Offering tax incentives to lure businesses into the District has gotten a lot of attention recently. Late in 2009, DC engaged in a high-profile effort to get the Costar Group to move from Bethesda to DC, and the city is now competing with Virginia and Maryland to attract Northrop Grumman as they move their headquarters to the Washington area.
This is a good time to review the literature on how well tax incentives work to affect business location decisions ‘ and to take a hard look at DC’s “NET 2000″ tax incentives that were used to lure CoStar and are being marketed to Northrop Grumman. The fact is that there is a lot of research saying that tax incentives are not particularly effective, and the little evidence we have on NET 2000 is not encouraging.
DC provided $16 million in tax breaks to 89 companies under NET 2000 in 2007. The program offers qualifying high-tech businesses 5 years with no corporate income taxes and a reduced corporate income tax rate after that. It also includes tax credits tied to wages paid and to employees who move to the District, as well as reduced capital gains taxes, and sales tax exemptions on products they sell.
Just because companies are claiming DC’s tax incentives, though, doesn’t mean they are working, because we don’t know if those businesses would have come here anyway. After 10 years of operation, NET 2000 has a record that can be assessed, but the District’s leaders haven’t done that.
A 2008 report from the DC Fiscal Policy Institute suggested that NET 2000 is not doing much. It found that high-tech employment in DC grew more slowly than overall employment in the city between 2000 and 2006. It also found that high-tech employment grew more slowly in DC than in the rest of the region. These don’t prove that NET 2000 is a flop, but they certainly don’t point to success.
Why might this be the case? There is a good amount of research showing that tax incentives generally don’t play a large role in business location decisions because other factors matter a lot more ‘ like the quality and costs of labor, the quality of public services, and the proximity to business markets. A recent report from Good Jobs First concludes that tax incentives are “crude tools” that “exert a very small marginal influence on corporate investment decisions.”
It makes sense that companies locate in markets that work for them, and that financial incentives alone wouldn’t lure a business to an otherwise unappealing location. In DC’s case, the NET 2000 tax incentives average less than $200,000 per company. It’s a big loss of revenue for the city, but not necessarily a big change in any one company’s bottom line.
Whether or not DC successfully competes for Northrop Grumman or not, the Mayor and Council should call for a review of how effective NET 2000 has been in bringing businesses that we otherwise wouldn’t expect to have. It is worth investigating to see if DC is getting its money’s worth.
