Tax Incentive Review in Washington, D.C., Offers Insights, Recommendations

The District of Columbia has joined a host of states that provide policymakers with detailed analyses on the history and effectiveness of their economic development tax incentives. The District’s Office of the Chief Financial Officer published the first comprehensive assessment of these programs late last year.

Like many states, the District examines its tax incentives, other tax credits, exemptions, and deductions—collectively known as tax expenditures—on a rotating schedule. Previous studies looked at tax expenditures in policy areas such as housing, the environment, public safety, and transportation.

As in other high-quality evaluations, the report released in November includes insights on the design, administration, and impact of the tax incentives. The authors make a series of recommendations on practices to ensure that incentives are effective and accomplish what they are meant to accomplish.

The analysis showed that the city committed $57 million to economic development tax expenditures in fiscal year 2017. The largest share, $45 million, went to the Qualified High Technology Company (QHTC) program, which offers incentive packages to high-tech companies locating in the District. The assessment found the QHTC program to be poorly designed and complex to administer, and that it was difficult to assess its effectiveness.

For instance, no agency is responsible for administering the program. That makes it difficult for the city to monitor its performance and prevented evaluators from conducting a full economic analysis. They found that QHTC incentives allow businesses to claim credits on activities that do not qualify if at least 51 percent of a firm’s activity in the District was eligible. As a result, the program provides windfalls to some businesses with both qualified and nonqualified work.

Other significant areas of spending in fiscal 2017 included exemptions for supermarkets and credits to encourage insurance companies to invest in local businesses under the Certified Capital Company program (CAPCO). The city also provided targeted economic development provisions, such as tax abatements for a 20,000-seat soccer stadium and for the Advisory Board Co.

To improve the effectiveness of the city’s tax incentive programs, the assessment recommended several changes focused on the QHTC program. It said the District should:

• Improve incentive targeting to focus on firms that plan to make new investments, as opposed to those they would have made without the incentive.
• Cap the amount that can go to a single firm and the total of QHTC incentives annually.
• Implement “clawback” provisions to recoup tax dollars if a firm fails to meet program requirements.
• Improve the quality of data used for evaluation.
• Enhance transparency by disclosing incentive amounts and recipients to the public.

Policymakers in other jurisdictions have seen positive results after acting on the recommendations of similar high-quality tax incentive evaluations. Florida, Indiana, Maine, Maryland, Oklahoma, and Washington have used such analyses to invest with greater confidence in programs that are working well—and to reform or end those that are not.

The District’s evaluation contains a clear history of the city’s active economic development incentives and concise findings and recommendations on how to make these incentives work better for residents. Armed with this information, policymakers can make informed, evidenced-based decisions.

Josh Goodman is a senior officer and John Hamman is a senior associate with The Pew Charitable Trusts’ state fiscal health initiative.