Posts about Tax Breaks

First wave of subsidies reap healthy return

Most pre-recession subsidies were made through tax increment financing (TIFs), in which future gains in sales and/or property taxes from a development are used to repay bonds that finance a developer subsidy.

Each of these TIFs are repaying to the city well ahead of schedule, providing needed funds for schools, social services and other cash-strapped priorities in DC.

Many of these projects were harshly criticized at the time as corporate giveaways. So the speedy repayment of these subsidies lends credibility to the arguments of their proponents, such as Councilmember Jack Evans and former Mayor Williams, and to TIFs in general.

Project	Year	Subsidy	Performance
Spy Museum	2001	$6,900,000	Paid in 2007 instead of 2014
Gallery Place	2002	$73,650,000	Returned $15,175,861 to city above debt payments
Mandarin Oriental Hotel	2002	$46,000,000
Embassy Suites	2003	$11,000,000	Paid in 2011 instead of 2016
DC USA	2004	$40,000,000	Estimated to be paid in 2015 instead of 2026
Capitol Hill Towers	2006	$11,500,000	$2.4 remaining, matures in 2029

These TIFs were successful because they were designed in accordance with two principles of effective corporate subsidies. As will be seen below, present-day corporate subsidies haven't always followed one or the other of these two principles.

1) Focus on knock-on benefits: Advocates for corporate subsidies often appeal to the tax revenue that would be lost if a developer doesn't build a building or a company chooses not to locate in one's city. Successful subsidies, however, are more focused on knock-on benefits that are strategically important to a city's finances.

Granting subsidies so that a company's activities—developing a property, locating in one's city—will yield tax revenue only encourages rent seeking by all companies who develop a property or choose to locate in the city.

When the desired activity is to locate in one's city, a "race to the bottom" ensues between states which only hurts their collective ability to pay for education and social services.

That's why effective subsidies are designed to yield knock-on benefits that support a city's strategic goals, like developing a particular sector or a particular part of the city.

The first wave of TIFs were intended to steer the development of downtown away from office buildings and towards multi-use. As Councilmember Evans explained it, "The highest [revenue] use is an office building but then you end up with a Crystal City complex which I can't stand."

The knock-on activities—more downtown residents and more downtown shoppers—the downtown TIFs triggered are not only strengthening those investments, but also producing tax revenue from downtown in many other forms. That's what happens when knock-on benefits are the goal, not the direct tax revenues of an investment.

2) Narrowly target subsidy to yield knock-on benefits: There are always risks with corporate subsidies. The company could pick up and leave without it, or maybe they would have completed the project even without the subsidy.

That's why it's critical to limit a city's exposure. Subsidies are investments, and investments have risks. The DC CFO narrowly targeted the first wave of TIFs to be only as much as is needed to stimulate the intended knock-on benefits for the city.

For each TIF application, the CFO conducted a gap analysis. This analysis compares the amount of private financing that should be available for a development to the costs of the project. The CFO would only certify TIFs at that subsidy amount. The head of economic development finance for the DC CFO, John Ross, explained the process this way:

CFO had to do a certification, and that certification had to include a list of issues. One of them was whether the TIF would cover the debt service payments. One was whether the project would move forward without government support. One was the level of benefits of the TIF that would go to the community. Without that, the TIF could not even go to the Council.

While time-consuming, such a process ensures that subsidies are narrowly targeted to yield the benefits intended.

Present-day subsidies often veer from principles of early TIFs

If the District's first corporate subsidies have reaped such healthy returns, several present-day subsidies veer from the principles behind the successful subsidies.

Some recent large TIFs, like Southwest Waterfront and O Street Market, as well as the proposed LivingSocial tax break, don't follow these principles.

There has been no financial gap analysis for more recent TIFs. Without ensuring that any financing gap actually exists, DC doesn't know if development projects would have happened anyway and it risks overpaying.

The first wave of TIFs were granted under the TIF Authorization Act of 1998 which required a thorough financial analysis and certification by the CFO.

