Firms cash in on lawmakers’ craving for ‘Champion of Small Business’ label

Steven Miller

Hankering to be publicly recognized as a “Champion of Small Business?”

If you’ve been in politics the last few years, it’s been surprisingly easy. And it’s a label that provides useful bragging rights.

The reason? Few voters have the time to investigate what’s behind the label, which always looks authoritative on a politician’s brochure.

To get so designated during these last few years, all many legislators had to do was to introduce legislation — either state or federal — that some companies out of Louisiana were very happy to write up for them.

Introduce such legislation and, not too long afterward, you could pretty much expect to be officially anointed as a “Champion of Small Business” by a little nonprofit closely affiliated with those same out-of-Louisiana companies

The nonprofit — calling itself “The National Coalition for Capital” — handed out its accolades at posh dinners in cities wherever the National Conference of State Legislatures was holding its annual meetings. Photos were taken by coalition staffers to memorialize the occasion and provide fodder for news releases. Later sent to state and local newspapers, the packets thus helped build the prominence of agreeable lawmakers.

A recent Nevada Journal search of the Web for any joint appearances of the phrases “National Coalition for Capital” and “Champion[s] of Small Business,” produced names of over 60 individuals. Primarily these were state legislators, to whom the coalition applied the label, between the years of 2008 and 2015.

Virtually all of these state lawmakers — reviews of their legislative records reveal — had introduced legislation sought by the sponsors of the nonprofit. Those sponsors were, according to a 2011 article by the Portland, Maine Press-Herald, Advantage Capital Partners, Enhanced Capital Partners and the Stonehenge Capital Fund.

All three firms — doing business as “community development entities” — are receiving and selling insurance tax credits under the Nevada New Markets Job Act that state legislators passed in 2013.

Under federal tax law, for an organization to qualify to receive tax-deductible contributions, it must register with the Internal Revenue Service under paragraph 501(c) of the Internal Revenue Code and file annual Form 990 reports.

The “National Coalition for Capital” filed 501(c)(6) reports with the Internal Revenue Service as a nonprofit for three years — 2009, 2010 and 2011 — copies of which reports were downloaded from the Web’s largest inventory of nonprofit 990s,, last year. However, GuideStar appears to no longer have those reports.

Today, the “National Coalition for Capital” is not on the IRS listing on its website of nonprofits authorized to receive tax-deductible contributions.

Additionally, the website that for years existed for that name —, for which Web links still exist on multiple sites — is no longer operating or even owned, but rather is now for sale. The website that replaced it — — is significantly out of date, the last entry apparently made in August 2013.

Why the organization may no longer exist, at least as a nonprofit able to receive tax-deductible contributions, may be explained by differences between the organization’s 2010 and 2011 reports to the IRS.

The last report, for 2011, had for the first time included supplemental information noting that a Schedule C was attached. Including a Schedule C is required by the IRS when ostensible nonprofits are involved in “political campaign activities or lobbying activities…”

The supplemental information also for the first time acknowledged that:

NCFC receives contributions from three member companies who pay NCFC for management of the coalition, reimbursement of expenses and as a pass-through for political contributions.

For several years, the NCFC “Champion of Small Business” news releases listed Ben Dupuy as NCFC’s president. Currently Dupuy’s LinkedIn page states — as did the NCFC web site earlier — that he is now employed as a director for Enhanced Capital, of New Orleans, Louisiana, and was previously a director for Stonehenge Capital, headquartered in the same state.

Three generations of tax-credit monetization

At least three generations of the tax-credit monetization bill drafts have come out of the originally Louisiana-based firms — the name for the different versions changing over time.

In the 1980s and 1990s, the bills were introduced to lawmakers as “Certified Capital” legislation and nicknamed “CAPCO” bills. Then in the 2000s and until just recently, the same basic approach was rebranded as “New Markets Tax Credits” — or sometimes, as in Nevada, as a “New Markets Job Act.”

