Mutually Beneficial: DC Council Needs To Improve LivingSocial Deal

June 7th, 2012 |

Today, DCFPI testified before the DC Council’s Finance and Revenue Committee on legislation that would give daily deal company LivingSocial a $32.5 million tax break. Here are the remarks of DCFPI policy analyst Kwame Boadi:

I am here today to testify on the Social E-Commerce Job Creation Tax Incentive Act of 2012.  The bill would provide LivingSocial, the online daily deal company, up to $32.5 million in tax breaks over ten years if the company meets certain targets.  DCFPI believes that the Council should support this a subsidy deal with LivingSocial — if the legislation is strengthened to ensure that it is both a good deal for LivingSocial and the District.  As currently written, the legislation does not provide enough safeguards for the District.  In my testimony today I want to focus on how DC officials can maximize the benefits and minimize risks to the District to make it a mutually beneficial deal. 

The bill before the committees would grant LivingSocial two separate tax breaks — $17.5 million corporate income tax break and a $15 million property tax break — over ten years. As a qualified high-technology company, LivingSocial would also qualify for up to $5 million or more in additional tax breaks. In order for LivingSocial to qualify for the full abatement, they must meet a number of conditions, including: making 1,500 hires between 2010 and 2015; retaining at least 1,000 DC-based employees throughout the abatement period; making 50 new hires annually after 2015; completing a joint business activity strategy with the District; and occupying a building of at least 200,000 square feet.

There are several good reasons for DC to want to keep LivingSocial in the city. It is a homegrown company that has gone from an idea among four friends to over 1,000 employees in the District. Half of LivingSocial’s DC employees live in the city. It has 130,000 square feet of office space in the city, and wants to purchase or lease a new headquarters of at least 300,000 square feet. With its projected growth over the next few years, both Mayor Gray and company executives see LivingSocial as a catalyst to create a high-technology hub in DC and diversify the city’s economy.

LivingSocial has indicated that now that it wants to consolidate its operations into one global headquarters, although other jurisdictions have offered financial incentives to lure the company from DC. It has also stated that while it would like to stay in DC, the high real estate costs may make that difficult. 

Yet, offering a large tax break package to a big business raises a number of concerns, including whether a subsidy of this size is really needed, the lost potential to use these resources to support economic development in other ways — such as small business development — and whether this sets a precedent that companies can threaten to leave DC if they do not get a tax break. The proposed $32.5 million is more than double the cap on subsidies for high-tech companies that the Gray Administration recently proposed.

DCFPI’s focus is on ensuring that this legislation guarantees the District the greatest return, while including the strongest safeguards in order to minimize the city’s risk. While the Gray Administration has developed a deal that has some safeguards for the city and ties the subsidy to LivingSocial’s performance, a review of the bill reveals that there are significant risks to the District, and that it should be modified to better protect the city’s interests. The key shortcomings of the bill include:

  • The subsidy deal requires LivingSocial to have “new hires” but does not mandate any increase in total employment in DC beyond its existing level. The “new hire” requirements could potentially be met by turnover — hiring  new staff to replace departing staff  — without a net gain in employment;
  • There is no minimum requirement for DC resident employment. LivingSocial could claim over half of the full subsidy deal even if it does not employ a single DC resident;
  • The deal would not allow DC to reclaim subsidies already paid if LivingSocial does not meet its obligations. LivingSocial could potentially claim most of the subsidies fairly quickly and then move employees out of DC or leave the District entirely; and
  • The community benefits are not tied to specific benchmarks.

While DCFPI believes that the potential exists for a mutually beneficial relationship between the District and LivingSocial, the current legislation should be amended in the following ways in order to guarantee a return on the District’s investment and to better protect the District’s interests:

  • Tie subsidies to net job growth among DC residents

LivingSocial should only be able to claim the full tax subsidies offered if the company actually adds employees — with the full subsidy tied to reaching 2,000 employees — and if it continues to have at least half of its employees living in DC. As currently written, the subsidy legislation requires LivingSocial to maintain 1,000 employees in the city — its current employment level — but other hiring provisions could be met simply through turnover. The District should tie the provision of the full subsidy package to meeting job growth projections that LivingSocial already hopes to meet. 

