Using tax incentives to attract new businesses is a popular game in DC. Political leaders so firmly believe that corporate subsidies are critical to the city's economic development that they offer them without much thought. Consider this: the DC Council has proposed expanding tax breaks intended to encourage high-tech businesses to move here. But the biggest beneficiaries of the new tax cuts? Companies that are already in the District! So much for an incentive.

This is but one of a string of questionable business subsidy ideas that have surfaced recently, including a possible $20 million city subsidy to lure Nordstrom to Georgetown. Yet no one ever really analyzes whether these tax breaks really make a difference. This is important, since there's lots of research suggesting that businesses actually don’t make location decisions based on tax incentives. And every dollar in ineffective tax subsidies is a dollar that cannot be used to fix up schools or parks or roads. I bet we’d all be surprised if someone tallied up just how much revenue the city gives up on business tax breaks. Here are some examples.

If You’re Not Sure a Tax Incentive Works, Just Make it Bigger
DC currently offers five-year property and income tax abatements to high-tech businesses that locate here. A bill introduced this year – the "New E-Conomy Transformation Act" – would increase those tax breaks to 10 years. Did anyone evaluate whether the current law is working well? No. Is there any analysis to show that extending the breaks to 10 years will attract more businesses? Again, no.

Most outrageous is the fact that the bill would give the expanded tax benefits to high-tech businesses that moved here as long ago as 2000. If the companies are already here, the new bill clearly is not an incentive to relocate to DC. It’s just a waste of taxpayer dollars.

Does Every New Development Project Deserve a Tax Break?
There’s a big project underway near the New York Avenue Metro station called Constitution Square. It will bring offices, housing, a grocery store and other retail development to the up-and-coming NoMa area. A bill before the DC Council would give them about $10 million in tax breaks. Why? The argument is that the grocery store needs underground parking, which the developer wouldn’t have to build if they were in the suburbs. But they wouldn’t have access to DC shoppers in the suburbs, either.

It’s not clear why this project deserves special tax breaks that others do not get. In fact, DC already gives generous tax benefits to new grocery stores, and this one will likely qualify. While underground parking is an added cost, no one has said the project cannot be viable without getting even more tax breaks.

Should We Really Pay Businesses to Come Here?
The District is in the process of luring Radio One back to a new development near Howard University with an offer of more than $20 million in subsidies. The company says it needs an incentive because it doesn’t want to pay any more rent in DC than it does currently in Lanham, in Prince George’s County. Well, who would?

The District would go bankrupt if it tried to subsidize every company that could get a cheaper lease in the suburbs. Beyond the nostalgic value, what does bringing Radio One back do for the city's economy? It can't be worth $20 million, especially when another business would probably move in to the space without any subsidy.

Doing Subsidies Right
This is not to say that businesses subsidies never make sense. For example, the most profitable thing to build in downtown DC is office space. Yet the city’s leaders have long hoped for more retail, as well as hotels to serve the convention center. In those cases, a subsidy might be needed to encourage a developer to build something other than an office building. Some form of assistance also may be needed to encourage development in disadvantaged areas when private investors are wary.

Even in these cases, there are things the city should do to use economic development subsidies appropriately:

Answer the Question: Is the subsidy really needed? The Chief Financial Officer can review deals to determine whether a project needs city financial assistance to be viable – and if so, just how much is needed. Unfortunately, the CFO is not asked routinely to do this kind of financial review. The District also should evaluate standing tax incentive programs, such as the high-tech incentives, to see if they work.

Acknowledge the cost. Too often, tax subsidies are treated as if they have no budget effect, usually based on claims that the project will generate new tax revenues. But business subsidies should be budgeted, because it's fiscally responsible and would help policymakers understand that the choice to support a tax incentive means they may not be able to fund something else they also support.

Get something in return. Like other communities, the District should expect developers to provide some amenity in return for a subsidy. This could include hiring DC residents, perhaps in conjunction with city-provided training, or building some affordable housing.

In the end, business tax subsidies create unfair advantages for a favored few, and they bleed tax revenues without always a clear benefit. The city's economic resurgence raises questions about the continued need for heavy business tax subsidies. I hope we can start to wean ourselves from this reliance. Until then, we should at least make some better choices about when tax incentives are needed, such as targeting development that will bring good jobs to underserved neighborhoods.