The state needs sufficient revenue to provide education, health care, transportation and other critical services for Texans. But this Wednesday, March 17, the House International Relations and Economic Development Committee will consider a flagrant tax giveaway that would drain state resources.
HB 570 by Rep. Paddie would give up to $500 million a year in insurance tax credits to venture capitalists promising to make investments in small businesses, a program generally known as CAPCO. The state would hope to receive an indirect return from tax revenue generated by supposed new economic activity, although this pipe dream has failed to come true in states that have created similar programs. Prior Texas CAPCO programs, implemented in 2005 and 2007, were criticized by then-Comptroller Susan Combs and then-Lt. Gov. David Dewhurst as poorly structured and wasteful.
This session’s bill is a repackaging of HB 1000, a failed attempt to establish a similar tax break in 2019, one of a long line of related bids rejected by the Legislature every session since at least 2011, including one highlighted in this 2013 newspaper column. The most recent prior version was pitched as helping rural areas and federal opportunity zones, the hot topics at the time. This session’s version is marketed as a response to the difficulties suffered by small business as a result of the pandemic, with an additional credit for rural area investments. The bottom line is unchanged: a windfall for a few select investment pools.
One quarter of the lost revenue would come from the Foundation School Fund, the major source of state support for our public schools.
This proposal lacks basic safeguards to ensure that Texas benefits from the investments receiving this special treatment. Only a handful of firms can even compete for these credits, due to oddly specific requirements for certification. Since approval for credits is on a first-come, first-served basis, the state cannot reject an applicant for any reason other than not meeting these narrow criteria.
This tax giveaway does not contain specific minimum targets for the number of jobs recipients of the tax breaks will create or the wages companies will pay. Such minimum goals are required in most other business tax incentives. Clawback provisions — which require repayment if key targets go unmet – are limited to cases involving excessive distribution of profits to investors, not to failure to provide adequate economic benefits.
The bill would give the Legislature only one report on the effects of investments that tax giveaway recipients made, including only totals for the program, not numbers broken down by each individual fund, businesses benefitting, or location of specific job creation. The tax giveaway scheme would be permanent, without a thorough sunset review, and credits could be carried forward indefinitely.
Other states have similar tax breaks to encourage investments, but in some other states the programs are much more competitive, efficient, and market-oriented. For instance, Maryland auctions off its tax credits, reducing the cost to the state. The state then invests the proceeds in firms that bid competitively for investments, rather than in a limited number of firms meeting pointlessly specific requirements. Finally, if the investments are successful, Maryland receives a substantial share of the profits; HB 570 would deliver nothing except an unenforceable promise of jobs.
HB 570 would commit the state to financing up to $500 million a year in wasteful, low-return tax credits to a limited group of special interests. Rather than enriching out-of-state shareholders and opaque venture capital funds, Texas can more efficiently aid small businesses through existing federal and state programs, such as the Governor’s Office of Small Business Assistance or the Texas Workforce Commission’s Skills for Small Business.
Lawmakers should reject HB 570.