LivingSocial should also be required to meet a minimum DC hiring threshold to qualify for subsidies. Because the typical company has one-third of its employees living in DC, LivingSocial should not get any tax incentives unless it meets a higher threshold, such as 40 percent working in DC

  • Mandate that LivingSocial maintain, at a minimum, its current salary and benefit levels.

If the city is to grant LivingSocial a subsidy it should also mandate certain standards for salary and benefits for LivingSocial employees to ensure that the city’s investments results in good quality jobs. LivingSocial notes that the average salary for its employees is around $60,000 and that the company offers competitive benefits packages to its employees. Given that, it should not be controversial to include wage and benefit standards into the subsidy legislation. The legislation should ensure that at a minimum, LivingSocial maintain its current level of wages and benefits during the abatement period. Without minimum wage and benefit requirements, LivingSocial could pare back benefits or salaries as a cost-saving measure and still obtain a subsidy from the District.

  • Limit the subsidy deal to $32.5 million and prohibit LivingSocial from taking advantage of additional subsidies that are available to QHTCs.

As a “qualified high-technology company (QHTC),” LivingSocial would also qualify for additional QHTC tax breaks, which the CFO has estimated could total $5 million or more. Because the $32.5 million targeted tax break for LivingSocial is substantial — it is more than double the cap on subsidies the Gray Administration has recommended for other high-tech firms — the company should give up any claims to additional QHTC tax breaks.

  • Require LivingSocial to maintain its IT and software development headquarters in the District.

 The District hopes that LivingSocial will spur the growth of a technology hub, in part through the training and retention of software developers and engineers who may go on to begin their own startups in the District. Those efforts would be hampered if LivingSocial shifted its software development and other tech-related divisions out of the District. Yet, as currently written, the legislation would enable LivingSocial to do just that. As a condition of the subsidy package, LivingSocial should be required to certify that no less than 15 percent of its District-based employees work in software development and IT, matching the employment distribution of its current DC-based workers.

  • Include a clawback provision requiring LivingSocial to repay the District if it violates conditions of the deal.

 If the intent of the LivingSocial subsidy is to build a technology hub in DC, it can only work if the company remains in the city and continues to grow. A clawback provision should be included in the legislation obligating LivingSocial to maintain the terms of the subsidy through FY2025, when the property tax abatement period passes, including keeping its corporate headquarters here and meeting hiring targets. The company should lose a portion of its subsidies and be required to repay DC if it no longer meets the targets. This provision will especially help safeguard the District against the possibility of LivingSocial leaving early.

  • Obligate any potential future buyer of the company to abide by the stipulations of the legislation.

The Gray Administration wisely included a clause in the legislation that stipulates that LivingSocial will become ineligible for any benefits in the legislation if it declares bankruptcy. However, the legislation neglects to address another plausible scenario in this dynamic industry: LivingSocial could be purchased by another company. If that occurred, there is nothing in the legislation that would require the buyer to repay the subsidies received by LivingSocial if the buyer does not adhere to the requirements of the legislation. The legislation should include a clause that would require any potential future buyer of LivingSocial to pay back the subsidies if it decides not to uphold the standards set forth in the legislation. 

  • Strengthen the community benefits with verifiable benchmarks and a formal partnership with District education institutions.

 The District should work with LivingSocial to ensure that the community benefits the company agrees to are as specific as possible. The legislation should include specific benchmarks for each of the commitments LivingSocial will make: hiring students from the Summer Youth Employment Program, developing deals with DC businesses in corridors disrupted by streetscape construction, and training individuals and businesses in software development and social media.

Additionally, the District should also consider having LivingSocial enter into a formal partnership with District educational institutions, such as McKinley High School, the University of the District of Columbia, or the Community College of the District of Columbia, to ensure that DC students studying computer science and engineering can be put on a pathway towards employment with the company.

LivingSocial officials have made it clear that they want continue growing in DC. Their continued presence and growth would be a positive development for the District’s economy. But in order to maximize the city’s benefits and minimize its risks, the legislation should be amended to more concretely tie the subsidies to LivingSocial’s current plans for growth. The District should not take this deal unless it is guaranteed something good in return.

 

 

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