27 Mar Critics say tax limits could handcuff tech investment
Opponents of the new Taxpayer Bill of Rights proposal are aiming directly at the heart of its main justification: that revenue limits on state, county, and municipal governments are necessary to improve Wisconsin’s business climate.
TABOR, they say, places economic development, and by extension technology investment, in jeopardy.
Based in part on Colorado’s TABOR experience, detractors say that economic development would be handcuffed should the measure be enacted, even the more flexible version recently introduced in the Wisconsin Legislature.
John Neis, co-founder and senior partner of the Madison-based Venture Investors, which provides seed and early-stage venture capital to technology companies in Wisconsin and the Midwest, worries that TABOR might put restraints on technology development.
“I am very concerned in terms of the kinds of constraints it puts in place, it really takes away a lot of flexibility that communities might have to be innovative in how they approach economic development,” Neis said. “Overall, I just see it as really putting handcuffs on what can be done to stimulate high-tech entrepreneurial company growth.”
Bills introducing a modified version of TABOR have been introduced in the state Senate and Assembly, but even in the absence of the governor’s stamp of approval, the measure faces a series of gauntlets. As a proposed constitutional amendment, it must be approved in both houses in consecutive legislative sessions, and then be approved by voters.
Colorado went there already
The TABOR concept has been tried in Colorado. Approved by the voters in 1992, it controlled state spending and returned surplus revenue to taxpayers. Its detractors believe Colorado paid a heavy price, measured in government services and economic development. During the boom years of the 1990s, the state’s economy soared with the rest of the nation, but in the minds of TABOR’s detractors, its flaws were exposed during the recession of 2001 and the sluggish recovery that ensued.
Under the TABOR concept, surplus taxes are returned to taxpayers, and proposed tax increases above the prescribed revenue limit must be approved by residents. Last fall, Colorado voters allowed the state to keep an estimated $3.7 billion that otherwise would have been refunded to taxpayers. The referendum allows increased spending on education, healthcare, and transportation.
In addition, TABOR limits on revenue have been suspended for five years, which puts money back on the table. Last week, three new bills were introduced in the Colorado Legislature to boost biotechnology funding. The bills would allocate $15.5 million to help researchers commercialize new ideas and give the state’s bioscience industry an infusion of cash.
Denise Brown, executive director of the Colorado Bioscience Association, said as the economy has improved and revenue to the state has increased, the state has not been able to spend those revenues on things that it “ratcheted down on” during the recession. As a result, she said the state has cut all but very essential services like K-12 education and healthcare, and has “little to no” incentives for economic development, which has hurt its competitiveness in recruiting and retaining companies.
While the state still receives ample private venture investment – in 2005, venture funding for Colorado bioscience companies doubled over 2004 – there have been no state initiatives to bridge the gap for early-stage and start-up companies. “The venture capitalists aren’t funding that very early stage any more like they did in the 1990s,” Brown said.
Brown, who characterized TABOR as “way too restrictive,” also noted that most Colorado communities have passed ballot initiatives that remove the impact of TABOR from local governments.
AP: Wisconsin profits grow faster than taxes
All of which should provide fodder for Wisconsin’s forthcoming election season. Earlier this week, the Associated Press published a study showing that Wisconsin companies saw their profits grow more than twice as fast as their state and local tax bills from 1982 to 2000, an indication that the state isn’t necessarily the “tax hell” that many believe. Dan Leistikow, press secretary for governor Jim Doyle, said the pro-TABOR lobby should be more concerned about the amendment’s impact in Colorado, which has more than 10 years of actual experience with it.
“If I were them, I’d be even more concerned about the experience in Colorado, where TABOR has not only decimated the schools, it has been very bad for business,” Leistikow said. “I think there will be a lot of opposition to the amendment with or without this [AP] study, and there will be opposition from the business community because it would really put economic development in the crosshairs.”
Nationwide, TABOR proponents have not been deterred by Colorado’s experience, and they still press for tax and spending limitations. Wisconsin Manufacturers and Commerce, the state’s largest business association, continues to endorse a taxpayer protection amendment.
Pointing to a recent analysis by the Legislative Fiscal Bureau, WMC noted that actual state revenues increased by an average of 4.8 percent annually from Fiscal Year 1983-84 to FY 2003-04. Had the taxpayer protection amendment been in place during that period, revenues would have been allowed to increase by 3.9 percent annually, a difference of 0.9 percent per year.
Jeff Schoepke, director of tax and corporate policy for WMC, said it would be hard to convince any taxpayer that a 1 percent difference in annual revenue growth at the state level “would have any effect on the quality and availability of government programs and services.”
The bureau’s analysis of TABOR’s impact on local units of government indicated that in 2004, 45.8 percent of Wisconsin cities and 48.6 percent of villages operated underneath the cap. For Schoepke, that raises the question, “If half of our cities can do this, why can’t the other half?”
Jim Pugh, public relations director for WMC, believes technology businesses with a lower tax burden would be more attractive to investors. “You’re going to put more money into the private sector and less money into the government sector for consumers to buy products, for businesses to invest in their business – products, expansion, whatever – and it’s going to lead to economic growth and opportunity,” he said.
Strike the capital gains tax?
As part of its recent report titled “Encouraging Growth Companies in Wisconsin,” the Wisconsin Policy Research Institute advocated the elimination of the long-term capital gains tax on investments in “growth companies,” those with annual growth of 20 percent or more. Under existing law, 60 percent of long-term capital gains are exempt from state tax, and the report, authored by former state revenue secretary and Tommy Thompson administration budget director Richard Chandler, said eliminating the tax would boost the amount of capital available to early-stage companies.
To compile the report, Wisconsin Policy Research Institute surveyed and interviewed a panel of 30 people involved in investments, business development, and research. They observed that Wisconsin generates more than its share of marketable ideas and qualified workers, but lacks early-stage capital, especially at the angel investor stage. They identified bold steps that Wisconsin could take to stimulate investment, including the capital gains suggestion.
“Without this type of tangible change, the prospect for raising the economy into the top tier of states appears dim,” Chandler wrote.
Neis, who was interviewed for the report, is one of the doubters. He said the idea of eliminating the capital gains tax only impacts certain kinds of investors. “From the venture capital community perspective, the vast majority of money comes from pension funds, foundations, and endowment funds, not to mention out-of-state investors, and none of those are Wisconsin taxpayers,” he noted. “So, it’s not going to have an impact on the biggest pool of capital out there.”
In addition to eliminating capital gains taxes, the report recommends improvements to the angel and venture capital investment tax credits included in Wisconsin Act 255. To Neis, Act 255 is the superior approach.
“One of the things I absolutely loved about Act 255 was it was a really strong incentive to invest in the state, and there is actually language there that enables you to make the benefits of that tax credit available to tax-exempt investors and out-of-state investors within a venture capital fund,” he said. “That, to me, is a much more appealing program because I can actually consider the tax credits in making my investment decisions under fiduciary guidelines, and it has a much broader appeal.”