Though no longer empowered to certify TIFs, the CFO still provides financial assessments of TIF applications to the Council and Mayor. These assessments raised particular concerns about 2 TIFs: City Market at O Street and the Southwest Waterfront.

Project	Year	Subsidy
City Market at O Street	2008	$46,500,000
Southwest Waterfront	2014	$198,000,000

The CFO, in his assessment, complained that both the O Street and Southwest Waterfront TIFs were being granted with less information about the project than would be required to issue a complete financial evaluation. There were no final plans or cost estimates for either project.

In fact, neither application included a specific financial commitment from the private developer, making impossible any analysis of the necessary size of the subsidy. The O Street application said that the developer for the hotel hadn't even been identified yet, even though the hotel was supposed to provide 44% of the incremental tax revenues to repay the bond.

While the CFO's office was included in negotiations with the developers after raising concerns in their analyses, the process for granting these TIFs was clearly intended to increase speed at the expense of financial scrutiny.

More recently, the proposed LivingSocial subsidy of up to $32 million to remain and consolidate their operations in the District also veers from proven principles of corporate subsidies.

Proponents of this subsidy often appeal to the tax revenues from LivingSocial that will far exceed this subsidy. Paying for tax revenue, however, only rewards companies who threaten to leave while encouraging a race to the bottom between states competing for companies.

The LivingSocial proposed subsidy is intended to be targeted. The subsidy doesn't begin until 2015 and scales based on the number of DC residents employed, which must be at least half of LivingSocial employees.

But are these jobs that we should be paying for? They aren't strategically aligned with the needs of the city's unemployed, and most of the jobs won't contribute to building a tech sector.

According to a source, only 15% of LivingSocial jobs are in technology, IT, and product development. A subsidy that was targeted to generate knock-on benefits that are strategically important would thus focus on retaining that 15% of LivingSocial positions.

The debate around corporate subsidies is too often dominated by loud voices at the extremes. But experience shows that corporate subsidies can work, and they can also be a waste of precious dollars.

The next time you read of a proposed corporate subsidy, avoid these hyperbolic extremes and ask if the subsidy adheres to these two proven lessons for effective subsidies. If it does, defend the administration that proposes the subsidy, If it doesn't, as recent subsidies have not, then ask questions.

Just for comparison, $32.5 million is about the cost of modernizing an elementary school like Stuart-Hobson ($33.6 million). It's also roughly equivalent to the cuts Mayor Gray is proposing to the Housing Production Trust Fund, our best vehicle for promoting affordable housing ($38 million).

Before supporting the tax break, DC residents deserve to know specific benefits that these LivingSocial tax breaks will yield, and that they are more important than modernizing an elementary school or increasing the supply of affordable housing.

The proposed tax breaks reduce LivingSocial's property and income tax from 2015-2020 on a sliding scale based on number of DC residents employed. At least half of their employees must be DC residents for the tax breaks to kick in at all.

The vast majority of LivingSocial's employees are not engineers. Half of them work in sales and many work in transitional jobs writing copy for the deals.

These are good jobs, but they're not tech jobs, and don't contribute to a tech hub. The people who fill these jobs wouldn't necessarily work in technology firms after LivingSocial.

There are two unique things that LivingSocial or another tech company can bring to the District, and these essential elements are part of all successful tech hubs.

1. Smart money: The executives are good at innovation, and will start investing in other innovative companies if their company goes public or is acquired.
   
2. Smart engineers: The companies recruit and train very capable software engineers.

A deal that will benefit DC residents must be structured to retain smart money and smart engineers in DC.

Smart money, i.e. venture capital, is regional and is not confined to a particular county. So keeping LivingSocial execs who cash out and become venture capitalists in DC instead of Arlington doesn't seem worth paying $32.5 million for.

Smart engineers are another story. Most of LivingSocial's engineering openings are not in DC. Why not structure the tax breaks to target software engineers? Their presence in DC contributes to a larger tech cluster when they leave to work for other innovative tech companies.

