Gone are the days of D.C.’s financial control board, when the District’s finances were in such poor shape that Congress installed an outside panel to oversee them. But while the ship has been righted, budgetarily speaking, D.C. is now squandering millions of public dollars every year on “ineffective” economic development programs, according to a left-leaning think tank.
In a new report released on Wednesday, the D.C. Fiscal Policy Institute (DCFPI) argues that the District “offers several economic development tax incentives that cost the city millions in lost revenue each year, yet fail to contribute to economic growth.” Those programs, the think tank notes, include ones designed to attract so-called “high technology companies” as well as grocery stores to do business in the city. And they have not been shown to work, DCFPI says.
“The District is wasting money on tax subsidies that aren’t working,” DCFPI’s Amy Lieber says in a statement. “Worse yet, no one has been checking to see if they make a difference.” D.C. should alter or eliminate these programs to free up additional revenue, per the report.
Currently, the D.C. Council is considering Mayor Muriel Bowser’s budget proposal for next fiscal year, which begins on October 1, 2019. Bowser filed her proposal with the Council last week, and lawmakers have begun to hold hearings on various pieces of it and city agencies. (It’s drawn flak from D.C. Auditor Kathy Patterson, who called it “not fiscally responsible.”)
Citing a comprehensive review by the D.C. Chief Financial Officer last year, DCFPI’s report says the District’s “Qualified High Technology Companies” (QHTC) tax incentive program—implemented in 2001—now costs D.C. $40 million annually in foregone revenue. The Chief Financial Officer’s office ultimately determined that it was “not able to reasonably identify what new actions were taken due to the [QHTC] incentives” or “what economic benefits are attributable to the incentives,” which include various tax breaks and tax credits. Per DCFPI:
The process for claiming the incentive is self-certification by the companies, with the Office of Tax and Revenue having the burden to prove ineligibility (which is a difficult task, as a 2012 court case shows). Additionally, for legal reasons, there is no disclosure of which companies receive the benefits or how much they receive. This means that taxpayer money is going into the pockets of unknown beneficiaries that have few restrictions to qualify.
The [Chief Financial Officer] found that many of the companies claiming these incentives are headquartered outside DC, often in Northern Virginia, but maintain a small operation in DC or have employees who contract with the federal government.
The report also found that many of the companies claiming the tax incentives were already engaged in the same business in the same location before they started claiming tax subsidies. This means the incentive gave away millions in tax breaks to companies for activities they likely would have undertaken anyway, without necessarily generating growth.
The DCFPI report also critiques the District’s tax incentives for grocery stores to move into underserved areas, saying these incentives cost $29 million in revenue from 2010 to 2017, with only three supermarkets currently serving neighborhoods east of the Anacostia River.
Pointing to a 2017 report on grocery access from the D.C. Policy Center—another local think tank—DCFPI says the vast majority of recent supermarket development in D.C. has been “in transitioning and higher-income areas that likely would have drawn a supermarket anyway.”
“While the DC government requires that the incentive only go to new grocery stores in specific parts of the city, the targeting is not limited to the highest need areas, and the incentives have not been enough of a draw to bring an adequate number of stores to these areas,” DCFPI says. It recommends replacing the program with more targeted investments.
In response to the report, Deputy Mayor for Planning and Economic Development Brian Kenner said D.C.’s incentive programs are “vital tools” for supporting the city’s economy.
“With the recent federal government shutdown and other unforeseen circumstances, it is even more critical that we remain focused on diversifying the District’s economy,” Kenner said in a statement. “Removing even one tool from our toolbox can negatively impact our efforts, especially with attracting fresh food options east of the river. We would welcome additional data on the uptake of QHTC benefits by high-technology companies in the District, to have a more evidence-informed discussion of how to strengthen the program.”
Amazon would have benefited from the QHTC program had the tech giant chosen D.C. for its corporate expansion. The total amount in tax benefits would probably have been in the order of hundreds of millions of dollars over time. The program does not have clawback provisions.
This post has been updated with comment from Kenner.