What steps should the District take to encourage the growth of a high-tech sector in the city? What incentives are most effective to encourage these types of businesses to incubate and relocate here? That was the subject of a DC Council Committee on Finance and Revenue hearing this morning, as members considered Bill 19-747, the “Technology Sector Enhancement Act of 2012.” DCFPI testified at the hearing, and here are some of policy analyst Kwame Boadi’s thoughts on the legislation:
For over a decade, the District has made a concerted effort to increase its attractiveness to technology companies in the hopes of developing a high-tech sector. To that end, the Council passed the “New E-Conomy Transformation Act of 2000,” which established a wide range of lucrative tax incentives commonly referred to as the NET 2000 program. Among the incentives created by NET 2000 for Qualified High Technology Companies are exemptions from sales and property taxes and deductions to corporate income tax earned through relocation and wage credits.
The bill before the committee would alter the eligibility criteria for these NET 2000 benefits in three ways. First, the bill enables a QHTC to reside anywhere in the city, as opposed to current law which restricts eligibility to “high technology development zones.” Second, the bill starts the five-year clock for when a company can claim a corporate tax break once the company has reached its first year of profitability, as opposed to current law which starts the clock once the company starts operating. Third, the bill would cap the amount of the corporate income tax break that a company can receive at $15 million, as opposed to current law, which has no cap.
Our issue with the bill under consideration is not with its specific proposals. In many ways, the proposals seem reasonable, if the incentives in the NET 2000 are actually effective. But the effort to amend the NET 2000 program is putting the cart before the horse. It makes little sense to begin considering ways to amend a program when there has been no detailed analysis to date on how well the original program is working in the first place. To date, no analysis has been done on the impacts of this very generous set of tax subsidies. A 2008 DCFPI analysis suggested that the incentives were having little effect.
The Office of the Chief Financial Officer periodically releases figures indicating the total number of companies who claim the credit each year and the overall amount that the District spends each year on these tax credits. However, because the CFO is bound by taxpayer confidentiality, neither the public nor other District agencies know which companies are claiming this credit, where they are located, how many District residents are employed by these companies, or the total amount of subsidy that each company is receiving.
This needs to be changed. If a company is able to benefit from public funds, the public has every right to know who its money is going to and how much they are getting. The public should know if any of these companies are locating in areas of the city that have struggled to develop. The public should know if these companies are actually hiring DC residents. Without this information, it is impossible to determine whether or not NET 2000 is effectively achieving the District’s goals. And without this information, it is impossible to adequately assess whether the NET 2000 benefits should be modified and expanded, as this bill would do, or eliminated entirely due to lack of impact. We can all agree that it does not make sense to spend more of the city’s limited resources on something that may not be working.
DCFPI recommends two changes before any proposal to expand NET 2000 benefits is considered. First, the legislation should be modified to require any company participating in the program to disclose critical information, such as the aggregate amount if subsidy received and statistics on hiring of DC residents. Second, the District should contract with an independent research entity to assess the impact of the existing tax subsidies on the growth of high-tech firms in the city. This work could be conducted as part of the research that will be done for the upcoming Tax Revision Commission. Before we amend the NET 2000 program, we need to thoroughly examine its costs and benefits.
