My colleague Kate Tummarello wrote last year about the District of Columbia’s “New E-Conomy Transformation Act of 2000”, a 2001 law which set up tax benefits encouraging technological innovation. The Act granted tax benefits to “Qualified High Technology Companies” (QHTCs), certain DC-based, for-profit businesses that make most of their revenue from the sale of products and services related to information technology.
Among other incentives, the Act granted to QHTCs tax credits for wages and costs of retraining qualified disadvantaged employees, credits for wages to qualified non-“disadvantaged” employees, exemptions from DC sales and use tax and reduction of DC’s corporate franchise tax rate, and exemption for 5 years from DC’s corporate franchise tax.
In April 2012, DC Mayor Gray proposed expansions of the QHTC program, in his “Social E-Commerce Job Creation Incentive Act of 2012.” The 2012 legislation, enacted in part and still pending in part, would accomplish 3 major things:
First, the 2012 proposals would expand the reductions and 5-year exemptions from DC’s corporate franchise tax to QHTCs wherever located in the District, currently limited to certain lower income “High Technology Development Zones” (listed geographically in this DC Government publication). As David Zipper, the Mayor’s director of business development and strategy described it, “We want to make sure it’s as easy as possible for tech entrepreneurs and business people to set up their business in the city without worrying about which streets are in and which streets are out.”
Second, the proposed legislation would modify the personal income-tax rate that “angel” investors would pay. This aspect of the legislation is not included in the current framework, and early-stage investors are subject to the District’s ordinary income tax rate on investment earnings (capital gains), currently at 8.95%. The Mayor’s 2012 proposals would effectively reduce capital gains tax rates on QHTC investor income to 3%, subject to a 2-year minimum holding period.
Third, the proposed legislation offers a number of tax incentives directly to a single DC-based tech company, LivingSocial.
From a press release on the Mayor’s website:
In the past year, I’ve made several mentions about how our technology sector is playing a crucial role in the future of our business and economic diversification efforts here in the District. LivingSocial is a very large part of the reason why other tech companies of all shapes and sizes have flocked to the District. We want to see that trend continue, and it was important to us to make sure they stayed and expanded in the very place they began — the District of Columbia.
LivingSocial could see tax savings of as much as $32.5 million starting in late 2015. In return, the legislation projects that LivingSocial will create and retain 2,000 jobs, and, in order to claim all benefits included within the package, at least half of those new hires must be District residents.
In return, the Mayor expects that “LivingSocial will engage in partnership activities to hire summer youth, provide social media classes for small businesses and run programs to attract, train and retain software developers. LivingSocial will also bundle daily deal services for businesses in corridors disrupted by construction and streetscape improvements.”
Responding to the Mayor’s proposals, DC’s Fiscal Policy Institute argues that direct tax reimbursements (to specific companies, i.e. Living Social) won’t help tech companies in DC grow (other than perhaps Living Social) – at least not as much as the city’s “strong set of incentives to encourage tech companies to locate, grow, and thrive in the District,” or its “qualified talent pool and proximity to other tech companies.”
Commentator Ken Archer writes on Greater Greater Washington that taxes aren’t the reason why DC isn’t a technology hub, adding that high tech jobs in DC won’t address the area’s unemployment problems. The reason? The DC workforce isn’t relevant to high tech start-ups, according to Archer. “There is no leading computer science department in a Washington-area university, and there is no rivalry amongst local firms for the best developers as exists between Google, Facebook, and Twitter. Putting DC residents back to work requires addressing the gross mismatch between the skills of the District’s unemployed and those required by the area’s knowledge economy.”
The DCist quipped “If only the deals offered to LivingSocial’s subscriber base were this sweet.” But that may actually be the bigger problem for the sector. The Wall Street Journal recently reported gloomily about LivingSocial financial health, regardless of Mayor Gray’s efforts, while commenting even more ominously about industry leader Groupon and the fundamentals of the sector generally. The Journal’s “Heard on the Street” column reported today that for Groupon, the number of “active customers” who purchased deals within the last 12 months has flattened considerably, coupled with a sharp increase in the proportion of sales coming from products and services it acquires and then sells directly (at significant hits to margins).
Bruce Fryer, an intern with Mirsky & Company, PLLC, contributed to this post.
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