More recently, the same companies have been attempting a third version of the same basic approach: Now it is rural jobs their tax-credit monetization approach would supposedly create.

Under whatever name, the core of the legislation is written to allow the firms to first be awarded, and then convert into cash, state tax credits. Thus the firms’ underlying business plans are ultimately quite simple: “Create plausible rationales for governments to give us taxpayer money.”

The mechanics of the monetization

While in some instances state income taxes have been the vehicle targeted by the CAPCO/NMTC middlemen for tax-credit bills, more commonly it is has been insurance taxes.

These are taxes that insurance firms have to pay on the premiums paid them by customers. Thus, when the CAPCO/NMTC middlemen offer to sell, at a discount, credits against those taxes, the insurance firms are usually willing purchasers.

By this stage under the legislation the middlemen have lobbied into law, these financially sophisticated middlemen have been re-designated, or “certified,” as “Community Development Entities,” or CDEs.

It is under this “CDE” hat that the firms thus take control of the hundreds of millions of dollars paid by the insurance firms for the discounted tax credits.

What is rarely understood by the state lawmakers who pass the enabling legislation is that if the financially astute middlemen are careful with those “community development” dollars over the relatively short term specified in the legislation, the CDE firms can essentially pocket the left-over dollars. All they need do is select safe, no-risk companies they know will repay the loans — loans which count as “equity investments” under the controversial redefinitions always included in the draft legislation

And those profits don’t even count the hefty administrative and legal fees that, year after year, the middlemen pay themselves out of those “community development investment” funds.

Into whichever state the firms go, they are accompanied by top, highly paid knowledgeable lobbyists. In the 2013 Nevada legislature, it was the Las-Vegas-based R&R Partners political “juice” firm that mobilized an “all-hands-on-deck” push for the legislation.

Those lobbyists never candidly lay out the spotted history of their clients.

What financially unsophisticated lawmakers are sold instead is simply the “sizzle” — the idea that, under the legislation before them, the CDEs will use the monetized tax credits as “venture capital” to be invested in deserving small businesses in the state’s economically depressed areas.

Not only that will mean new or “retained” jobs, goes the pitch, but all the new tax revenue from flourishing new companies and the newly employed will more than make up for the initial tax revenue given up by the government!

Name-wise, too, the legislation nearly always has sounded great — titled so as to appeal to everyone except skeptical defenders of the public purse.

Here in Nevada, for example, the bill was titled the “Nevada New Markets Jobs Act” — implicitly suggesting that to be against the bill was to be against “new jobs.”

Titles with “Jobs” or “Community Development” in the title also allow sponsoring politicians to posture more effectively before voters and other elected individuals, regardless of party affiliation or virtually any persuasion.

Ostensibly, such bill names say you’re “caring and compassionate,” since you’re pushing legislation that supposedly will “provide jobs to people who need them.”

In addition, you’re also “pro-business,” because your legislation supposedly means more investment capital available for “small business” in a program managed not by the government, but by private, for-profit firms.

Would that the sizzle actually represented the reality.

How CAPCOs began

The basic idea was devised in Louisiana in 1983, in an attempted solution to a state problem: Venture capitalists from around the country didn’t see the state as a great place to invest.

As a consequence, Louisiana wasn’t reaping the benefits — in jobs and diversified development — that lawmakers wanted to see.

Unsurprisingly, the state’s elected lawmakers assumed what was called for was some new government program that would “fix” the problem.

But since direct government subsidies for favored businesses has, even in Louisiana, a reputation for corruption and failure, what emerged was a “public-private” solution: Allow state-certified private firms to sell — at a discount — credits against future state taxes, then take some of those proceeds and invest them in politically favored sectors of the state.

In short, the state-certified companies — or “CAPCOs,” as they soon were nicknamed — would supposedly act in the state like venture capitalists, investing in small firms that presumably had great potential to create solid jobs and tax revenue for the state.