The competition for smart engineers is intense in all tech hubs around the country. Even if LivingSocial, which currently loses hundreds of millions of dollars per year, doesn't find an exit strategy, DC would still benefit by the presence of hundreds of smart engineers looking to join innovative startups.

Apparently LivingSocial executives have told Deputy Mayor Hoskins and his staff that Virginia officials are courting them and that they are considering options such as Arlington. That shouldn't be a surprise. All corporate executives try to negotiate subsidies for jurisdictions where they have offices.

At the Tysons Corner software company I co-founded, we are frequently telling local officials where we have branch offices (Norman, OK and Charleston, SC) that we might move. We have received over $100,000 in subsidies over the past 3 years as a result.

But these cities only allow us to spend the subsidies we received on training for local employees in new positions that we add. That makes a lot of sense, because if we do leave, we will leave behind smart engineers who will go looking for jobs with similar companies.

Those jurisdictions are selling their locales based on value, not based on price. Such targeted incentives are what help build a cluster of related firms.

Reducing the corporate tax payments of a company that primarily hires salespersons and copywriters, on the other hand, doesn't appear targeted to yield any specific return. By comparison, spending that $32.5 million to modernize an elementary school or increase the supply of affordable housing feels like a more responsible choice.

DC councilmembers, who will consider the proposed LivingSocial tax breaks, should ensure that the tax incentives will actually help make DC a tech hub. Corporate subsidies and tax credits can benefit the District as long as the subsidies are vetted in a transparent, rigorous process that demonstrates specific benefits to DC residents. A tax break for LivingSocial could do that, but as it's structured right now, it wouldn't.

The bill would make a new and much-needed regional hospital dependent on building the casino, a link that Baker specifically opposes. On the positive side, the bill would dedicate a portion of the gambling profits to the county's economic development incentive fund and education trust fund.

Baker was right to specify National Harbor as preferred choice for a casino

County Executive Baker says the casino should locate at National Harbor, because that picturesque Potomac River site would be a better draw for tourists than Rosecroft Raceway. Also, the existing transportation infrastructure would better support the anticipated traffic, and impose less of a burden on traditionally residential areas.

By making the specific proposal for National Harbor, Baker is attempting to provide some much-needed local perspective and guidance in this brewing debate. Any casino that comes to Prince George's must be "high-end," Baker says. He wants the developer to invest $1 billion in the facility, to ensure it doesn't become a low-grade "slots barn."

State Senate president Thomas "Mike" Miller, whose support for Rosecroft Raceway is well known, rejected Baker's expression of support for National Harbor, and also opposes decoupling the casino from funding the county's new regional hospital.

Regardless of whether one agrees with Baker's decision, it's exactly the type of decisive action that the head of county government should take in this kind of situation. Indeed, this is the very type of action that I recently called for the county to take in its effort to lobby the GSA to relocate the FBI's headquarters to Prince George's.

Just as the county will ultimately be better served by articulating a specific site and vision for any new casino (e.g., National Harbor vs. Rosecroft Raceway; "high-end" vs. "slots barn"), so will it be better served by recommending to the GSA a preferred site for the relocation of the FBI headquarters, like the Morgan Boulevard Metro Station area.

Casino must not receive public subsidies

To ensure that the county wins and doesn't "crap out" on this move to bring Vegas to the Potomac, it must insist that not one penny of public money goes to assist the developers or the property owners at National Harbor in constructing the casino.

No tax-increment financing (TIF) districts, special assessment districts, public bond issues, or tax breaks—nothing. If expensive roadways, overpasses, and parking garages have to be built to accommodate the additional anticipated vehicle traffic, they must be fully funded and guaranteed by the developers.

Additionally, to alleviate the need for at least some of the expensive roadways and parking garages, the developers must be required to contribute a substantial sum to improve the public transit connections to National Harbor.

And no, this does not mean bringing Metro or the Purple Line to National Harbor. That would entail significant amounts of public expense that the county cannot afford right now. Frequent express bus service between National Harbor and one or more of the existing Metro stations should suffice.

