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LivingSocial Wants a Discount to Stay in D.C.

2 min readBy: Lyman Stone

Back in April 2012, the Washington Post reported that LivingSocial, the D.C.-based tech startup that connects its users to local deals and events, was being offered $32.5 million in taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. incentives over 5 years by Mayor Gray. These incentives would only kick in if LivingSocial hired more employees and established a large, concentrated corporate headquarters. At the time, LivingSocial had 956 employees in the District, and was expected to hire 1,000 more.

But as the Post now reports, these big plans came to nothing. LivingSocial has actually shrunk to about 600 employees, and has shed office space rather than acquiring new space. Luckily, D.C. taxpayers won’t be subsidizing a failing firm: the tax incentives can only be used if LivingSocial meets certain thresholds for hiring and office expansion.

However, this narrative speaks to the larger irrationalities that permeate the weird world of tax incentives. LivingSocial wants tax incentives to stay in D.C. because it’s a very expensive town, so they agitate for subsidies while other taxpayers foot the full freight of D.C.’s high tax bills. As more firms get these sorts of carve-outs, the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. gets smaller, necessitating higher rates to pull in the same amount of revenue. This, in turn, makes operating in D.C. more expensive.

This is also a classic case of tax incentives distorting economic decisions. Without incentives, LivingSocial might operate somewhere cheaper. As an online-centric firm, location can be flexible, hence why some Silicon Valley firms have recently moved to lower-cost locations like Boise, Idaho.

Tax incentives are a way that the government tries to play venture capitalist. But, as in the case of LivingSocial, it often doesn’t work. Even when it does “work,” it may actually be a net loss for the economy as the company operates in a less efficient location, and the tax incentives used will have to be financed by higher taxes on the rest of the tax base, who could have put that capital to better use.

More on the District here.