The District has spent more than $184 million on tax incentives that are supposed to encourage high-tech employment in the city. But those incentives don’t appear to be paying off, according to a recent report from D.C.’s Office of the Chief Financial Officer.

The incentives have been in effect for 17 years, part of a law meant to create high-paying tech jobs in D.C. It offers tax exemptions and other benefits to “qualified high-tech companies,” or QHTCs, that do business in the city. But the audit finds that the law is poorly targeted and lacks oversight — no particular agency is tasked with overseeing the incentives — and it mostly benefits a few large companies without requiring them to generate new economic activity.

Tax incentives for tech companies sparked controversy during Amazon’s search for a second headquarters, as the mega-company sought generous perks from governments eager to bring high-paying jobs to their jurisdictions.

While the report doesn’t explore the incentives D.C. officials offered Amazon to come here, it raises questions that cropped up in the heated regional debate about tax incentives for Amazon HQ2 — namely, are corporate tax incentives really generating the kinds of returns lawmakers and economic development officials say they do?

A Poorly Targeted Program

The main problem with D.C.’s tax incentives for tech employers, the audit shows, is that most of its benefits are going to a few large companies, and no firms that receive the incentives have to prove they’ve created new jobs or generated a lot of spending in order to get them.

“Any company that already qualified [for the incentives] at the time the law was passed was able to take advantage of the incentives, and companies are not required to make new investments in the District to claim most of the benefits that are available,” says Lori Metcalf, a fiscal analyst with the District’s Office of Revenue Analysis.

That means D.C. may be giving breaks to companies that would have done business here anyway, and there’s no way to know whether the incentives are driving new growth.

The audit also shows many large companies that receive benefits aren’t based in the city. A number of QHTCs are headquartered in Virginia, for example, but that doesn’t disqualify them from receiving D.C. incentives. Between 2007 and 2015, the report shows, most QHTC incentives went to large companies based in the suburbs.

“One explanation for this geographic distribution of QHTC credits could be that some larger firms headquartered in Virginia or Maryland are contracted by federal agencies for technology-related services and their employees are assigned to report to work in the federal agencies located in D.C., allowing the companies to claim QHTC status,” the audit says.

What Does ‘High-Tech’ Mean, Anyway?

What was “high-tech” in 2000 isn’t necessarily “high-tech” today.

“The QHTC legislation was written nearly 20 years ago, when technology buzzwords included ‘mainframes’ and ‘servers’ and the internet was just becoming a household term,” the audit says.

Consequently, D.C.’s tech incentives may be going to companies that stretch the modern definition of “high-tech.” Firms’ names aren’t disclosed in the audit because their tax returns are confidential, but the Office of Revenue Analysis shows that many QHTCs report consulting as a primary business activity. To qualify for QHTC incentives, a company only has to prove it has two or more employees in the city, and that 51 percent or more of its gross revenues in D.C. come from “technology-related goods and services,” leaving ample room for interpretation.

“With the ever-present role of technology in nearly all aspects of our lives, it has become difficult to differentiate what is a technology business versus any other industry that incorporates technology in its structure,” the audit says.

Problems With Transparency

Transparency issues are common to all tax incentives programs, and D.C.’s are no exception. Tax breaks don’t appear as line items on a budget, and they’re not subject to annual legislative review. Consequently, it’s easy to lose sight of their true costs.

The QHTC program cost the District at least $184 million in foregone tax revenue between 2000 and 2015, the audit says. In 2016 and 2017, the total approached $35 million per year. (Those are all conservative estimates, the report adds, because a lack of data prevents a full accounting.) But the last time residents and lawmakers had a chance to weigh in on the tax benefits was six years ago, when the D.C. Council last amended the program.

“Tax expenditures remain in place unless policymakers act to modify or repeal them,” the audit says. “In this respect, they are like entitlement programs.”

Possible Solutions

The shortcomings in D.C.’s QHTC incentives program aren’t unique. Lori Metcalf with the Office of Revenue Analysis says most city tax incentives she’s reviewed aren’t demonstrably effective. But she adds that many incentives programs lack the necessary data to draw firm conclusions about their results.

That’s the main reason the D.C. Council passed a law in 2014 that requires the Office of the Chief Financial Officer — which oversees the Office of Revenue Analysis — to review local tax incentives on a five-year cycle. (This latest report is pursuant to that law.)

The Pew Charitable Trusts, which reviews state tax incentives policies, says D.C. is getting better at analyzing its tax incentives. Many states have no oversight process at all. And while almost every local jurisdiction offers some kind of incentive for tech employers, D.C. is the only one that requires regular evaluations of those perks, according to a policy brief by the Center for Washington Area Studies at George Washington University.

Nevertheless, D.C.’s high-tech incentives program needs an overhaul, Metcalf says.

The program has to have better-targeted incentives that require firms to engage in new economic activity, so the city isn’t just paying for investments that would have been made anyway, the analyst says. Capping the total amount of benefits individual companies can receive is also crucial, as is implementing clawback provisions that force companies to return money to the city if they leave soon after receiving benefits.

“We also recommend continued monitoring and oversight, development for a verifiable standard of eligibility for QHTCs — and also increased transparency,” Metcalf says.

Tax breaks for companies — especially large ones — have critics on both ends of the political spectrum. When Arlington County was in the process of courting Amazon, progressive and conservative activists alike urged the county against giving the company tax breaks, calling incentives a form of corporate welfare. D.C. officials also took hits for keeping the city’s Amazon offer under wraps. (Details on what D.C., Virginia and Arlington offered the company have since been made public. Maryland’s Amazon offer had to go through the state’s legislature, so it was made public in April.)

But despite criticism of incentives, the District probably won’t stop offering perks to employers anytime soon. Governments want to attract high-paying jobs, often for the political cachet that comes with them, if not the added revenue. And tax-based incentives also have special political appeal: It’s easy to mask their true cost when they’re stashed in the tax code.

“The form by which a government gives money to a firm has implications for the visibility, and therefore the political viability, of the decision,” says the Center for Washington Area Studies policy brief. “Loans or grants are direct expenditures by government, must be authorized, and are visible in budget documents. These expenditures are at least plausibly transparent. Expenditures via the tax code … are more opaque.”

Asked to comment on the audit’s findings, a spokesperson for the District’s Office of the Deputy Mayor for Planning and Economic Development (DMPED), which oversees most of the city’s economic development incentives, calls the QHTC incentive program a “vital tool” in attracting, retaining and growing D.C.’s tech industry.

“The Bowser Administration is currently reviewing the OCFO’s findings and recommendations, and look [sic] forward to collaborating on how to ensure the program continues to support job creation and diversifying our economy,” the spokesperson said in a statement.