This "no public subsidy" stance is important for several reasons. First, regardless of whether it is actually true, the county simply cannot afford the negative perception that this casino project is just the latest in a series of Upper Marlboro- or Annapolis-brokered developer sweetheart deals fueled by corruption, political favoritism, or some other under-the-table influence.

For example, people are already asking whether Sen. Miller's vociferous support for Rosecroft Raceway over National Harbor is the result of an off-the-grid deal between the senator and Penn National Gaming, the organization that recently bought the Rosecroft property out of bankruptcy.

To combat any perception of payoffs, bribery, or any other undue influence, this casino deal needs to be a squeaky-clean, completely above-board process that does not involve government handouts of any variety.

Second, this stance is consistent with the county's stated (albeit rarely followed) policy of incentivizing transit-oriented development and neighborhood revitalization efforts around its 15 Metro stations and in surrounding inner-Beltway communities.

In 2010, the Maryland-National Capital Park and Planning Commission launched a comprehensive, countywide community planning effort called "Envision Prince George's." Among the Envision recommendations (which were subsequently adopted and endorsed by the County Council) was the position that the county should focus 66% of its future growth around its 15 Metro stations and other densely-populated, inner-Beltway corridors.

To ensure that the county meets its TOD goals, Envision recommended that the county "[a]lign public expenditure policies and Capital Improvement Program (CIP) items with the goal of encouraging development in these areas and discouraging further sprawl development in other areas of the County."

Public funding of a National Harbor casino, both far away from a Metro station and outside the Beltway, is simply inconsistent with the county's stated TOD policies.

Third, the casino doesn't need public investment or subsidies. A casino is a natural moneymaker. If you build it, people will come, and they will spend a lot of money. Baker has rightly proposed that, in exchange for building a higher-quality casino, the developers should keep a larger share of the profits than the current 33% provided in state law, and possibly even greater than the 40% proposed by Senator Peters in SB 892.

Prince George's County certainly doesn't need a casino to be economically viable. But having one wouldn't necessarily be the worst thing in the world, either—as long as the county doesn't put any money on the table to get it.

Who are the unemployed?

Tackling crisis-level unemployment is one of Mayor Gray's top priorities. Yet the DC government appears to have no profile of the unemployed in DC and their barriers to employment.

Even the number of unemployed by ward that DC provides each month is deeply flawed. Each month, the federal Bureau of Labor Statistics samples DC residents and reports unemployment for DC. The DC Office of Labor Market Research then allocates that number to each ward based on out-of-date ratios from the last census. Ben Orr of Brookings has shown that the resulting numbers of jobless by ward are sometimes wildly inaccurate.

The government also has no data on the reasons why the jobless don't have a job. This lack of data creates a vacuum that is then filled with assumptions and stereotypes about the obstacles faced by jobless residents.

Advocates for cutting off Temporary Assistance to Needy Families (TANF) benefits after 5 years, as the corresponding federal program does, say that dependency on TANF is the cause of unemployment. Those who support tax incentives for developers say that lack of jobs is to blame. Smart growth advocates point to lack of affordable transit access to most jobs. Training providers say that the problem is a mismatch between workers' skills and available jobs.

Who is right? What policies should we invest in to address unemployment? We don't know because we lack basic data about the unemployed.

Investment in a survey of unemployed DC residents by a research company on an annual basis would cost a fraction of what these policies cost, and would help ensure we are actually targeting the true causes of unemployment.

Who are the training providers and are they effective?

The District has no data on the effectiveness of training providers across the city. In fact, the director of one training provider recently told me that the Department of Employment Services (DOES) actually has no comprehensive list of training providers at all.

The training providers, known as Workforce Development Organizations, provide a range of services from soft skills training and hard skills training to case management of jobless clients. What percentage of their clients get a job? More importantly, what percentage of their clients are still employed a year or two later? No one knows.

The DC Department of Employment Services (DOES) should require such reporting by recipients of government funding. This data could presumably be verified using payroll tax data.

