thrilled" to invest the state's money under these conditions and still return the principal and most of the profits back to the state.
She pointed to the federal "New Markets Tax Credit" program, which provides a tax credit of up to 39% over seven years for any equity investment in companies in distressed areas. The program is "oversubscribed," she said, with more investment funds interested in participating than are needed.
Panned in several states
Proponents of the venture capital program have capitalized on the desire of many states to transform themselves into high-tech powerhouses. Using tax subsidies, the venture capital firms are supposed to invest in start-up companies with high job growth potential.
But studies of Florida and New York, which have allocated a combined $580 million, show that companies in which they invested actually lost jobs.
The concept was originated in Louisiana, whose legislature spent $631 million on the program from 1989 to 1999. A 1999 study commissioned by the state called the program "expensive and inefficient" and said "the greatest and most immediate beneficiaries of the CAPCO program are CAPCO companies and their owners."
A state study in Missouri found 66% of the funds generated by the venture capital program there "were not being used for the intended purposes of providing capital for start-up or expanding Missouri businesses."
A legislative audit in Colorado noted that "CAPCO programs are a most inefficient means for the state to raise venture capital" and questioned whether any jobs created were attributable solely to that financing.
In Wisconsin, according to an analysis by the state audit bureau, the $50 million program had generated just 157 jobs by March, more than three years after the allocations began.
Certified capital firms' representatives have defended themselves in Wisconsin and other states by arguing the spending and job figures are only midterm results for a program that will ultimately have a bigger payoff.
Lobbying and donations
The Colorado audit also noted the capital firms had spent $471,503 on lobbyists in Colorado, and $85,000 of it came from the state program. In addition, said Coffman, the firms' legal costs came out of the state allocation.
In Wisconsin, 10 lobbyists are working for companies and organizations pushing for the Wisconsin Capital Companies Program bill.
Banc One, whose subsidiary company Stonehenge Capital is one of the three companies funded by the state, has donated some $210,000 in campaign contributions to Wisconsin Assembly and Senate candidates in the last 10 years, according to an analysis by the Wisconsin Democracy Campaign. Banc One, however, lobbies for many issues besides CAPCOs.
In addition, Stonehenge has donated $2,500, and Wilshire Investors, another capital company, has donated $2,000.
State-supported capital firms have been aggressive in pushing for funding. In Florida, Advantage Capital Partners, a beneficiary of state capital funding, threatened to sue Gov. Jeb Bush if he delayed it.
One prominent critic in another state said he could no longer comment publicly because he had been threatened with a lawsuit by venture capital interests.
Carter Dunkin, a senior vice president with Advantage Capital, said the state-supported capital industry supported public discussion of the merits of these programs but added that he knew of one incident where a letter discussing a possible lawsuit was sent to "an individual who spread information that was defamatory."
Rubin said her reputation was attacked when she testified against legislation in Rhode Island.
"Because I was testifying against the CAPCO bill, the CAPCO representatives were telling legislators or implying I was getting paid by other companies, thereby smearing my reputation as an academic," she said.
But Dunkin said "we don't know of anyone making such aspersions."