The CAPCOs’ incentives, however, were in reality distinctly different from those of real venture-capital companies.

Real VC operations look for small startup firms pursuing new, disruptive ideas that — although risky — have immense potential. VC investors realize that they’ll lose their investments on most of these experiments, but should make it back in the few instances where they strike it big — with a truly disruptive new concept, such as an Apple, or an Uber.

With certified capital companies, however, it’s not the same.

“The overriding incentive for the CAPCOs,” says Dr. Julia Sass Rubin, of Rutgers University, “is not to make the kind of high quality equity investments that have enabled normal venture capitalists to help grow local economies.”

The CAPCOs’ situation is different, she notes, because they already are in possession of the millions of dollars from the monetized state tax credits. Their incentive instead, therefore, is to keep as many of those taxpayer dollars as possible.

It’s also a different situation because VC firms, to succeed, must intelligently invest their own funds to hit home runs.

“The incentive for the CAPCOs” on the other hand, notes Rubin, “is to lend or invest the taxpayers’ dollars as quickly as possible, so that the CAPCOs can decertify and keep those dollars as profits.”

Even in Louisiana, where the middlemen firms started in the 1980s, an early 2000s study done specifically at the request of the state Department of Economic Development concluded that:

The CAPCO Program, in its current form, is expensive and inefficient … and does not provide adequate features or incentives to encourage investments that offer the greatest potential economic benefit to the State.

That was after 20 years’ experience with the legislation.

1. States and the CAPCO road

Indeed, all across the U.S., states that first went down the CAPCO road have decided it’s a loser.

What had happened, says Rubin, was that the CAPCO program, politically, had become too hard “a lift … because it became pretty easily accessible on the Web that it’s a rip-off.

“They had to find a new way to make money off the taxpayers because that’s how these funds live,” she told the Tennessean newspaper early this year.

So, increasingly facing bad press, the tax-credit monetizing industry went back to the drawing board, seeking to rebrand the same basic idea. Now they began presenting it as “New Markets Tax Credits.”

Today, however, politicians are also in flight from the “New Markets” bill drafts.

At the state level, word has gotten out — from independent economists, state auditors, comptrollers and others who’ve examined the record — that the programs are an imprudent use of taxpayer dollars.

For example, in Colorado, a 2003 state auditor’s review of that state’s CAPCO program reported that:

…extensive research has been conducted on the costs and benefits to state governments from this form of venture capital. Research indicates that CAPCO Programs are the most inefficient means for a state to raise venture capital. According to one CAPCO researcher, “the principal problem with the CAPCO Program is the large share of funds (40-60 percent) raised that are not available for investing in qualified businesses because they are held in government securities to guarantee the insurance companies’ initial investments.” We found this to be true of the Colorado CAPCO Program.

Out of the first $100 million authorized for the program, almost half had been invested in low-risk vehicles such as treasury bonds, $11 million went for setting up offices and $4 million went into management fees. Thus only about a third of the money actually went into the program’s alleged purpose.

Said the state treasurer at the time, Mike Coffman (now a U.S. Congressman), “It’s a scam. I don’t think there’s anyone who thinks this is a good deal for Colorado, with the exception of those companies who lined their own pockets.”

Bob Lee, the head of the state’s Office of Economic Development, which administered the program, told a legislative committee that “I think this state would be hard pressed to design a program that cost the taxpayers more and delivered less.”

One item in the state audit that particularly angered Colorado lawmakers was a finding from the Secretary of State:

… the CAPCOs spent $471,503 on lobbyists since Calendar Year 2000. According to self-reported data from the CAPCOs, about $85,000 of this total was financed with certified capital from the Colorado CAPCO Program. The remainder of the lobbying expenditures were financed through other sources, including funds from the CAPCOs’ parent companies. (Emphasis added.)

Perhaps not surprisingly, after the first year of the $200 million program, Colorado blocked the $100 million of tax credits scheduled for the second year.

