The program is called the Jobs Now Fund and represents part of the $400 million Wisconsin Jobs Act. It aims to jump-start job creation in Wisconsin by promising $200 million in future tax credits in exchange for $250 million raised from insurance companies.The money would be invested in Wisconsin businesses through management companies known as certified capital companies, or “CAPCOs.” …In written testimony submitted for the hearing, Tom Hefty, the former chief executive of Blue Cross/Blue Shield of Wisconsin, called the program “the largest special interest Wisconsin tax cut in history masquerading as an economic development initiative.”The $200 million in tax credits would never have to be repaid to the state. The payback, supporters say, would come from the job creation and business growth that would result from the investments.
The bill would create two funds totaling $400 million under the umbrella of a new Wisconsin Venture Capital Authority. The complementary funds — the Jobs Now Fund and the Badger Jobs Fund — are designed, respectively, to address Wisconsin’s short-term and long-term investment needs.The proposal builds on the success of the widely acclaimed and often duplicated Act 255 Tax Credits, which were passed in 2005 and enhanced in 2009. Those tax credits have helped enhance early-stage investing in Wisconsin — but largely at the “angel” capital level, thus creating a need for follow-up investing by venture capital firms in emerging companies.The credits helped spawn angel networks across Wisconsin, and those networks have dramatically increased both the number of deals and the dollars invested in those deals. But many angels are tapped out. They need “exits” — company mergers, acquisitions or venture investments — to recoup their money. And the companies in which those angels have invested are struggling to survive.Senate Bill 94 would create the Wisconsin Venture Capital Authority and two funds:The Jobs Now Fund is envisioned as rapid-response fund. It would issue $200 million in tax credits to insurance companies over time in return for investments in certified capital funds. The tax credits would be for 80% of the value of the investments made, so $200 million in credits could attract $250 million in investments. The credits could not be claimed for a minimum of five years, so the money would be put to work well before the credits are paid. It would invest only in Wisconsin companies that meet specific guidelines. In other states, this approach is called a “certified capital company,” or CAPCO, approach.The Badger Jobs Fund is the longer-term tool. It would invest in qualified venture capital funds on a “fund of funds” basis. The authority could issue up to $200 million in private placement bonds for the Badger Jobs Fund, with the bonds supported by investment returns, the incremental growth of state tax collections from financed companies and contingent tax credits. Bonds would not be a debt of the state, and no more than 15% of the funds could go to any single venture capital firm. For every $1 a qualified venture capital fund receives from the Badger Jobs Fund, it would need to raise $3 on its own.
… the law allows the CAPCOs to keep all the money invested in them by the state, plus 80 percent of the profits generated. Critics have called it a “massive corporate giveaway,” [reporter Kathleen Gallagher] writes.One new point in her story is a Minnesota study of Wisconsin’s earlier CAPCO program, which found that rather than increasing it may have actually displaced the total amount of venture capital funding in Wisconsin. …The language of the bill is quite convoluted, and most legislators never understand it. I’d love to hear a detailed explanation of the Wisconsin bill by its sponsors, Sen. Randy Hopper (R-Fond du Lac) and Rep. Gary Tauchen (R-Bonduel).The CAPCOs have a set game plan and typically grab all the state funding before any real venture capital companies can get a dollar of it. “Local venture capital people often support the bill because they think they’ll get the money,” says [Rutgers University Prof. Sass] Rubin. “But they never do. It’s a con.” …Rubin cites an earlier law passed in Wisconsin, a 25 percent tax credit for angel investors, as a far more sensible way to go. “It’s just enough money to encourage investment, but you’re not screwing up the market and becoming the only reason they invest.”
Wisconsin previously passed a CAPCO bill in 1998 which created a $50 million venture capital fund. Normally, experts say, a venture capital fund attracts money from investors, invests it in start-up companies and then returns the principal plus 70 to 80 percent of the profits to the investors. But under the CAPCO model, the state was the investor and got nothing back: None of the profits flowed back to it, and none of the principal was returned.The state Legislative Audit Bureau found it cost $90,000 per job for that CAPCO program. That’s an outrageous cost, but actually better than the experience in most states. Florida spent $150 million and lost 150 jobs. New York spent $280 million but lost 88 jobs.A study done for the National Association of Seed and Venture Funds found that state subsidized CAPCOs gained “10 times the return” of unsubsidized companies.
The plan would offer $200 million in future tax credits to insurers not because anyone likes them but because they’re giant pools of investment money. They’d put up the cash, $250 million, that other management companies would parcel out to entrepreneurs, and the tax credits would ensure they wouldn’t lose their shirts. The credits are a lure, nothing more.Still, why the special inducements? Why the tax gimmicks, which are what high-tax, regulatory hells offer? Why not stick with the program of making taxes more reasonable generally and regulation more rational for all? Sen. Glenn Grothman called it “the most dubious giveaway I’ve seen since I’ve been in the legislature,” and Tom Hefty, Mr. Business Climate, calls it suspect. Experts get quoted by the Journal Sentinel as saying it’s a deal of dubious worth.Hit the brakes. Read the prospectus carefully, as they say in those ads, because if forgoing future tax revenue is to be considered an investment in luring capital to Wisconsin start-ups, it isn’t an investment that state lawmakers have spent enough time examining.