Austinite Rick Hayes is that rare venture capitalist who says he doesn’t want to take taxpayers’ money — at least not how it’s proposed in legislation from state Rep. Jim Murphy.
“This bill will make four or five companies half-a-billion bucks,” said Hayes, CEO of Waveland Ventures. “It’s a way for guys like us to make a lot of money.”
Murphy, R-Houston, is sponsoring legislation that would create a state version of the federal “new markets” program, which offers tax credits to investment firms that make capital available to companies in low-income communities.
Murphy says House Bill 2061 is “about your mom-and-pop small businesses trying find a source of capital” and not enriching a few investment firms.
Over seven years, Murphy says, the measure would invest $750 million of private capital into Texas companies that operate in distressed economic areas. It would cost the state $292.5 million in tax credits to insurance companies, but Murphy said it also could attract $465 million of new investment from the federal program. He estimates that the combined $1.2 billion from the federal and state programs would create 14,400 jobs and $448 million in new state revenue.
The federal program raises money from lending institutions that want tax credits to lower their income tax bill. Since Texas doesn’t have an income tax, Murphy’s bill gives state tax credits to insurance companies that pay a tax on policy premiums.
It’s unusual for someone to object to a bill that would benefit his own company, but Hayes said that Murphy’s legislation doesn’t resemble the federal “new markets” effort as much as it does a discredited state program.
In 2011, the Legislature refused to authorize new tax credits for the Texas Certified Capital Company program — commonly known as CAPCO — because of high costs to the state and the double-counting of jobs it supposedly created.
“CAPCOs have become a dirty word in Texas,” Hayes said.
Hayes, whose company participated in the CAPCO program, said Murphy’s bill is “really a CAPCO bill in disguise — except it’s bigger.”
Murphy disputed that, suggesting Hayes’ opposition is because the bill — unlike the federal new markets program — wouldn’t finance commercial real estate development other than owner-occupied buildings.
Hayes’ company, according to its website, has built medical clinics, hotels, energy-efficient schools, factories and a downtown soccer stadium for the professional Houston Dynamo team as part of the federal “new markets” program.
Murphy said he wants the state program focused on helping existing businesses in low-income areas.
“In a world of limited capital, you have to focus,” Murphy said. “You can’t just say, ‘Everybody gets it.’”
Murphy, who’s in commercial development, said he excluded it because there is a greater economic impact in investing in the operations of a business. Commercial real estate doesn’t need the state’s help, he said: “There’s plenty of people who will loan on real estate.”
Hayes said he opposes Murphy’s bill because it will make it harder to pass a bona fide “new markets” program in Texas because it won’t deliver the jobs promised while enriching just a few investment companies.
“From a PR point, we want a good bill, not a bad bill,” Hayes said.
Hayes said Murphy’s bill limits the competition for the state tax credits because it requires a $500,000 refundable application fee and gives an investment firm only 30 days for state approval and a year to raise and invest the money.
Murphy said those provisions protect the state and get the money to small businesses quickly.
Hayes also objects to Murphy’s bill limiting investment opportunities to smaller businesses. He argued that larger companies can make a bigger impact in a low-income community.
“Would you rather have Google in a distressed neighborhood or four guys doing an app?” Hayes asked.
Murphy said he doesn’t dispute “that the large businesses would benefit,” but said the larger businesses “would suck up all the funds very quickly. Big businesses are the ones who have greater access to capital already.”
Hayes appears to be a lone voice of opposition within the industry.
Investment firms such as Stonehenge Capital Company and Advantage Capital Partners, which participate in CAPCO as well as the federal “new markets” programs, are lobbying for Murphy’s bill.
In a “new markets” program, John Witten, Stonehenge’s general counsel, said his company acts more like a lender focused on operating loans for small businesses. He said CAPCOs make money by investing in companies.
He called Hayes’ criticism “a distraction” and disputes that Murphy’s bill is tailored for CAPCOs.
“I don’t think it has anything to do with fees and people getting rich,” Witten said of the criticism.
Julia Sass Rubin, a Rutgers University associate professor, has researched and written about the “new markets” tax credit and venture capital programs and has been involved in their creation. She’s also a CAPCO critic.
“It’s a horrible deal for taxpayers,” she said of Murphy’s bill.
She said Texans are being asked to “hand over” almost $300 million with no competition for the taxpayer money.
“Those dollars are just going to be transferred to the CAPCOs’ pockets, and Texas gets nothing,” she said. “They are going to be making investments they are making anyway.”
Rubin said she agrees with Hayes’ criticism, saying the state bill is tailored for CAPCOs because of their relationship with insurance companies — the source of the funds.
“CAPCOs have a deal with insurance companies,” she said. “It’s their protected turf.”
Murphy’s bill cuts out banks, who are major players in the federal “new markets” program, by limiting the state tax credits to insurance companies.
“It’s all about who’s the most likely investors,” Murphy said of that decision. “Insurance companies are one of the major sources of equity.”
On the jobs front, lobbyists in Texas cite a professor’s estimate that the Missouri “new markets” program has created almost 6,000 jobs. But last month, amid a legislative debate whether to continue the program, the Associated Press reported that the Missouri program has created less than half of the anticipated jobs.
Specifically, the Associated Press cited figures from the Missouri Department of Economic Development showing 823 “actual new jobs” and 3,141 “jobs retained” as opposed to 9,679 “anticipated jobs.”
Murphy said he was unaware of that news report.
Rubin said Texas would be better off operating its own revolving loan fund that could help low-income communities indefinitely. Or, she said, Texas could copy a Maryland program that auctions tax credits to the highest bidder, then invests the money with venture capital firms.
“The VC firms have to return the money to Maryland, plus 80 percent of the profits,” Rubin said. “How gullible are Texas legislators?”
Murphy said he looked at the Maryland program, but he said he was reluctant to put the state in the lending business, competing with the private sector.
“Our inclination was to make the state less involved and leave the risk with the private sector,” he said. “The state’s return on its investment is in economic expansion.”
Hayes said he’s warned state leaders about the bill.
“We’ve told everyone from the governor’s office down, it’s a bad bill for the state,” Hayes said. But he added, “If it passes, we’ll show up at the trough with everyone else.”