Hiding the Costs of $50 Million in Tax Credits

“CAPCO” – a DC economic development program created in 2004 – is getting a lot of attention these days, following a highly critical report from the DC Auditor. The $50 million program, which uses tax credits to encourage venture capital investments in DC businesses, apparently has created just 31 new jobs for DC residents. (See, for example, this Washington Post story.)

The DC Auditor’s findings were covered in a DC Council hearing on April 3, where DCFPI testified. The Auditor recommends eliminating CAPCO, and we couldn’t agree more.

There is another scandalous aspect to DC’s CAPCO experience, however, that has not gotten much attention. It’s the story of how this $50 million program was set up in a way to have no official cost to DC’s treasury. It reflects an abuse of DC’s budgeting rules that continues to this day.

Under CAPCO, insurance companies get a $1 tax credit for every $1 they invest in a “certified capital company,” or CAPCO, which are then required to invest in local businesses. The law allowed $50 million in tax credits to be claimed.

Normally, the costs of any new program that increases or reduces expenses must be calculated – and numbers must be adjusted to keep the budget balanced. That is, the program has to be paid for. So how is it that CAPCO’s $50 million in tax credits appear to have no cost to the budget? Is it magic? Hardly. Under DC budgeting rules, the costs of a new program are budgeted for four years. Under DC’s CAPCO law, the insurance companies start redeeming their tax credits in – wanna guess? – five years.

This gimmick is still being used. In fall 2008, the DC Council approved a $10 million loan to Arena Stage, but the loan won’t be made until fiscal year 2013. Yes, you guessed right again, five years from now. So, the ten million dollar load is seen as having no impact on the city’s finances.

This occurs because it’s a lot easier to get a program adopted if it appears to be cost-free. But hiding the costs is fiscally irresponsible. And it makes it too easy for elected officials to adopt new tax cuts or programs, rather than making the difficult – but important – decisions to set priorities within a limited amount of resources.

The District should fix the budgeting rules that allow this to happen. One solution is to require the full costs of a new program to be budgeted up front, no matter when full implementation occurs. That may make some people unhappy, but it would ensure that we always make budget decisions we can afford.

Latest Posts