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Critics question merits of economic development legislation
Bill would expand program that gives tax credits to firms who invest in state’s (WI) start-up companies
By BRUCE MURPHY
[email protected]
(Thanks to Dan Ripke of the Center for Economic Development http://www.csuchico.edu/cedp for passing this along.- Russ)
At the heart of the current discussion about economic development in Wisconsin is a legislative bill critics call a gift to lobbyists.
"We’ve got to start more new companies in this state."
– Sen. Ted Kanavas,
Brookfield Republican who is chief sponsor of the bill
Related Coverage
Wisconsin: 18 states reject venture capital program http://www.jsonline.com/news/metro/nov03/188832.asp
"It was a creation by the fixers, for the fixers. The people who will make money off this are the lawyers, the accountants, the lobbyists and the packagers," said Rep. Bob Ziegelbauer (D-Manitowoc).
Supporters say the bill boosts high-tech development by giving subsidies to venture capital firms that invest in start-up companies. The bill would expand an existing program, created in 1998, which critics say hasn’t had much success: Statistics from the state Legislative Audit Bureau show the program’s $50 million in tax credits has so far yielded just $20.7 million actually invested in start-up companies.
Those start-ups, in turn, have created 157 new jobs, the bureau found. That’s a cost of about $318,000 per job for the taxpayers so far, though supporters say the program is designed to run for 10 years and will ultimately create more jobs, lowering the cost.
Ziegelbauer called the program "a horribly inefficient, fat, sloppy idea," while Rep. Glenn Grothman (R-West Bend) called it an "outrageous handout" to venture capital companies.
Even state Sen. Ted Kanavas (R-Brookfield), the bill’s chief sponsor, conceded some problems. "It isn’t perfect. It’s the best model we have in front of us," he said.
Sen. Rob Cowles (R-Green Bay) questioned why there is so much haste to expand a program with such high costs per job created.
"We need to know how much the venture capital companies are making, what it’s costing per job, and how it compares to other programs in the country," he said.
But the Senate rejected his suggestion, adding $75 million more to the program by a 25-7 margin. It’s expected to pass the Assembly and win Gov. Jim Doyle’s signature as well.
Why?
Commerce Secretary Cory Nettles said the bill improves the old law, creating a "solid program" that deserves support.
Ziegelbauer offered a different theory.
"The governor and the Republicans are having a press release contest as to who’s more in favor of economic development," he said. "There’s a panic by both parties to pass something, anything. It’s almost an attitude of, ‘We don’t care what’s in the bill.’ "
Intense lobbying
In such an atmosphere, said Cowles, "heavy lobbying pressure" is paying off.
Among those lobbying for the bill are:
* William Broydrick, Timothy Elverman and Moira Fitzgerald, representing Stonehenge Capital Corp.
* James Leonhart and Ronald Kuehn, representing Wisconsin Biotechnology Association Inc.
* John Neis of Venture Investors.
In addition, the Wisconsin Economic Development Association, which employs four lobbyists led by veteran James Hough, is also pushing for the legislation.
Leonhart is among the lobbyists sponsoring a Wednesday fund-raiser for Kanavas, the bill’s leading champion. Rep. David W. Ward (R-Fort Atkinson), another key proponent, used lobbyist Elverman to drop off information supporting the plan to a Journal Sentinel reporter.
Few legislators actually understand the bill, both its supporters and critics say.
"I think most do not understand the legislation and are accepting its merits on the say-so of established lobbyists," Grothman said.
There is a consensus that Wisconsin has a problem with venture capital that needs a solution.
"We haven’t had a culture that supports entrepreneurship in Wisconsin," Kanavas said. "We’ve got to start more new companies in this state."
Wisconsin ranked 21st in the number of high-tech jobs in 2002, but behind that rating is a frustrating paradox. The state is a leader in creating innovative ideas, ranking 4th in the number of patents, Kanavas said.
The University of Wisconsin-Madison ranks first among public universities in research dollars received, with some $550 million, and the Medical College of Wisconsin, in Wauwatosa, now brings in another $119 million.
But because Wisconsin lacks the investors and private sector support to commercialize its innovations, it ranks a dismal 47th in the creation of start-up businesses, Kanavas said.
"We’ve got the best ideas, but the ideas are being picked up and taken to different states," Kanavas said. He noted that the Wisconsin Alumni Research Foundation, which tries to commercialize UW research innovations, has opened an office in California.
Wisconsin has a very conservative culture in its style of investing, said Jeff Rusinow, a founder of Silicon Pastures, a group of "angel investors" – those who provide the earliest and most risky dollars for start-up ventures.
"There is a great deal of wealth in this state," but very few individuals who want to play in this angel investor sector, he said. "There is an unusual aversion to risk."
Doyle and the Legislature want to radically transform the state’s financial culture, hardly an easy task. But Joe Hildebrandt, a Foley & Lardner attorney who is a leading authority on venture capital and emerging businesses, questions how the state has gone about this task.
He estimates that under the current program, the state gets less than 40 cents in investment money for every dollar it spends in tax credits.
"It’s very inefficient and doesn’t bring the most tax dollars down to the actual companies," Hildebrandt said.
Kanavas agreed. "It was way too top-heavy in fees," he said.
The new law nudges the rate of return up to about 50 cents in investment for every dollar in subsidy, Hildebrandt estimated. It should be possible to design a program with powerful incentives for venture capital investors that would deliver $1.50 in investments for every dollar in tax credits, a rate of return that’s 300% higher, he said.
David J. Ward, president of NorthStar Economics, an economic development firm, agreed that the return for taxpayers under the revised legislation is still too low, though he said it could end up as high as 60 cents on the dollar. He also agreed that the goal should be to create a program with "upward investment," meaning every tax dollar generates more than a dollar in investment.
Alternative proposal
Rep. Terri McCormick (R-Appleton) has sponsored alternative legislation that Hildebrandt and Northstar Economics’ Ward believe would result in upward investment, while providing an ample return for venture capital firms.
She noted that unlike Kanavas’ bill, which would fund only a select list of companies, her bill would allow any individual or company in the venture capital field to receive subsidies.
McCormick’s legislation also creates a private capital investment corporation with a chief executive officer appointed by a bipartisan government oversight board. Experts at this corporation would provide help for entrepreneurs trying to structure deals.
"We not only have a venture capital gap but a deal gap in Wisconsin," Ward said. "We need to increase the number of deals that get offered."
But Kanavas and others portray McCormick’s bill as one that injects government into the process of venture capital investments.
McCormick counters that hers is more free-market-oriented.
The Kanavas legislation gives the Department of Commerce the power to pick the venture capital fund managers and to certify the start-up businesses that the venture funds choose for their investments.
McCormick argues this puts too much power in the hand of the governor, who appoints the secretary of commerce. She proposes creating an Economic Leadership Board whose members would be appointed by the governor, state legislative leaders and State of Wisconsin Investment Board.
Kanavas, who has been an outspoken critic of Doyle for mixing policy and politics, conceded the irony of a plan that gives the governor the power to pick the winners. But he said the law requires quick reporting of any decisions to assure a "transparent" process.
McCormick counters that the Kanavas legislation allows more money for fees and administration. "It is not going to be as effective in producing jobs," she said.
From the Nov. 29, 2003 editions of the Milwaukee Journal Sentinel
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