Using Tax Incentives and Giveaways To Lure Amazon's HQ2 Is Like Going To a Strip Club
Elected officials are like half-soused businessmen chasing a dream in the champagne room. But with your money.
Give Amazon and its CEO, Jeff Bezos, a lot of credit. They really know how to play local and state governments against one another. When the online behemoth announced it was taking bids for its second headquarters (HQ2), it laid out some ground rules for an operation it claims will come with $5 billion in investment and 50,000 new jobs.
It wants a metro area with more than a million people, with the actual site located within 30 miles of the population center and within 45 minutes of an international airport. It wants enough space to eventually build up to 8 million square feet of office space.
All told, the online retailer received 238 applications from desperate state and local governments ready to throw tax dollars at Amazon like a half-soused salesman making it rain dollar bills on a pole dancer at a strip club. Amazon recently narrowed down to 20 finalists. How frenzied are the bids? The city of Newark and the state government of New Jersey have said they'd put together a combined $7 billion in incentives to lure the company to one of the country's most famously failed cities. Maryland Gov. Larry Hogan, a Republican who supposedly trades in fiscal responsibility, has put his taxpayers on the hook for $5 billion to woo Amazon to Montgomery County, which is adjacent to Washington, D.C. Chicago's Rahm Emanuel has talked about gifting Amazon employees' income taxes back to the compnay and Dallas has pledged to build a high-speed-rail station at the retailer's location (exactly where a train will go to and fro is not clear).
A decision is expected by the end of the year, which gives us all more than enough time to ask a very basic question: Is any of this worth it? The short answer is no. The long answer? Also no. We know this for sports stadiums and for movie subsidies, even if our elected officials keep chasing after jocks and stars, but it's also true for less-glamorous development giveaways.
As The New York Times reports, most economists say that
tax incentives are little more than corporate giveaways that divert money from education, infrastructure and other priorities that ultimately do more for a region's economy. In the last decade, those arguments seemed to be gaining traction, as state and local officials put limits on once-generous handouts.
The worst of the subsidies are those directed only to specific companies, typically to lure them into entering a particular market. Anything that is specifically gifted to Amazon in the form of tax breaks, for instance, not only gives the online giant an advantage over local businesses who may be directly competing for customers and workers, it starves the area of money for general maintenance and improvement of roads, infrastructure, schools, and the like. Offers to upgrade and expand general infrastructure for transportation, sewage, and other services are less dubious from an economic point of view, but they are also what every government should be doing anyway. Amazingly, just the cost of advertising the availability of tax freebies costs way more than what they produce in terms of economic activity. In 2015, for instance, Matt Welch reported the New York state spent $28 million on advertising for a program that ultimately created on net 76 new jobs. That works to $368,000 per job.
In a 2007 Reason article about the American South's particularly strong tradition of offering companies incentives to relocate in Dixie, John Sugg marshaled substantial evidence that incentives don't pay off:
The Mackinac Center's research finds little or no connection between subsidies and job creation. In a study it conducted from 1998 to 2002, seven companies that received a total of $120 million in grants from the Michigan Economic Development Commission promised to create 775 jobs, a goal that was later reduced to 458. When the job creation project was complete, the companies claimed they had exceeded the revised goal by 177 jobs. But when the Michigan auditor general's office examined the companies' actual reports, it turned out the enterprises had actually lost 222 local jobs….
Imagine a local economy of $100 million in 2000. A new business relocates to the area that year and directly spends $10 million. Economic development boosters claim that for every dollar spent another three are generated indirectly, as the relocation draws more businesses. (Manufacturers of automotive parts, for example, will establish plants or distribution facilities near a new car assembly plant.) So in 2001, the economy should be pumping along at $140 million—the original $100 million plus $10 million in direct spending plus $30 million from the multiplier effect.
"It never happens," says Phil Porter, an economist at the University of South Florida. Porter has looked at several cities where the multiplier effect was promised and checked to see if it worked as predicted. His method is to take the current economy and work backward—in the case of our hypothetical city, subtracting both the $10 million spent by the enterprise and the $30 million allegedly generated by the multiplier effect. If the effect worked as promised, he'd arrive at $100 million. Instead, he invariably gets less.
Worse still, incentives are rarely the decisive factor for a company on where to locate in the first place. Sugg again:
"Companies don't rank incentives very high," says Mike LaFaive of the Mackinac Center for Public Policy, a pro-market think tank in Michigan. "But they're definitely willing to accept the gifts states give." Based on information from relocation consultants and company officials, the Mackinac Center concludes that most businesses pick a locale based on such factors as access to suppliers, transportation facilities, work force training, prevailing wages, and the availability and price of office or industrial space.
So when it comes to using tax dollars to lure businesses, state and local governments are doubly stupid. First, they're not going to get taxpayers' money back. Second, they're paying for something that's likely going to come their way (or not).
Amazon may be something of a black swan when it comes to a company setting up shop in a new location (disclosure: Jeff Bezos is a supporter of Reason Foundation, the nonprofit that publishes this website). Certainly, the number of jobs and the amount of money reportedly being dropped on the operation makes HQ2 sexier than any sports franchise or movie production. But the plain fact is that state and local incentives to bribe this or that corporation to set up shot in a particular city is simply flushing public dollars down the toilet.
Deeply Related: "Desperate Mayors Compete for Amazon HQ2"
"I have in my hand a legal document that entitles all high-ranking employees at Amazon to hunt and kill for sport human beings inside the city limits of 'Amazon' Virginia."