Photo by asmythie on Flickr.

The $32.5 million LivingSocial tax package is supposed to grow DC’s technology sector. However, its weak hiring requirements mean that the deal is not structured to help the District create a tech hub.

The requirements are so weak that LivingSocial would get most of the package without hiring DC residents, or even retaining and adding technology-related jobs. Washington Business Journal said this deal has “loose hiring requirements.”

DC is already ranked 51st among states in attaching hiring requirements to its subsidies. The DC Council should not approve this LivingSocial deal until it includes reasonable commitments to hire DC residents and create technology-related jobs.

How the current deal works

The $32.5 million tax deal being offered to LivingSocial would come from a $17.5 million income tax credit and a $15 million property tax credit. Both tax credits would be available beginning in 2016.

The income tax credit requires that DC residents make up 50% of any new employees hired the year previous to the credit, beginning in 2014, even if they are just replacing employees who turn over. If DC residents make up less than 40% of new employees, they still get a $9 million credit.

LivingSocial also would receive a $10,000 property tax credit for each new employee hired from 2010-2015. While this sounds like a requirement to hire 1,500 people to get the full $15 million credit, LivingSocial has already hired 1,000 employees since 2010, and is expected to hire at least another 100 through 2015 through turnover.

In other words, LivingSocial is guaranteed a large part of the property tax credit, even if they never hired another employee from today on.

The DC Council should make the following changes to this legislation to ensure that we are spending $32.5 million to build DC’s tech sector, not just to retain a company.

Require hiring of DC residents in order to receive any subsidy

In the current deal, LivingSocial gets the full subsidy if 50% of its future hires are DC residents. It will collect most of the subsidy if it hires 40% District citizens.

It LivingSocial hires less than 40%, even 0%, of its future employees from DC, it still gets $18 million.

There should be a floor—say 35% of new employees—of DC residents hired below which no subsidy is given. Alternatively, LivingSocial could receive credits that scale based on the percent of new employees that live in DC.

Tie credits to new positions, not new employees

My company receives training subsidies from the states of Oklahoma and South Carolina that are tied to new headcount. That makes a lot of sense. DC should do the same thing.

Currently, the deal allows LivingSocial to count replacement employees toward its hiring count. This means that the company could actually shrink, and as long as 50% of the employees they hire to replace people who quit or are fired are DC residents, they will receive $28 million.

It makes no sense to give a company more subsidy the higher their turnover is. Turnover should not be rewarded; added positions should. DC residents currently comprise a little over half of LivingSocial’s DC workforce. If their turnover is high, they could very easily receive most of the tax credit without employing any more DC citizens than they currently do.

There actually seems to be a lot of confusion on this point. Councilmember Michael Brown, whose chairs the Economic Development Committee, tweeted last week that the deal requires LivingSocial “to hire and retain a certain number of DC residents.” After being corrected, he removed the tweet.

The mayor’s description of the deal appears to be contributing to the confusion.

The proposed legislative package projects that LivingSocial will create and retain 2,000 jobs at the company. In order to claim all benefits included within the package, at least 50 percent of LivingSocial’s new hires will have to be District residents. LivingSocial is estimated to generate $166 million in tax revenue to the District over the next 10 years.

The mayor estimates LivingSocial will pay $166 million in tax revenue, but that estimate appears to assume the company will create 2,000 jobs. But the deal doesn’t require the company to grow at all. District officials have declined to provide the formula they used to reach this estimate.

Require product development to remain in DC, and any potential buyer to abide by commitments

After seeing our previous article, hearing from our readers, and sitting down with me, LivingSocial agreed to “codify our intent to maintain DC as our technology center.” This is excellent news, and a sign that LivingSocial is committed to working with residents to make this a win-win deal.

This commitment needs to make it into the legislation, though. And any future buyer of LivingSocial needs to be bound by the same commitments during the tax abatement period (through 2025).

Otherwise, a company like Groupon could acquire LivingSocial in 2017, right after DC has given them significant tax credits, and move all product development jobs to Chicago where Groupon is based.

The lessons we have learned from previous subsidies is that they work when they are targeted to yield specific knock-on benefits, like development of a depressed part of town or a particular sector. The LivingSocial subsidy is an exciting opportunity to grow our tech sector, but the council has to ensure it’s actually targeted to yield that benefit.

Ken Archer is CTO of a software firm in Tysons Corner. He commutes to Tysons by bus from his home in Georgetown, where he lives with his wife and son.  Ken completed a Masters degree in Philosophy from The Catholic University of America.