Posts about Tax Breaks

As any entrepreneur can attest, creating a new business brings with it many inherent risks and living in an environment that is extremely expensive can make diving into working on a tech start up a challenge. Reducing transportation costs—making it realistic for residents to not need a car—is one such way to make urban living more affordable. DC has made progress on this front in recent years with innovations such as the Capital Bikeshare program.

Moreover, if downtown DC only has rents that are affordable to large corporations or the government, then startups are going to logically locate somewhere else. A study by real estate firm CBRE found that downtown Washington had the second-highest commercial rent in the United States—with only Midtown Manhattan being more expensive.

What can DC do to increase the supply of affordable commercial office space? DC took one step by helping fund 1776, a new incubator which offers startups some much-needed office space.

What about the height limit?

More controversially, there is the question of whether DC should allow its buildings to be taller. Congressman Darrell Issa (R-CA), who chairs the House Oversight and Government Reform committee, has held hearings on modifying the 1910 Height of Buildings Act, which limits building heights based on the width of the adjacent street.

I asked Tregoning what she thought of this proposal. She argued that lifting the height limit would not necessarily create less expensive office space, as the new taller buildings are costly to build. She also said that building farther upwards could take away some of the charm that makes DC such an attractive place to live.

Corbett: DC plan is "bulls**t"

The world of startups and government are very different, and people in the startup world have often eyed the world of government and policy with suspicion. Some of that seemed to be on display as Corbett criticized Mayor Gray's stated goal of making DC the foremost east coast technology center, colorfully calling it impractical. Corbett said DC is not going to catch up to New York, which is already far larger and is constructing an "Innovation Island" tech center on Roosevelt Island.

However, that seems somewhat beside the point; it's good for DC to set high goals for itself. Many startups set goals of being the market leader in their industry and people in tech companies often speak of "taking over the world" with whatever product they are building, even though few ever do so and many are profitable and successful without massive dominance.

Corbett also argued that DC should make itself more attractive for investment by lowering its capital gains tax rate, which is significantly higher than in Maryland or Virginia. Mayor Gray has proposed this, but the DC Council did not go along.

However, in response to a later question, Corbett also said that "it's incredibly easy to get angel money in DC" and "anyone who's gonna kill it in the tech sector isn't going to let the location of their money stop them," Aaron Wiener reported, statements which seem to bolster Ken Archer's argument that the tax cut wouldn't really make a difference.

These debates are incredibly important for the future of the District. DC is known for being a government town. In the future it could be known just as much as a place where startups and entrepreneurs come to thrive. That would be good for all residents and the District's economy.

The developers plan to build 445 apartments with 74,000 square feet of retail space, including a grocery store, and 320 underground parking spaces.

Development of retail amenities is great, and helps reduce crime, increase pedestrian traffic while boosting tax revenues. But we have a right to know if developments would happen anyway before spending taxpayer dollars to subsidize them.

Thanks to a law passed last year, the CFO must assess whether individual developments actually need the tax break or loans to get financing to build the project. The Howard Town Center is the first tax abatement proposal that CFO Natwar Gandhi has unequivocally opposed on these grounds.

Gandhi identified these problems with the tax abatement:

• The project, in a redeveloping neighborhood, should be able to charge higher rents than the developer is claiming.
• The developer, who is setting aside 20% of units for affordable housing, should be able to secure financing through Low-Income Housing Tax Credits.
• The developer can save money by deferring the developer's fee, a common practice with developments that include affordable housing.

Greg LeRoy, director of subsidy watchdog Good Jobs First, says "There is a time and a place for development incentives, but the problem is that elected officials don't know when to take their foot off the gas." That certainly applies at this location, where earlier this year Harris Teeter signed a letter of intent for a development only 2 blocks away.

Between Columbia Heights and Shaw, 1,321 apartment units are under construction while another 797 units are expected to be completed in the next 3 years. The trend of development moving eastward along U street and northward through Shaw is likewise driving up housing values to between $450,000 and $700,000 for 2-bedroom condominiums, according to a Trulia search.

In addition to the objections the CFO raised, there is another glaring problem with the claim that $11 million is necessary for this development: The 320 parking spaces. Are the spaces really necessary 3 blocks from Shaw Metro? The developer could save a lot of money by cutting down on the number of underground floors.

The DC Council should reject this unnecessary tax abatement. Otherwise, it will further undermine public confidence in its ability to operate free of corporate influence.

On retail, for example, the report says that "Most interviewees stated that the District has great potential to become a model for the future: a vibrant and walkable city. The majority said traffic congestion will become less relevant to the retail sector in the future." (page 78)

This is a refreshing change from the tired trope from the economic development transition team, which we still hear today from some business groups, who say that one of the most important steps they want DC to take is to time all of the traffic lights to make streets high-speed for cars into the District in the morning and out at night.

