CERTIFIED CAPITAL COMPANIES IN TEXAS
Historically there has been a shortage of capital to grow small and early stage businesses in the State of Texas. In 2005 the State of Texas passed legislation that enabled the use of insurance premium tax credits to target investment to small and early stage businesses in the State of Texas. This legislation, The Texas CAPCO Act, created $400 million of investment capital for businesses located in the State. The program targets investment in early stage companies throughout Texas, with a portion of the investment targeted to low-income areas. Click here to learn more about our Sources of Capital.
CAPCO’s earn tax credits by raising large sums of capital to invest in targeted businesses. A CAPCO must meet certain investment criteria and timeframe milestones, pay annual certification renewal fees to the Comptroller’s office and adhere to reporting and spending requirements. This results in tax revenues for the state through business growth and creation of high- paying jobs.
Another benefit of the program’s structure is that the deferred utilization of tax credits (2009) allows for the fiscal impact of increased revenue-generating activity to actually precede any state revenue loss from the tax credits themselves. This contrasts with many other programs in which the tax credits are utilized during the first year of operations. Its scheduled, predictable design also compares favorably to programs that use contingent or off-balance sheet tax credits, which when ultimately claimed, can shock the state budget without warning.
A further salient feature of the CAPCO program is that it brings the hands-on management expertise that is essential to the development of the small firms. This aspect is unique, managerial and financial expertise is provided to the small business to help the business manage growth.
In practice, investment capital companies apply to the Texas Comptroller’s office to become certified as a CAPCO. CAPCOs must submit annual reports to the Comptroller’s office, including detailed jobs and investment data, with a nonrefundable annual fee of $5,000. Rule violations can lead to administrative penalties or de-certification of the CAPCO.
The law requires CAPCOs to invest 30 percent of their capital in “strategically located” (i.e., rural and low-income area) businesses and 50 percent in “early stage” businesses. The tax credits may not be used until 2009, and are restricted to offsetting future insurance premium taxes starting that year at a maximum rate of 25 percent of earned insurance premium tax credits annually.