2. The ‘New Markets’ maneuver                          

As the credibility of CAPCO legislation sank and the tax-credit monetization industry began rebranding its pitch under the “New Markets” label, one of the first instances of the latter was passed by Maine state lawmakers in 2011.

It, also, would turn out to be a disaster.

Called the Maine New Markets Capital Investment program, it sounded great to state lawmakers entranced by the promise of “new jobs.”

Today, however, the program is relatively notorious, largely because of what an in-depth investigation by the Maine Sunday Telegram turned up.

The “sizzle” sold to Maine legislators was largely a rosy picture drawn by the middlemen’s lobbyists of a re-opening the Great Northern Paper mill, which had provided 200-plus jobs to the East Millinocket community.

After passage of the legislation, the middlemen — Stonehenge Community Development and Enhanced Community Development — sold the Maine tax credits to out-of-state investors, as a supposed start to channeling $40 million-worth of “investment” cash into Great Northern.

Enhanced boasted of all the good it was doing in a January 2013 press release on the PR Newswire and on the “National Coalition for Capital” website, stating:

Enhanced Capital Helps Provide $50 Million in New Market Tax Credit Financing to Great Northern Paper

Investment Will Create Up to 50 New Jobs and Improve Operations

Enhanced Community Development, a subsidiary of Enhanced Capital Partners (“Enhanced Capital”), announced today it recently participated in providing $50 million in New Market Tax Credit financing to the Great Northern Paper Mill (“GNP”) in Each Millinocket, Maine, which includes $40 million in Maine New Market Capital Investment tax credits and $10 million in Federal New Market Tax Credits.

However, as the Telegram would reveal two years later, the “investment” actually was $40 million only on paper:

By using a device known as a one-day loan, the deal’s brokers artificially inflated the value of the investment in order to return the largest amount of Maine taxpayer dollars to the investors.

The paper’s investigation found that, while the owners of the mill property did receive a loan of some $31.8 million, it was only for some 24 hours, during which they used that sum to purchase the mill’s paper machines and equipment from themselves.That is, they moved ownership of the equipment from one firm they owned to another firm they owned — after which, said the paper, “that $31.8 million was returned to the original lenders the same day.”

A few months later, Great Northern Paper filed for bankruptcy, with more than $20 million in unpaid bills owed to local businesses.

But that wasn’t the whole story.

Because the Maine legislation — written by sophisticated bill drafters working for the middlemen — had made the tax credits refundable, Maine taxpayers ended up obligated to pay the out-of-state investors roughly $16 million from the state general fund for the no-jobs, no-revived-business “New Markets” scheme.

Since the investor firms — U.S. Bank and Microsoft co-founder Paul Allen’s Vulcan Capital — were not located in Maine, and thus owed no Maine taxes, their “tax refund” for the nominal, short-term “investment” had to be in the form of annual checks from the State of Maine.

According to one Nevada Journal source, the Maine paper-mill story appears to have been one of the reasons Congress declined to renew the federal version of New Markets Tax Credits.

3. ‘Rural Jobs Acts’

Now that both the CAPCO and New Markets versions of the tax-credit-monetization business are tainted, the firms that made their money with those versions appear to be testing yet a third version of the approach: “Rural Business Investment Companies,” or RBICs, also presented in the form of state “Rural Jobs” legislation.

The legislation is presented as based on the federal Agriculture Department’s Rural Business Investment Program (RBIP). Again, the middlemen firms seek to leverage a politically established federal program to give ostensible credibility to their proposed state legislation.

In actuality, however, the U.S. Department of Agriculture’s initial RBIP plan was stripped of funding by Congress in 2005.

Currently, “Rural Jobs Acts” have been either introduced or announced in Alabama, Kentucky, Missouri, Nebraska, Ohio, Tennessee and Wisconsin.

None, currently, appear to have passed into law.

