September 14, 2011
A small business owner approached me concerned about tax credits given for job creation. “The government doesn’t have to pay our taxes to create jobs,” he said. “That’s transferring revenue to a liability.”
The business owner was concerned the company receiving the tax breaks “gains an unfair advantage”.
With the focus on jobs, it’s not surprising lawmakers would write a multitude of bills creating various job funds. The idea is to free up dollars through investors to help new companies. The problem is sometimes these funds become a real benefit to investors with little payoff in new jobs and a big price tag to taxpayers.
In the rush to use tax dollars to create jobs, some forgot a lesson from the past.
In 1999, Wisconsin certified three capital companies, known as CAPCOs. These companies were to invest in businesses needing cash. To raise money, the state awarded 33 insurance companies $50 million in tax credits. So, instead of paying some taxes owed, the insurance companies invested in the CAPCOs. If they did not perform, the insurance companies still got the benefit. Taxpayers were left with the bill.
In 2006 the Legislative Audit Bureau conducted a wide-reaching investigation of economic development programs. Auditors found over six years only 316 jobs were created by the CAPCO program. Management expenses and debt service cost about half the total $50 million dollars. Jobs were created with a cost to taxpayers estimated at over $150,000 per job!
And while small businesses account for almost three quarters of all businesses in Wisconsin, they didn’t get an equal share of the nearly two hundred million in grants and loans awarded.
I worked with colleagues to put the work of the Legislative Audit Bureau into law. For nearly a year our bipartisan working group examined details of the audit and created reforms. We worked to take the ‘politics’ out of economic development awards. To make sure awards were based on wise investments and showed real results.
We streamlined rules and deleted or combined programs. We established performance standards and evaluations. The reforms, which became law in 2009, made sure each business accomplished what was promised and tax dollars were wisely invested.
Unfortunately, with the creation of the new Wisconsin Economic Development Corporation this spring most of these reforms were abandoned. I fear also lost was wisdom lawmakers gained from the extensive work by the Audit Bureau.
This year, among the bills introduced creating a ‘jobs fund’, are some to re-establish the CAPCO project. One such bill would expand CAPCO to $200 million in tax dollars.
This program was discredited in Wisconsin and other states like Colorado and Louisiana. In 2010, Minnesota rejected a CAPCO program. Iowa’s governor vetoed a similar program. But a $200 million tax credit lures cash.
Milwaukee Journal Sentinel journalist Kathleen Gallagher reported three out-of-state financial companies spent over $150,000 lobbying legislators to pass the new version of CAPCO. Two of these three companies were involved in the 1999 boondoggle.
Tom Hefty, a former insurance executive, served on economic development councils for governors of both parties. He wrote to Legislators concerned about the CAPCO proposal. He called it “the largest special interest Wisconsin tax cut in history masquerading as an economic development initiative….CAPCO costs to taxpayers [are] $100,000 to $200,000 per job created.”
Hefty wrote, “There is an old management saying, ‘the wise learn from the mistakes of others, fools learn from their own… it appears Wisconsin failed to learn from its own mistakes.”
Regardless of the party in control, there’s often a less than random relationship between those awarded grants and loans and those who contributed to the governor’s campaign. These problems are not limited to just one governor or just Wisconsin.
Too often economic development grants and loans went to the few and politically connected. Not lost on local business is the potential uneven playing field created when government picks winners and losers by awarding grants and tax credits.
With the flurry of ‘jobs’ bills introduced chances are good some will become law. As lawmakers rush to create “jobs now” funds, it is paramount we remember lessons of the past.