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LivingSocial tax deal needs stronger hiring requirements to grow a tech hub in DC

The $32.5 million LivingSocial tax package is supposed to grow DC's technology sector. However, its weak hiring requirements mean that the deal is not structured to help the District create a tech hub.


Photo by asmythie on Flickr.

The requirements are so weak that LivingSocial would get most of the package without hiring DC residents, or even retaining and adding technology-related jobs. Washington Business Journal said this deal has "loose hiring requirements."

DC is already ranked 51st among states in attaching hiring requirements to its subsidies. The DC Council should not approve this LivingSocial deal until it includes reasonable commitments to hire DC residents and create technology-related jobs.

How the current deal works

The $32.5 million tax deal being offered to LivingSocial would come from a $17.5 million income tax credit and a $15 million property tax credit. Both tax credits would be available beginning in 2016.

The income tax credit requires that DC residents make up 50% of any new employees hired the year previous to the credit, beginning in 2014, even if they are just replacing employees who turn over. If DC residents make up less than 40% of new employees, they still get a $9 million credit.

LivingSocial also would receive a $10,000 property tax credit for each new employee hired from 2010-2015. While this sounds like a requirement to hire 1,500 people to get the full $15 million credit, LivingSocial has already hired 1,000 employees since 2010, and is expected to hire at least another 100 through 2015 through turnover.

In other words, LivingSocial is guaranteed a large part of the property tax credit, even if they never hired another employee from today on.

The DC Council should make the following changes to this legislation to ensure that we are spending $32.5 million to build DC's tech sector, not just to retain a company.

Require hiring of DC residents in order to receive any subsidy

In the current deal, LivingSocial gets the full subsidy if 50% of its future hires are DC residents. It will collect most of the subsidy if it hires 40% District citizens.

It LivingSocial hires less than 40%, even 0%, of its future employees from DC, it still gets $18 million.

There should be a floorsay 35% of new employeesof DC residents hired below which no subsidy is given. Alternatively, LivingSocial could receive credits that scale based on the percent of new employees that live in DC.

Tie credits to new positions, not new employees

My company receives training subsidies from the states of Oklahoma and South Carolina that are tied to new headcount. That makes a lot of sense. DC should do the same thing.

Currently, the deal allows LivingSocial to count replacement employees toward its hiring count. This means that the company could actually shrink, and as long as 50% of the employees they hire to replace people who quit or are fired are DC residents, they will receive $28 million.

It makes no sense to give a company more subsidy the higher their turnover is. Turnover should not be rewarded; added positions should. DC residents currently comprise a little over half of LivingSocial's DC workforce. If their turnover is high, they could very easily receive most of the tax credit without employing any more DC citizens than they currently do.

There actually seems to be a lot of confusion on this point. Councilmember Michael Brown, whose chairs the Economic Development Committee, tweeted last week that the deal requires LivingSocial "to hire and retain a certain number of DC residents." After being corrected, he removed the tweet.

The mayor's description of the deal appears to be contributing to the confusion.

The proposed legislative package projects that LivingSocial will create and retain 2,000 jobs at the company. In order to claim all benefits included within the package, at least 50 percent of LivingSocial's new hires will have to be District residents. LivingSocial is estimated to generate $166 million in tax revenue to the District over the next 10 years.
The mayor estimates LivingSocial will pay $166 million in tax revenue, but that estimate appears to assume the company will create 2,000 jobs. But the deal doesn't require the company to grow at all. District officials have declined to provide the formula they used to reach this estimate.

Require product development to remain in DC, and any potential buyer to abide by commitments

After seeing our previous article, hearing from our readers, and sitting down with me, LivingSocial agreed to "codify our intent to maintain DC as our technology center." This is excellent news, and a sign that LivingSocial is committed to working with residents to make this a win-win deal.

This commitment needs to make it into the legislation, though. And any future buyer of LivingSocial needs to be bound by the same commitments during the tax abatement period (through 2025).

Otherwise, a company like Groupon could acquire LivingSocial in 2017, right after DC has given them significant tax credits, and move all product development jobs to Chicago where Groupon is based.

The lessons we have learned from previous subsidies is that they work when they are targeted to yield specific knock-on benefits, like development of a depressed part of town or a particular sector. The LivingSocial subsidy is an exciting opportunity to grow our tech sector, but the council has to ensure it's actually targeted to yield that benefit.

Ken Archer is CTO of a software firm in Tysons Corner. He commutes to Tysons by bus from his home in Georgetown, where he lives with his wife and son. Ken completed a Masters degree in Philosophy from The Catholic University of America. 

Comments

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This policy of giving millions of dollars to rich people is absolutely retarded. It isn't a legitimate use of public funds, and it won't cause real growth.

DC is a terrible city with an awful climate and even worse people. It's expensive, and companies only come here because of the massive outlays of federal cash.

If you want people to come here to engage in actual commerce then we should take steps to make it more affordable, like taking away power from the NIMBYs and planners.

by Michael Hamilton on Jun 14, 2012 10:47 am • linkreport

1) I'll save DC the trouble and just flush all that money down the toilet for you.
2) Living Social is not a tech company, its a marketing company.
3) In 5 years nobody will remember Living Social.

by spookiness on Jun 14, 2012 10:53 am • linkreport

@ Michael HAmilton:+1 Exactly.

by Jasper on Jun 14, 2012 11:18 am • linkreport

Jeez, Mike. If you hate it so much here, maybe it's time to move to a place that suits your personal interests better.

A lot of us actually do like DC.

by andrew on Jun 14, 2012 11:20 am • linkreport

@Spookiness, LivingSocial isn't even a marketing firm, it's essentially an accounts receivable factoring firm, aka it's a short term pay-day-esque loan company...

