Are Tech Tax Breaks Obsolete?

A week after San Francisco ended its "Twitter tax break," Washington, D.C., ditched some incentives for tech companies.
by | May 31, 2019 AT 4:00 AM
The headquarters of Twitter in San Francisco.
Twitter received a tax cut for moving its headquarters to the Central Market Street area in San Francisco. (AP/Eric Risberg)

In the tech world, most believe that the key to success is quickly adapting to change. Some cities are applying that idea to the tax incentives they give technology companies.

This week, Washington, D.C., drastically cut a tech tax break that has been in place since 2000. Earlier this month, San Francisco -- home to some of the world's biggest tech companies -- let its eight-year-old "Twitter tax incentive" expire.

This follows Amazon’s yearlong hunt for a second headquarters, which state and local governments tried to lure with sizable tax breaks. The process has led to increased scrutiny over corporate incentives in general.

In D.C., the catalyst for the decision was an audit that revealed that the tax cuts primarily benefit a few large companies without requiring them to generate new economic activity. In other words, the tax break that costs the city $40 million a year is no longer generating the job creation that policymakers originally envisioned.

“It’s just so clear that this was not a sound use of tax dollars,” says Councilmember Brianne Nadeau.

She authored a budget amendment, which received preliminary approval this week, that pars down the so-called Qualified High Technology Companies tax credit by removing a sales tax exemption and reducing a tax credit for employee wages, among other things. The changes are projected to give the city $16 million back in revenue for the upcoming budget year. Lawmakers are earmarking it for a slew of health and human services programs.

When asked why not nix the tax break altogether, Nadeau responded, “I might.” But in the short term, she says her amendment narrows the scope of the program while not doing any immediate harm to smaller companies still relying on the tax cut.

A final vote on the budget will be in early June. It's expected to pass and receive Mayor Muriel Bowser's signature.

In San Francisco, the city is taking a more extreme approach.

It erased the 1.5 percent payroll tax for tech companies that move into certain downtown buildings in the Central Market Street area. When it was enacted in 2011, half the area’s offices and 30 percent of the retail shops were empty, according to city data.

Now, most of those buildings are filled by the likes of Twitter, Match.com, Square and Uber. The vacancy rate has dropped to 10 percent, while office-space rents have soared, boosting the city's property and transfer tax revenues.

But activists and politicians debate whether the economic development boon for the neighborhood was worth the minimum $70 million the city gave up in tax revenue.

Critics argue that Market Street, while improved, still has vacant storefronts and a rising homeless population. In addition, the neighborhood's turnaround occured at a time when tech companies were expanding up and down Silicon Valley and in San Francisco. In other words, the city paid for business activity that would have happened anyway.

D.C. and San Francisco are just two of hundreds of governments with tech tax incentives. More than 2,000 tax breaks have been given to tech companies totaling $5.3 billion since 1989, according to the subsidy tracker Good Jobs First. States and cities' tax break frenzy in bidding to become Amazon’s second headquarters location illustrates just how in-demand tech companies are to governments.

Still, the Amazon HQ2 contest resulted in a backlash over the size of the incentives that governments were willing to throw at the online retail company. The resistance in New York City led to Amazon pulling out of its second headquarters deal there. (Virginia and the D.C. suburb of Arlington, where Amazon chose to build its third headquarters, is still committed to nearly $800 million in incentives and subsidies.)

David Brunori, a research professor of public policy at the George Washington University, says D.C.’s move is the result of good timing. Not only did the Amazon hunt sour public opinion toward tax incentives, but the council wanted more money for things like affordable housing and early childhood programs.

“Usually audits like this are put on a shelf somewhere and they don’t really amount to a lot of policy change,” Brunori says. “In this case, the interests all aligned.”

 

In Other Public Finance News:

 

Tax Measure Poised for 2020 Ballot in Illinois

An income tax measure that could give Illinois as much as $3.4 billion in new annual revenue is set to go before voters next year.

The proposal cleared the state legislature this week and has been championed by Gov. J.B. Pritzker as a way to help alleviate some of the state’s chronic billion-dollar budget gaps and address part of its $133.5 billion in unfunded pension liabilities.

The bill would eliminate the state's flat income tax in favor of a progressive structure in which people who earn more than $250,000 a year would pay a higher rate. Because it amends the state’s constitution, it has to be approved by voters in the next general election, which is November 2020.

Illinois has the worst credit rating of any U.S. state. Last week, a Moody’s report named it and New Jersey as the only two states that aren’t financially prepared for the next recession.

 

New Education Funding Numbers

States are slowly regaining the education funding they lost after the Great Recession.

A total of 28 states put more money into K-12 education in 2017 than they did when the recession hit their budgets in 2008 and 2009, according to new inflation-adjusted data analyzed by the Center on Budget and Policy Priorities (CBPP). That’s up from the 26 states in 2016.

While that’s positive news, it still means that 22 states plus the District of Columbia provide less funding per student than they did a decade ago. And in seven states -- Alabama, Arizona, Florida, Georgia, Nevada, North Carolina and Oklahoma -- combined state and local school funding was at least 10 percent below pre-recession levels.

In addition, the report shows that there has been a shift in the source of education funding: It used to be primarily funded with state dollars, but local money now accounts for a bigger piece of the picture. This “can worsen funding inequities among school districts,” the report says, because local funding relies heavily on local property taxes. That means that “school districts in neighborhoods with high property values can more easily raise adequate revenue” than poorer districts.

 

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