Of course, no one knows the extent to which we should even invest in job training because we have no definitive profile of the obstacles to employment faced by jobless residents.

What development projects have received incentives, and have they been worth it?

The CFO's office does not track economic impact of development projects that receive incentives. In fact, there appears to be no comprehensive list in existence of companies that have received tax incentives for development projects over the past 5-10 years.

The District has provided billions of dollars in tax abatements and TIF financing to developers over the past decade. The rationale of proponents is that these investments bring a return to the District in the form of corporate property taxes, sales taxes and jobs for DC residents. If proponents of what some call corporate welfare are so sure that these returns are real, then why not track and report them to bolster their case?

All this data should exist in the Office of Tax and Revenue's (OTR) integrated tax system. OTR says that sales taxes cannot be tracked by address when retailers have multiple DC locations. However, recipients of incentives could simply be required to report such data by address as a condition of receiving incentives.

Hotels under construction currently in the District are receiving over $500 million of tax incentives in total. While some are questioning whether we will really see that money in higher tax revenues, the reality is we will never know.

It's difficult to solve problems when you don't know their causes or whether previous attempted solutions worked. When such information is lacking, then dogma and stereotyping supplants reasonable, data-driven policy discussions.

• Tax breaks: Councilmembers currently have to judge the merit of large numbers of tax abatements, TIFs, and other development incentives for projects. How will you evaluate these, personally? Should they be approved in most cases, or only in rare circumstances? Do you think the Council needs to pass a law to get more information before making these decisions, and if so, what information would you want to have to make these decisions?

• Public land: When should DC sell public land to a developer to accommodate new residents and jobs, and when should the government keep the land for future needs like schools and parks?

• Metro: If Metro faces further budget crises, do you think DC should find more money in its budget to support our transit service? Or should Metro cut bus and train service, possibly including late-night service? Or should fares go even higher than they have?

• Bicycling: "Bike lanes" turned into a symbol for controversial Fenty administration policies, but they are also coinciding with a dramatic increase in the numbers of people traveling by bicycle. How would you like to see DC ensure that streets are safe and comfortable for all users including cyclists as well as pedestrians, transit riders and drivers?

• Affordable housing: Is the current inclusionary zoning rule sufficient to ensure a mix of housing price points, or does DC need to do more? What other policies should DC be pursuing?

• The bag fee: At the last forum, some candidates derided the 5¢ carryout bag fee. Specifically, do you support or oppose the bag fee as currently enacted into law?

• Tax increases: The Council will be considering a tax increase, likely on upper-income earners in DC, for the FY2012 budget. Would you support a tax increase along with spending cuts, and if so, how broadly or narrowly should it apply?

• In general: What is one vote of the DC Council in the past year where you would have come out on the opposite side from the majority (i.e. you would have voted against something that passed, or for something that failed)?

What else do we need to know from these candidates, and more importantly, from all those who will be running in the special election for April 26?

In this case, at least there was some independent analysis by the CFO, which raised some questions like predicting the break would take away from other hotels' revenue and therefore the taxes they pay. Even with the analysis, it's still unclear whether it's a good deal, but at least people have some numbers, which is often not the case.

At the very least, I hope the Council would ask for a Transportation Demand Management (TDM) plan, or a reduction in the number of parking spaces. The project has as more spaces than rooms, and Adams Morgan already has more cars driving around than space on streets. The neighborhood could use more foot traffic, but really doesn't need a lot of people just driving to the hotel only to then drive downtown for their meetings. The hotel needs to plan to have at least a large percentage of its visitors and employees use the many buses that serve the area.

Then there's the Southwest Waterfront deal, which Cheryl Cort wrote about yesterday. A developer promised to build some housing and some office on public land, and agreed to include some low- and moderate-income housing as part of the deal. Now, they want to take some of their office space and convert it to more housing, but without the affordability requirement.

