Crony Capitalism

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.

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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."

NEXT: How to Legally Buy Weed In D.C. Without Actually Buying Any Weed at All

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  1. That video never gets old. Inspired genius!

    1. As the process proceeds throughout the year, I suspect that video is going to be a huge traffic generator for REASON. It’s the perfect blend of non-partisan cynicism and comedic escalation. It goes so smoothly from “perfectly plausible” to “they wouldn’t do that…would they?” that it’s hard to identify the point where they pass from realistic-but-ill-advised to hyperbole to Swiftian mockery.

      And you can put an ‘R’ or a ‘D’ in front of either guy and the point is still made that the incentives for politicians here have nothing to do with ideology, and all to do with long-term career payoff for the decision-makers. That’s a wisely skeptical analytical stance for people to use, rather than accepting the swell-sounding rationale the politicians spew. It’s not like they’re going to be transparent about their personal cost/benefit calculations.

      “I could be in Congress before Amazon bolts for greener pastures/fails to deliver economic benefits/asks for greater subsidies. I might even call for an investigation lol!” ~said no politician of any party, ever, publicly.

    2. I’m making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life.

      This is what I do… http://www.startonlinejob.com

  2. I repeat my call for a 200% federal excise tax on all incentives given by state and local governments to private entities. Symbolically, the excise tax would be 10,000% on sports facilities.

    1. Just because the states are doing stupid stuff doesn’t mean Congress is authorized to step in.

      Instead, why not a federal constitutional amendment requiring equal treatment of newly-relocated businesses vis-a-vis existing businesses? Thus no state would be able to lure in a business by offering any benefit which is not available to the businesses already in the state. Likewise no special benefits for businesses which threaten to leave the state.

      Just throwing this out there for praise, condemnation, or indifference, as the case may be.

      1. The beauty of the idea is it still leaves room for nondiscriminatory measures to improve the business climate – like not overtaxing them or regulating them to death, etc. Yes, and building roadz from the taxes business pay.

  3. (disclosure: Jeff Bezos is a supporter of Reason Foundation, the nonprofit that publishes this website)

    Suddenly, the contempt for SpaceX and Musk in these pages makes so much more sense…

    1. Just think how much he could pump into a Libertarian Presidential campaign, and didn’t.

      1. And never will.

        1. Well, yeah. He’s a businessman. He probably wants at least a plausible return on his investment.

  4. Yes it would but don’t expect Amazon to turn down the offer if given nor the taxpayer having to pay out the a** after the bribe is excepted and pay out.
    I would highly doubt that Amazon would sign a contract to stay in that taxpayer funded facility for a certain time to get the bribe either because in one location insistes on the contract there are more cities that will not insist on that feature.

    1. Unlike a sports team, a contract ‘to stay in one area’ is effectively impossible to enforce. I they want to move HQs again they just move the staff and important equipment and leave one dude ‘working’ there as a watchman and call it a day.

      Oh wait – they’re effectively impossible to enforce for sports teams also.

      So Amazon could sign all the ‘we pinky swear not to leave you for at least ‘X’ years’ clauses they wanted. When its time to go they’ll just pack up in the middle of the night and go.

      1. I see a problem:
        If the lease is as expensive as it might be after the subsidies dry up, it could be very expensive to keep it open for one worker and the janitor.

      2. That’s three times you promised.

  5. Tax incentives I have no problem with since taxation is theft but giving them tax dollars no.

  6. Slogging through a book regarding FDRs’ career in politics; IOWs, his whole life.
    His entire ‘jobs programs’ (to “end the depression!”) as POTUS had the government as the employer and none of the jobs produced anything of value (meaning nothing that would find willing buyers), and it left him dumbfounded that none of his work programs ended the depression.
    He swore he had to forget all the econ he’d learned at Harvard, and I have no idea whether that was good or bad, but he ignored the basic driver of value: When two free agents trade, each ends up with greater value than they had before the trade. It’s so by definition; if it wasn’t true, neither would do the trade.
    Similar idiocy gives us the stuff mentioned in the article: “New York Spends $28 Million to Advertise a Tax Cut That Maybe Created 76 Jobs” https://reason.com/blog/2015/04…..vrbh3:N0Yy
    The hubris and stupidity of gov’t agents is amazing to behold!