Plan is sector-specific

Some jurisdictions try to build jobs by indiscriminately throwing money at any company in any sector that is willing to come into town for a tax break. It's far more effective to develop clusters of related companies. That makes the city a generally attractive place for someone in that field, and the strong supply of labor in the field then attracts employers in a mutually-reinforcing cycle.

This plan seriously analyses key clusters that DC can reasonably hope to developed: technology, hospitality and retail, professional services and government contracting, real estate and construction, higher education, and health care. It lays out strategies for each that consider the particular needs of that sector. We commended Gray's emphasis on sector-specific economic development in an article earlier this year.

For example, this plan envisions a world-class medical center at the McMillan Sand Filtration Site, which is right next to a cluster of hospitals. The job growth in health care and higher education has exceeded all other sectors in DC in the past decade.

Here are some of the many recommendations which jumped out:

Build a tech hub at Saint Elizabeths. The plan calls for creating a technology center at the Saint Elizabet's campus. It also recommends finding ways to offer tech startups lower-cost office space and connecting tech entrepreneurs with established leaders in their sector. These are all recommendations from the letter from tech executives, which we organized with InTheCapital.

Strategically relax height restrictions. While Mayor Gray emphasized at today's press conference that he's not counting on any changes to federal law, the plan contemplates raising height limits near the Anacostia River. This is similar to Paris's approach to their height limit, and is a good compromise between the economic value of more growth and federal aesthetic concerns.

Change zoning to allow retail in more areas. Commercial space in most parts of the District is very limited. This makes retail space more expensive and contributes to "retail leakage" to the suburbs, which is where many residents leave the District to spend their shopping dollars.

The plan calls for expanding the supply of low-cost retail space while respecting residential impacts and allowing residents to walk for as many of their shopping needs as possible. In particular, it suggests making retail more continuous along commercial corridors. When there are gaps of residential zoning, especially at prominent corners, it stops many shoppers from continuing along the street.

Promote hospitality and tourism. The proposal for the hospitality sector is particularly thoughtful and detailed. The plan envisions "delivering the highest standards in hospitality and service," creating a Hospitality Program at DC Community College, setting up a culinary incubator, and expanding tourism. These will all grow service sector jobs, and good service sector jobs are one of the best paths to the middle class in today's economy.

On the other hand, a few elements of the plan miss the mark or could go farther.

No new workforce development initiatives. Who will fill these 100,000 new jobs? Only 27% of DC jobs go to by DC residents, so adding more jobs won't address the unemployment rate east of the Anacostia river, which is one of the plan's stated goals. There isn't much in the way of new workforce programs beyond the administration's existing initiatives, One City One Hire and the Workforce Intermediary.

The only new initiative in the plan is to post new university and health care jobs on the DOES web site. What the District needs to do is use data-driven methods to steer the $100 million that DC spends on job training where it will do the most good, at training providers that produce validated results.

Tech tax incentives still lack focus. The report continues to promote Gray's plan for broad tax breaks for tech investment. An incentive for new angel investors in technology is a good idea, but any tax break needs to specifically target the District's goals of building a strong base of tech firms that actually create new technology and workers with software development and other skills.

DMPED could work with all stakeholders to properly design this tax break, but instead is choosing to shut out discussions of how to best tailor it. On LivingSocial's $32 million tax break, DMPED and LivingSocial mutually agreed not to negotiate on any terms ahead of time, the Washington City Paper learned.

The mayor wants to pass a tax break for tech investors, which the Council removed from a recent bill. DMPED refused to negotiate with opponents on that bill as well. That left the tax break's primary Council advocate, David Catania, bewildered that there was no discussion of a smaller reduction, which he would have gladly agreed to.

If DMPED can seriously think about what it needs to achieve and tailor the break to those goals with a spirit of collaboration, instead of letting tech executives and investors design their own tax cuts, it should be able to devise something that can win broad support.

Hospitality job growth significantly underestimated. Hospitality jobs are the 2nd fastest growing job segment in the District, having grown at a 28% clip and added 14,200 new jobs in the past 10 years. But they are only a small fragment of the 100,000 new jobs projected in the plan, which forecasts only an 8% growth in hospitality jobs from 2008 to 2018.

That disconnect resulted from the misuse of DOES labor market data by the report's authors, according to DOES Chief Economist Dr James Moore. The labor market data and projections used by the report's authors are not meant for economic development analysis, as they fail to factor many drivers of job growth and thus understate job growth.

This plan includes some of the best initiatives for improving hospitality jobs and workforce readiness in the nation, but it must be grounded in accurate data on job growth in the sector and its sub-sectors.

