Julia Sass Rubin, Ph.D.
Edward J. Bloustein School of Planning & Policy
Rutgers University
EARN Conference - September 13, 2011

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Insurance tax credit program
Began in Louisiana in 1988
Between 1997 – 2005 diffused to:
◦ Alabama
◦ Florida
◦ Missouri
◦ Texas
◦ Wisconsin
Colorado
Georgia
New York
Washington DC

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State provides $100 million in tax credits to insurance companies
Insurance companies lend $100 million to
CAPCOs
CAPCOs invest $50 million in 10 year zero coupon bonds to repay that loan
CAPCOs lend/invest other $50 million to instate businesses, until amount loaned/ invested equals $100 million
CAPCOs “de-certify” and keep all the money not repaid to insurance companies

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"I think this state would be hard pressed to design a program that cost the taxpayers more and delivered less.“
Bob Lee, head of Colorado's Office of Economic Development, which administered the CAPCO program
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"It's a scam…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.“
Mike Coffman, former Colorado State Treasurer who is now a
Congressperson

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Poor quality loans/investments
◦ Demonstration of prior success not required for
CAPCO managers
◦ Incentives for low risk and quick repayment
Extraordinarily expensive
◦ Normal venture investors:
 repaid $100 million investment
 earn 80% of profits
◦ CAPCO states receive $0

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Empty promise to “create and foster a local venture capital infrastructure”
◦ Louisiana spent >$630 million 1989 to 1999
◦ Attracted < 1/1000% of US VC $ from 2000 to 2003
May price out indigenous VC
Effective alternatives exist
◦ Fund of Funds
◦ InvestMD

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Solution in search of a problem
◦ Venture Capital? Economic Development?
Flexibility
◦ Change name and terms; keep basic model
Legislators do not understand
◦ How venture capital works
◦ How CAPCOs work

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Expensive and effective lobbying
◦ Often well-liked former legislators
Hard-ball politics
◦ Smear/threaten critics
Timing
◦ Push through in final days of session

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Clear objectives
◦ Venture capital or economic development?
◦ Profits or jobs?
◦ Geographic focus: State wide? Rural? Low-income geographies?
Clear criteria for selecting venture funds, based on program goals
◦ Financial returns
◦ In-state job creation
◦ Targeted economic development

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Prioritize
◦ VC funds w/ success investing in-State
Transparent VC selection process
Remove VC selection and investments from political oversight or input
If using tax credits vs. direct appropriations, use competitive monetization process
◦ minimize cost to taxpayers – e.g., InvestMD

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State receive same terms as private-sector
◦ Full return of principle
◦ 80% of any profits
Limits on fees to reflect VC norms
Limited financial commitment up-front
◦ Can reassess before disbursing additional funds