They say that they can't afford to have the same affordable housing in the new portion, and that this change is the only way to get financing for the project. We can believe that it's harder to get financing now and perhaps they need some change, but how much of a change? At the very least, for example, DC could probably insist that the new housing contain some housing at 80% Area Median Income, which is still "workforce" housing for fairly well off families, rather than 100% AMI as the developer has suggested.

But how much negotiating room is there? This is public land, which means that DC ought to try to get the best deal it can. The problem is that we don't know what is the best deal or what's even relatively close. The developer is likely to push for more than they need, figuring they might as well try for a little more. On the other hand, if nothing gets built, it doesn't help DC at all. What's the right balance?

Third, the Union Station payment in lieu of taxes (PILOT) will come back today. The Union Station Redevelopment Corporation theoretically owes taxes on the commercial activity happening on their land equivalent to what private properties would pay, but they aren't paying it. This bill would permanently excuse them from the tax in exchange for a much smaller payment.

USRC says that they are already spending lots of money that they wouldn't if they were private, like paying for elevators that get used by Amtrak and the Metro. As with the other two, though, the bigger problem is that we have little way of really evaluating how much of the break is reasonable given USRC's special circumstances, versus how much is just a request for special treatment that a for-profit organization thinks it can get out of elected officials.

The only Councilmembers who seem to know for sure how to vote are those with firm ideological attitudes toward tax breaks. Jack Evans, for example, seems so sure about the Union Station break, despite calling it "dead as a dog" last time, that he plans to introduce it as emergency legislation. There's no word on why there's suddenly an emergency on legislation that's been brewing for months.

Even the most well-meaning Councilmembers find themselves in a serious quandary when these votes come up. Do they push for more, risking that a project might then never materialize? Or do they give the developer what they want, knowing that there's a huge chance that developer will be patting their lobbyists on the back for pulling the wool over the Council's eyes and getting a big windfall out of the public till?

Advocates have called for a fuller analysis of the Waterfront tax break. As DCFPI has suggested, the Council should systematize the process for these breaks to require some analysis of each one and set an overall cap. Perhaps also it's worth requiring that some analysis be conducted afterward, to determine which ones actually paid off and which didn't. That could help watchdog groups create a sort of scorecard for long-serving Councilmembers about how much their tax breaks either added to or detracted from the District's overall fiscal health.

Some tax breaks make sense, while others don't. But right now, our leaders are flying blind, which isn't a good way to make decisions.

DC created a lot of value when it upzoned the land. But that value all went instantly into the pockets of the current owners of the land. It increased the likelihood of the land being developed, but it also made it almost impossible to ask for any amenities, like parks.

Plus, the height limit means that developers can't get their 10 FAR by, say, building a 20-story building on half the lot and retaining the rest for a park. DC can't even give this right to a single property owner for a single park.

This is exactly the mistake Larry Beasley warned against in his recent talk. Instead of simply adding as-of-right height, he suggested coupling higher development with requirement to provide various amenities. This is the approach Montgomery County is using at White Flint, for example. This means that a portion of the economic gain goes to the property owner, but some of it can go to making housing more affordable, or providing parks, or schools, or bike paths.

There are few development sites left and as development proceeds opportunities for a park will dwindle. It's too bad DC gave away all of its best tools years ago. In the map at right, blue and yellow properties are already built or under construction. The teal spaces represent unbuilt, planned projects; any park would have to displace one of them.

According to the WBJ article, Wells proposes allocating up to $51.5 million in tax revenue from NoMA into a special fund, but only if the revenue exceeds the 2010 level so it doesn't take away from the District's budget.

The NoMA BID and local developers support the plan, but perhaps they should also support increasing their tax rates a bit, at least in the future for a number of years, since they will benefit from the park and can sell units for more money (which will also generate more property tax).

And in the future, all cities and towns should avoid making the same mistake. Libertarian-leaning urbanists like Market Urbanism have recommended fewer development restrictions and greater reliance on the free market. In many cases that makes a lot of sense, but the NoMA experience shows a need for at least some mechanism to reserve for public goods some of the value an upzoning generates. Is there a more free market way to handle this?