Politicians the problem

For “as long as states have been racing to outdo each other in the tax breaks they offer, economists and other researchers have been searching for evidence of the influence of states’ tax policies on the vitality of their economies. The conclusion from these efforts has been, at best, inconclusive,” wrote Dr. Peter Enrich in the Harvard Law Review 20 years ago.

Today, that remains the conventional wisdom among social-science researchers. Far-stronger than tax incentives as determinative factors in businesses’ location decisions are the realities of wage and skill levels, utility costs, proximity of raw materials and markets and regulator stringency.

Given those realities, what explains state politicians’ so-frequent acquiescence to economically defective schemes such as New Markets Tax Credits?

Enrich addressed that question also, 20 years ago: “The real answer,” he said, “lies in the politics, not the economics, of location incentives. In a political atmosphere dominated by concerns about economic vitality and jobs, elected officials face intense pressure to engage in the incentive competition.…”

The lack of empirical evidence for the economic usefulness of tax incentives “does little to quell the political enthusiasm for them,” wrote Enrich, who has studied the issue for several decades. It’s not merely that lawmakers and their staffs frequently are quite ignorant of the economic evidence, it’s that they, in fact, are indifferent to that evidence:

What’s on their minds, he argued, is appearances:

…elected officials are often as interested in the “symbolic content” of their actions as in their concrete effects. By taking visible steps to encourage economic growth, they can take credit for subsequent economic successes, whatever their actual causes, and avoid blame for any losses of jobs to other states that otherwise would have been attributed to them if they had failed to act. From a political perspective, doing something is almost always better than doing nothing, particularly in regard to an issue about which voters care deeply. That other states are actively engaged in the competition strengthens the political arguments for joining in, both by providing “cover,” with which officials can justify their own actions, and by fueling the perception that a failure to act would be either negligence or folly.

Even if the likelihood of a positive impact is understood to be slim, the potential political benefits of a visible success, even when discounted for its low probability, may far outweigh the political costs of a measure whose burdens, in the form of reduced government revenues, are indirect and widely dispersed. Moreover, those constituents who will be directly and positively affected by a favorable location decision (or injured by a negative one) will typically be far more vocal on the issue than those state citizens who bear the diffuse costs, and far more likely to base their ultimate assessments of decisionmakers on their performance in this sphere.

In short, argues Enrich, American politicians are using public tax dollars to buy bragging rights that they can wave before uninformed voters. And they do it by providing special handouts to middlemen and taxpayer-funded profits to a politically connected few.

Correction: This article originally reported that The National Coalition for Capital had filed Form 990s with the IRS under subchapter 501(c)(3). That was incorrect: the filing had been under subchapter 501(c)(6). However, both categories of organizations are subject to the provisions of the private inurement doctrine, which prevent persons with influence inside the organization from unreasonably benefiting at the expense of the nonprofit. Nevada Journal regrets the error.


Steven Miller is managing editor of Nevada Journal and senior vice president at the Nevada Policy Research Institute

Related, previous Nevada Journal reporting:

At this rate, the State of Nevada will have blown $112.5 million for zilch

Even fallback assurances from lobbyist for NMTC ‘jobs’ program don’t check out

Does Tahoe’s North Shore fit the profile of a job-hungry, low-income community?


Steven Miller

Senior Vice President, Nevada Journal Managing Editor

Steven Miller is Nevada Journal Managing Editor, Emeritus, and has been with the Institute since 1997.

Steven graduated cum laude with a B.A. in Philosophy from Claremont Men’s College (now Claremont McKenna). Before joining NPRI, Steven worked as a news reporter in California and Nevada, and a political cartoonist in Nevada, Hawaii and North Carolina. For 10 years he ran a successful commercial illustration studio in New York City, then for five years worked at First Boston Credit Suisse in New York as a technical analyst. After returning to Nevada in 1991, Steven worked as an investigative reporter before joining NPRI.

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