There's much more in the 116-page document. It shows that, as with the sustainability strategy, one legacy of the Gray administration will be a set of excellent plans that can guide the District through the rest of his mayoralty and beyond.

Venture capitalists don't choose investments based on capital gains taxes

I own a software company in Tysons Corner and have worked with several venture capitalists over the past decade. It is inconceivable that these investors would avoid investing in a company that otherwise would produce a tenfold return simply because the capital gains would be taxed at 8.95%.

Most venture funds look for companies that could potentially grow big and make back 10 to 30 times the initial investment. Instead of trying to make a few percentage points on each investment, venture captalists figure they'll lose money on most of the startups, and then make their profits with the occasional home run.

Let's say an early-stage fund has $10 million, and invests an average of $200,000 in 50 companies. Its goal is to make a multiple of 3, which means it wants its investment to be worth $30 million after taxes at the end of 10 years. But every company won't be worth 3 times as much. Instead, it might expect only to make money on 10 of those 50 companies.

To make $30 million, it will need each of those 10 successes to be worth 15 times as much as when they invested. If the fund pays 3% capital gains tax, they need a multiple of 15.5. If the fund pays 8.95% capital gains tax, they need a multiple of 16.5.

Does anyone seriously think that that difference will bring in additional investment for DC tech companies?

The Gray administration also argues that reducing the capital gains tax rate for tech investors will keep them in DC. In Virginia, capital gains tax rates for tech investments is 0%.

But investors aren't going to fund a DC company that they believe less likely to succeed just because, if it does, it would only have to be worth 15½ times as much instead of 16½. They are looking for companies most likely to make it to the stage of getting bought or going public at all.

Also, venture capital at any stage is regional, not confined to a county. In fact, most investors in DC tech companies live outside of DC.

What is a tech company?

If this tax cut passes, it will create a loophole that is big enough to drive a truck through. Why? The definition of a technology company is such that, according to an analysis of the DC CFO, many companies would reclassify themselves as tech companies in DC to enjoy this loophole.

The CFO testified that the "negative impact cannot be reliably estimated at this time, but it could be substantial."

If the goal of this policy is to increase revenue by keeping investors in DC, then why limit it to tech companies? This tax loophole won't contribute another dime in investment to DC tech companies, and will only make it harder to reduce tax rates for everyone.

Mayor Gray created a Tax Revision Commission, led by former Mayor Anthony Williams, to recommend broad-based tax reform. Let's wait for the commission to finish its work instead of undercutting its with a poorly-conceived tax loophole.

If you agree, use the form below to tell the council to hold off on this tax loophole.

At the recent DC Tech Meetup forum on government support for the DC technology sector, David Zipper from the Office of the Deputy Mayor for Planning and Economic Development, said that "the city sees this as mostly a semantic distinction". But how can we target precious dollars for a sector that we can't define?

Matthew Yglesias recently claimed that "there's no such thing as a 'tech' company and no such thing as a 'tech' sector" and makes a good defense of that claim. Is Amazon a tech company? Then why isn't Best Buy, the largest online electronics retailer?

Does Starbucks not appear to be a tech company? They just appointed a Chief Digital Officer to consolidate all of their digital technologies, "web, mobile, social media, digital marketing, Starbucks Card and loyalty, e-commerce, Wi-Fi, Starbucks Digital Network, and emerging in-store technologies".

That's why Starbucks is 24th on Fast Company's list of the most innovative companies of 2012, right between Dropbox, Kiva, Genentech and LegalZoom. Should Starbucks qualify for tech tax incentives if they move their headquarters to DC?

It used to be that there were technology companies and companies with traditional business models, but now that innovation is becoming a necessity in all sectors, the line between a tech and non-tech company is becoming blurry. Any company that wants to survive in the future of their sector has to innovate.

Peter Corbett, head of the DC Tech Meetup, once responded to the question whether LivingSocial is a tech company by telling me that what really matters is not whether you sell a software product, but whether you innovate. And LivingSocial innovates.

I think Corbett is absolutely correct. Why is Tesla Motors in Silicon Valley and not Detroit? Tesla innovates. And innovation is what drives a tech sector.

What should DC do?

So what does this all mean for DC's strategy to target support for the tech sector? First, it means that the number of companies that we should target is much broader than it used to be. We should target companies that innovate.

Second, it means that the departments within those companies that we care about are likely to account for a small percentage of the company, like Starbucks' R&D Lab or Best Buy Online. And so incentives should (a) be structured to the size of those divisions, not the size of the entire company, and (b) be conditioned upon the location of those divisions in DC.

