Mutually Beneficial: How DC Can Best Incentivize Keeping LivingSocial in the Districtby Kwame Boadi | June 6th, 2012 | PDF of this report
LivingSocial, the online daily deal company, is looking for its own deal from the District of Columbia. The company says in order to stay in DC, where it is currently headquartered, it needs some financial incentives. The Gray Administration and LivingSocial have negotiated a $32.5 million tax break package, which is now currently before the DC Council for approval. The “Social E-Commerce Job Creation Tax Incentive Act of 2012” would give LivingSocial a $17.5 million corporate income tax break and a $15 million property tax break if the company meets certain identified targets. LivingSocial would also qualify for other DC subsidies available to high-tech companies, and these could add up to $5 million or more in additional tax breaks.
Should the District buy this deal? Yes — if the legislation is strengthened to make it a good deal for both LivingSocial and DC. Right now, the legislation benefits LivingSocial by handing over a lot of taxpayer dollars without many safeguards that the District will gain from the transaction as well. A few additions to the bill — such as guaranteeing job growth and hiring of DC residents, mandating good wages and benefits, and requiring LivingSocial to stay in DC for the long-term and maintain its product development headquarters here — will make the deal mutually beneficial.
There are good reasons to encourage LivingSocial to stay in DC. It is a homegrown company that has gone from an idea among four friends to over 1,000 employees in the District today. 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.
Yet LivingSocial says it is expensive to stay in the District, and now that it is looking to consolidate its operations into one complex, other cities have offered financial incentives to lure LivingSocial away from DC. There are concerns that the company may move if not offered a deal by DC, though the specifics of other offers are unknown.
What are the risks for DC? The biggest concern is whether this is the best use of a lot of taxpayer dollars. 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.
It is possible to make this a mutually beneficial deal for both LivingSocial and the District. While the District has an interest in encouraging LivingSocial to remain in the city, the terms of the current deal are not strong enough to guarantee a return on the city’s investment, and it needs to be modified to better protect the city’s interests. Hiring targets need to be strengthened so that as LivingSocial grows, the number of DC employees grows as well. The current deal allows LivingSocial to claim substantial subsidies even if it does not add any new employees or hire any DC residents. LivingSocial also could claim all tax subsidies well before the end of the ten-year abatement period and then be free of any obligations to hire DC residents or even remain in the city. Moreover, the cost of the proposed subsidy is relatively high when compared with state economic development programs. Finally, the community benefits that have been offered by LivingSocial are somewhat limited and lack specificity.
In order to maximize the benefits and minimize the risks to the city, District officials should amend the LivingSocial legislation in the following ways:
- Guarantee job growth and hiring of DC residents: LivingSocial should be able to claim the full tax subsidies offered only 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. LivingSocial should lose all subsidies if the share of employees who are DC residents falls below a specified level, such as 40 percent.
- Require LivingSocial to Provide Good Wages and Benefits: LivingSocial pays its DC-based workers about $60,000 on average, and the company claims to offer competitive benefits. The subsidy deal should hold the company to maintaining these standards.
- Limit LivingSocial’s Eligibility for Other Subsidy Programs: The subsidies that LivingSocial can claim should be limited to $32.5 million. It should not be able to claim other subsidies for high-tech companies or any other general business incentives.
- Require LivingSocial to Maintain Its Product Development Headquarters in DC: LivingSocial should be required to verify that a significant portion of its District employees are engaged in IT and software development jobs. The District’s efforts to develop a technology hub would be hampered if LivingSocial shifted its product development and other tech-related division out of the District. Yet, as currently written, the legislation would enable LivingSocial to do just that.
- Require LivingSocial to Repay the Subsidy If It Fails to Meet Key Deal Provisions: As noted, LivingSocial could potentially claim all of its tax subsidies fairly quickly, which would then free it from its obligation to maintain workers in DC and hire DC residents. The deal should require LivingSocial to repay some or all of the subsidy if it falls below specified employment targets or if it leaves DC before the end of the ten-year abatement period.
- Obligate Any Potential Buyer of LivingSocial to Abide by the Legislation: Several elements of the legislation are intended to protect the District from the volatile nature of the daily deal industry. However, none of the elements address the possibility that LivingSocial could be purchased by another company. If that were to occur, the legislation should ensure that the potential buyer meet the same requirements that LivingSocial is bound by.
- Strengthen Community Benefits: LivingSocial has pledged to hire students from DC’s Summer Youth Employment Program, develop deals with businesses in DC affected by streetscape construction, train small businesses in social media, and train software developers who may work at LivingSocial or other places. But the company should commit to specific levels of assistance. Moreover, the company should work with DC-based educational institutions, including DC Public Schools, the University of the District of Columbia, or the Community College of the District of Columbia to better connect DC residents with training and skills needed to work at a company like LivingSocial.
The full paper outlines in more detail the pros and cons of the deal that currently has been negotiated with LivingSocial, as well as the improvements that would make it a better deal for the city. To read the complete report, click here.
For a summary of the report click here.