    1. Yeah, beyond the jobs “created” by the tax break are the jobs created by spending that promotional money. The $28 mill as spent by the State of New York has the advantage of being directed: which ad agency gets the money for the campaign, who do they sub-contract with, who gets hired to direct the office distributing the funds, who gets the cushy job of ‘overseeing’ the distribution of the funds…patronage and payback jobs are waaay better than “jobs created by free people in a free market”. Where’s the score in THAT?

      A lot of government spending makes more sense if viewed as jobs programs for the children of the elite-the kind of kids who take Public Administration or Poli Sci at good schools and are already well-connected at age 20. Preparation for Rule. It’s how we get politicians who have never held a private sector job.

    2. It is the result of all stimulus programs, temporary government jobs don’t create long term growth.

  7. They spent a few hundred thousand to save one steel mill job in Pittsburgh when they could have paid a hundred grand to every steelworker to retire.The mills shut down anyways. In Aliquippa, PA, they were still installing new equipment up until the shutdown to write off the losses.

    1. So why don’t they ever do just that: pay them $ to retire? They’d sure win a lot of votes that way, wouldn’t they?

  8. So,there is such a thing as a free lunch for corporations at least.

  9. “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.”

    The idea of governments competing with each other for “customers”, such as individuals and businesses, is a libertarian idea.

    I appreciate that crony capitalism is a bad thing (not libertarian at all) but I wonder where we should draw the line between governments properly competing with each other to protect our rights better and for lower costs (fewer taxes) and crony capitalism.

    Surely, governments offering to lower taxes to attract businesses and individuals isn’t especially anti-libertarian. If there’s anything especially anti-libertarian, maybe it’s the idea that everyone should always be treated the same–regardless of whatever unique leverage they can bring to a negotiation.

    Subsidies are more of a problem than tax incentives.

    1. Well I think everyone should be taxed and treated the same. Perhaps that is just because I am a small business owner who has to pay every dime while my much larger competitors get sweetheart deals. Maybe that seems anti-libertarian. But the alternative is allowing the local and state governments pick the winners and the losers in the business world. There isn’t anything libertarian about that.

      Every election cycle I hear the Democrats from the big city go on with their class warfare rhetoric. Big business should pay their fair share, yada, yada. As soon as they get into office; they fall all over them themselves giving tax breaks to big businesses. Conniving bastards. Each and every one.

      1. “Well I think everyone should be taxed and treated the same.”

        To me, these are like any employee deal or investment–it’s subject to a cost/benefit analysis.

        Some football players are worth more than others because they bring better or more skills to the table.

        Imagine a situation in which every player had to be paid the same–no matter their skills. In free markets, people are willing to pay more for things that can qualitatively differentiate themselves.

        Think of the stock market. It assigns different prices to different companies in the same industry based on individual criteria and outlook–and how those things are likely to impact future earnings. Investors are willing to pay a higher multiple for a stock with the same earnings per share if that company’s future earnings are expected to grow faster.

        When cities are looking to attract businesses, why shouldn’t they be willing to sacrifice more in the short term for a company with more growth potential than they would for a company will less growth potential?

        I draw the line at subsidies, but some cities have more to offer than others, and so do the companies they’re trying to attract. Personally, I’d like to see the corporate tax go to zero, but I don’t necessarily begrudge anybody the ability to negotiate the ability to avoid being robbed as badly as I am.

        1. To me, these are like any employee deal or investment–it’s subject to a cost/benefit analysis.

          And the post you’re commenting on helps to illustrate why the municipalities bending over backwards to entice these businesses to locate within city limits are making a bad CBA.

          The corrupting influence of these deals lies in the fact that they’re political winners – politicians love to cut ribbons, and they do so with these “tax incentives” that Democrats don’t blink at and only some Republicans have slight anxiety about. So a big, fancy facility opens up, they crow about “creating jobs,” and the budget crunches that result from tax revenue shortfalls become a separate political discussion that breaks along conventional political lines. That’s the true reason these awful deals are nonetheless endemic to our current system – just more establishment politics. It’s exactly as distorting and corrupting as paying outright subsidies.

          1. Cities can and do overpay for investments–just like everyone else.

            I think we need to find a better way to make the distinction between sound business judgement, on the one hand, and crony capitalism, on the other.

            Taxpayers thinking of themselves as shareholders and city councils thinking of these things in terms of cost/benefit analyses is not the problem.

            The problems come from bad business judgement and/or not taking the real costs into consideration.