Great piece on Groupon, the company LivingSocial is trying to become: http://blog.agrawals.org/2012/03/31/why-groupon-is-poised-for-collapse-an-update/

by @SamuelMoore on Jun 14, 2012 11:31 am • linkreport

Why are we wasting our time and money on a company that will go bust in 2 years anyway?

by Phil on Jun 14, 2012 11:32 am • linkreport

What benefit is this deal supposed to confer anyway? DC has a very specific unemployment problem: the unemployment rate is very high among unskilled laborers. Among college-educated workforce, we probably have the lowest unemployment rate in the country.

How exactly are you going to incentivize a tech startup to hire any meaningful number of the folks that actually need jobs? Does anyone actually think LivingSocial is going to be hiring large numbers of poor folks east of the river? I just don't see it.

by oboe on Jun 14, 2012 12:02 pm • linkreport

Ignoring for a second the debate on whether Living Social will even be around in a few years (I doubt it), it irks me that DC is laying out the fancy red carpet, gold leaf china and the crystal decanters for a completely unproven company while systematically and historically ignoring much better options in the past.

I mean, DC lost bids for Northrup Grumman because it wouldn’t match or exceed the 22 million they were given, lost the bid to get VW’s Headquarters to FFX because we wouldn’t match or exceed the paltry 6 million FFX gave them. I could go on for awhile.

These companies have business models proven by the decades and decades they’ve been in business…have proven billions a year in profits whose employees are all high earning, highly educated white collar folks that we need in the District.

Nooo…instead we hand over the keys to the treasury for a glorified coupon circular that employs a bunch of relatively low paying 32-45K/yr “marketing associates”, half of the 1000 in the DC office, don’t even live in the District.

by freebies on Jun 14, 2012 12:10 pm • linkreport

^This is pretty stupid, too. We shouldn't be bribing companies to move here. We could simply stop making DC office space expensive on purpose by allowing building heights/density to increase to levels set by the market.

by Michael Hamilton on Jun 14, 2012 12:27 pm • linkreport

@Freebies

I am unsure of the specifics regarding either VW or NG, but if those are true, then totally agree, those were both huge mistakes. Both of those companies would have brought a lot of 100k jobs, the kinds of jobs every city wants.

As far as LS, I see them being around for a while. Further, the people with millions of dollars, see them being around for a while, hence why the continue to pump cash into them.

by Kyle W on Jun 14, 2012 12:51 pm • linkreport

Both of those companies would have brought a lot of 100k jobs, the kinds of jobs every city wants.

Unless you're a city who can't collect income tax on people who don't live in your city.

We should be trying to attract companies that have worker demographics that favor central city living. Not saying this deal in particular is good, but at least LivingSocial is one of those companies.

by MLD on Jun 14, 2012 1:03 pm • linkreport

@MLD

Fair enough. I agree. Most manager type people at a company like NG are going to live in MD or VA. Regardless, bringing a new company to DC is nearly always a good thing.

by Kyle W on Jun 14, 2012 1:12 pm • linkreport

First of all, if you want to do commerce, DC is not your place. What we should be doing is lobbying the federal government to locate more offices here in the city, rather than bribing companies to come here to do stuff that is considered fairly suspicious by most of the DC government along with many of the members of the community.

Next, Living Social isn't even worthwhile for this-- it's the kind of company that just doesn't have a lot of employees and likely never will. By its nature, Living Social's employees must be geographically dispersed, and a niche software/social networking company is never going to need a lot of software developers in the first place.

by JustMe on Jun 14, 2012 1:17 pm • linkreport

This deal is remarkable. Living Social could actually fire every DC employee of theirs, never hire another, and still see $9 million in income tax credits and $10 million in property tax credits.

Also, I'm with everyone else who says LS is really stretching the definition of a tech firm. Is Dunkin Donuts a tech firm because they email me about how, this week, I can buy one pound of coffee and get another free?

by worthing on Jun 14, 2012 1:36 pm • linkreport

Ugh. This kind of thing is why outside very special circumstances (like redeveloping a specific depressed area) a locality should establish a fair tax rate, regulatory processes that are clear and not overly burdensome, and generally be a nice place to live/work.

by Kate W. on Jun 14, 2012 1:57 pm • linkreport

How about no corporate welfare at all?

by Kolohe on Jun 14, 2012 2:41 pm • linkreport

Also, don't forget that Livingsocial lost over $500 million last year. That's right, more than half a billion in losses for a company that has never seen a profit. Sound sustainable to you?

Even if half of that is "book" losses from stock grants and such, that's still a really damning number. This is a textbook bubble firm, eventually the dumb money will run out for them and they will implode.

by Phil on Jun 14, 2012 4:48 pm • linkreport

I suspect that Living Social may not be around in five years. I read that it lost $580 million last year. I buy vouchers from them all the time for restaurants and vacations.

But I thought about it further. The Living Social business model may not be viable long term. I booked a vacation with them. The guy from the travel agency said his company was losing money by running the deal, but hoped to get repeat business. He hoped people would come back and buy vacation packages from his agency at full price.

Here is the problem, though. If I want to go on another trip I'll just wait for a Living Social deal unless that first company was downright excellent beyond my wildest dreams. I'll go to a different agency that is running a deal. I'll go to a different restaurant running a deal.

From the perspective of the business running the deals I'm not sure the economics are there for them to come ahead through advertising at Living Social. I'm not sure they'll get enough repeat business to justify the expense of losing money through Living Social promotions.

by Rain17 on Jun 14, 2012 7:34 pm • linkreport

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