That's why it was so important for LivingSocial to commit to keeping its product development division in Washington, DC in return for $32.5 million in tax credits to stay in DC. Only 15-20% of their DC employees actually work in product development, and that's where the innovation is happening. Those are the employees who are likely to jump onto other innovative companies after LivingSocial.

DC can and should help the tech sector. When it does, officials need to first understand the actual benefits that will come to DC, and be careful to design incentives that attract those benefits and don't just throw money away indiscriminately.

Ken has argued that DC should take action to encourage a hub of technology companies in DC, but the deal DC worked out with LivingSocial doesn't ensure that the money pays for what DC needs. DC would benefit from attracting more highly skilled software engineering workers, who might work for LivingSocial now, and could then start their own companies in the future or staff ones that others start.

The tax break pays LivingSocial for hiring employees who live in DC, but doesn't distinguish between actual jobs creating technology, which help DC in the long run, and jobs answering phones for customer service, which don't. It also still gets credit if it hires people only to replace others who leave, generating no net growth in jobs.

DCFPI has pointed out that LivingSocial could move its product development operation out of DC and not have to pay back its subsidy. It could sell to another company outside DC and move, and not repay the benefits it's gotten. Or it could earn the benefits in a few years, then stop following through on its promises, and pay nothing back.

More jobs outside of government are absolutely in DC's best interest, especially in the long run. The panelists will discuss the LivingSocial deal, and what the District can and should do in the future to build up a tech community—not just react to whichever company comes hat in hand to officials first. What would you like them to talk about?

DC tech firms benefit from DC's investments in the creative class

The District didn't just suddenly become an attractive place for talented young people to live. That transformation took years of investments, often at the expense of other priorities. DC is still making these investments, and needs to keep funding them.

Buying more Circulator buses and streetcars and operating them on more routes is costly. Building more cycle tracks and multimodal streets requires money. Renovating more schools, extending library hours, and investing in mixed-use development projects like St. Elizabeths and Walter Reed is expensive but critical to attracting and retaining a world-class workforce of knowledge workers.

The payoff from these investments is that DC has experienced the largest domestic population growth of any state, and the fastest growth of creative class jobs of any large metropolitan area. Creative class workers are the knowledge workers in demand by many of the fastest-growing companies, including tech companies like LivingSocial.

That's why just over half of LivingSocial's employees already live in DC, whereas 30% of employees at other DC employers live in DC. LivingSocial isn't hiring them for charity, they're hiring because DC residents are excellent employees. This is a fact that's widely recognized, every DC tech company I know hires DC residents in at least half their positions.

One investment that would grow our workforce of knowledge workers to have LivingSocial grow further. DC could invest in LivingSocial's growth, but is instead offering $32.5 million for LivingSocial to simply stay in DC. They don't have to actually add any new positions to get this money.

That approach to attracting and retaining companies, known as location subsidies, is practiced by states who can't offer a 21st century workforce because they haven't invested in one.

Richard Florida, whose book The Rise of the Creative Class has shaped urban development strategies for a decade, opposes a location subsidy for LivingSocial for the same reason:

I am fan of high-tech companies and very much like what LivingSocial does. But they are already leveraging the enormous historic investments made in DC over decades to become an attractive city with extraordinary quality of place that attracts highly skilled creative class workers. They don't need the subsidy and our cities and states need to put a stake in the ground and stop this corporate welfare. I doubt they'll leave the region anyway. Where would they go?

The DC Council should demonstrate the same faith in DC's ability to attract companies for the right reasons—our 21st century workforce—as Florida does. They should require LivingSocial to add jobs, particularly product development jobs that attract creative class workers, in order to receive a subsidy.

Chicago required job growth in return for Groupon subsidy

Groupon, LivingSocial's primary competitor, did not a get location subsidy from Chicago. Instead, Chicago offered Groupon $3.5 million on the condition that Groupon add 250 new jobs.

If the LivingSocial subsidy were similarly structured, DC would see 2,321 new jobs at LivingSocial in return for its $32.5 million subsidy.

Furthermore, Chicago's subsidy to Groupon is in the form of income tax and training credits. That ensures that Chicago doesn't subsidize a company that is losing money and perhaps about to go bankrupt.

$15 million of the proposed LivingSocial subsidy is in the form of property tax credits, which it receives whether it makes money or not and could receive right before a bankruptcy.

Why should the DC Council give LivingSocial a far better deal than Chicago gave to Groupon? The DC Council should only provide income tax credits to LivingSocial, or at least limit an annual property tax credit to the size of its income tax credit.

Let the DC Council know that we can't afford location subsidies at the expense of crucial investments to build a city that attracts a 21st century workforce. LivingSocial should have to add jobs, particularly product development jobs, in order to receive a subsidy—just like Groupon did. This will ensure the continual contribution of LivingSocial's growth to DC's rise as a creative class hub.