Photo by oooh.oooh.

Yesterday, the DC Council approved a $6 million tax break for CoStar to move from downtown Bethesda to DC.

To address criticism from small businesses and nonprofits that moving CoStar wouldn’t actually create new DC jobs since Bethesda is right on the Metro, the Council added several amendments to the deal. They now have to add 100 new jobs for DC residents, hire DC residents for at least half of all new jobs over the 10 years, and give at least 35% of their buildout work to DC small businesses. The total dollar amount also decreased from about $7 million to $6.1 million.

Nevertheless, this doesn’t benefit the region as a whole. The overall amount of business happening here won’t increase, nor will the total jobs. CoStar shareholders get some more money and residents lose a little. Meanwhile, small businesses like retailers and service businesses are finding it difficult to stay in business at all. Tax breaks would be much better spent on them, or spread out more fairly among businesses that create jobs whether or not they happen to have a personal chat with Mayor Fenty.

Northrop Grumman is also planning to move to the Washington area, and intends to play local governments off each other to get the best incentive package. But they’ve already decided to move here. If our region should give incentives to businesses to relocate, it should give them to woo the businesses to the area, not just to get them to locate in Tysons Corner instead of downtown, or the Capitol Riverfront instead of Silver Spring.

Ryan Avent suggests some jurisdictional cooperation:

The destination city would be better off if the local governments could agree not to compete for the new arrival, and to adopt some sort of transfer payment to share the gains from the relocation — the “winning” jurisdiction could pay a higher share toward multi-jurisdictional infrastructure investments, for instance. The failure to prevent this competition means that economic gain which would accrue to the metropolitan population, broadly speaking, is instead retained by the relocating firm.

Right now, each jurisdiction essentially ‘bids’ for how much of a break and what other incentives it can offer. What if the jurisdictions agreed to bid in an internal marketplace instead, with the winning bidder getting the exclusive right to negotiate with the company? In exchange, the winning bidder could agree to split any difference between their bid and the final incentive package with the others proportional to their (losing) bids.

For example, say DC is willing to offer $6 million in incentives, Montgomery and Fairfax $5 million, Prince George’s $3 million, and Arlington $1 million. DC wins but wins the deal away from Los Angeles for only $4 million. That $2 million could then share among the others, with DC keeping $600K in addition to the benefits they get, Montgomery and Fairfax getting $500K, Prince George’s $300K, and Arlington $100K. Then DC is sharing $1.4 million of the $2 million they “saved” through this compact with the others.

The savings could go to general small business tax breaks that benefit the other businesses not large enough to otherwise win special treatment from local governments. Or, as Ryan suggested, DC could just agree to pay the $1.4 million in extra capital contributions to, say, WMATA, from which all jurisdictions benefit.

Ryan is also skeptical about whether the District itself really benefits from these breaks:

Property tax breaks are particularly costly for the [District], given the many restrictions on land uses it faces (from public land ownership to the height limit). And there is no way for the District to ensure that employment will go to [DC residents], rather than suburbanites who will pay their income taxes elsewhere. Lucky Virginia might end up with much of the income tax gain without having to shell out incentives.

The city would be better off spending the money on investments that improve quality of life in the District — among them, measures to make it easier to open small businesses, including retail and service firms people want but which are often constrained by foolish government policies (limits on uses, high property tax rates, and so on).

People are currently moving into the city by the thousands. Why is that? It certainly isn’t because the city has been using incentives to attract prestige headquarters.

The suggestion earlier to limit tax breaks outside downtown makes a lot of sense, since it’s the other parts of the District that have empty commercial buildings, and where some office investment now could support growing mixed-use districts in the long run.

Economic development calculations ought to assume that as soon as the tax break ends, the business leaves for somewhere else with a larger tax break. If that happens, will the city be better off or not? If having a company in, say, Fort Totten for ten years helped turn that into a more thriving area and attracted other businesses, it could be great even if we never make a dime off the incentivized business.

The extra requirements to create jobs for DC residents are nice, but why not spread it around to anyone who adds jobs for DC residents? Why shouldn’t a new bakery that employs 4 DC residents not get at least 4% of the tax break that CoStar will get for 100?