            1. I think we need to find a better way to make the distinction between sound business judgement, on the one hand, and crony capitalism, on the other.

              Nah, we already know how make that distinction.

              Do you like the beneficiary? Then it’s just sound judgement. Do you not like ’em? Crony capitalism!

    2. Since most of these companies are choosing locations based not just on tax incentives but on availability of public amenities like roads, public education, safety services, and the like (which in turn makes it easier to attract employees and keep wage costs down), I think it’s fair to characterize “tax incentives” as “crony capitalism” in the truest sense. These companies are getting something for nothing.

      If you want to talk about states and municipalities competing on properly libertarian grounds, fine, but that’s just not what’s going on here. It’s not like one city lines up with a “socialist” package and another with a “libertarian” one. They both offer the same package of public benefits they offer everyone else, but different sets of tax preferences. Why should Amazon be entitled to the same benefits at a discount, if they’re not at least growing the tax base by more than the discount?

      1. “Why should Amazon be entitled to the same benefits at a discount, if they’re not at least growing the tax base by more than the discount?”

        If a city council overpays for an investment (I’m talking about tax incentives, here), then the voters should definitely take them to account for that.

        I don’t think it’s a blanket true statement that cities shouldn’t be free to make such “investments”–just because it’s possible they could overpay.

        I’d like to see cities behave more like corporations with a profit motive on questions of taxes, and that means they should have the freedom to take risks. I’m certainly not fundamentally opposed to cities becoming aware that they’re competing for businesses and taking it seriously.

        I wish California would do that instead of stupidly chasing us out of the state. Anybody can overpay for an investment.

        1. I don’t think it’s a blanket true statement that cities shouldn’t be free to make such “investments”–just because it’s possible they could overpay.

          Who’s talking about whether cities should be “free” to provide tax incentives? That’s not the question. The question is whether these tax incentives ever work. They don’t. So cities shouldn’t use them. That’s all.

          I’d like to see cities behave more like corporations with a profit motive on questions of taxes, and that means they should have the freedom to take risks.

          I’d like to see them act more like corporations, too, though again I think the whole point of this story is to demonstrate that cities-as-corporations would never “invest” by using tax incentives to woo employers, since that strategy doesn’t result in any net benefits to the cities that employ them. They are attractive to politicians only when you factor in their self-serving, non-economic goals.

    3. The idea of governments competing with each other for “customers”, such as individuals and businesses, is a libertarian idea.

      Really? Because what you are really asserting is that governments should then benefit from the outcomes of that. Cuz that’s the only way they could decide HOW to compete – some measure of perceived value to them. Which also then means they should be ‘competing’ not just for external ‘customers’ – but competing internally for ‘customers’ as well. eg – let’s kick the homeless over to the next village and make them their problem not ours; let’s take money from the poor and give it to the rich – and if necessary let’s reinstate servitude/slavery if that’s what the rich really want.

      I’ll tell you what’s a crappy idea – the notion that governments and markets are pretty much the same thing (or should be in some -topia). They are NOT. Classical liberals understood that. Only the plutocratic-wing of utterly corrupt R’s masquerading as ‘libertarian’ pretends not to understand that.

  10. Start working at home with Google! It’s by-far the best job I’ve had. Last Wednesday I got a brand new BMW since getting a check for $6474 this – 4 weeks past. I began this 8-months ago and immediately was bringing home at least $77 per hour. I work through this link, go to tech tab for work detail.

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  11. Georgia will win this battle.

    Luckily, Amazon will put its HQ outside the corrupt Atlanta in a suburb area like Gwinnett County. There will be plenty of political promises because there are all sorts of RINOs here who love to spend like Democrats.

  12. crony capitalism? ? or corporate socialism

  13. You’re going to see a lot of women shaking their ass and dancing on the pole?

  14. I respectfully dissent. It isn’t “like a half-soused salesman making it rain dollar bills on a pole dancer at a strip club.” It’s more like a guy bringing his wife’s purse into the bar to buy drinks for the girls. Any half-smart target will realize he would do the same with her money. Nobody is impressed. And any girl he gets isn’t likely to be much of a prize.

  15. Wow, Nick has been working out.

    1. Now, THAT is a funny comment. Thanks for the much needed humor on a gray, cloudy evening in the Bozone.

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  17. Companies promise X-number of jobs for the incentives but the states hardly ever insist on workable claw-back conditions to get their money back when jobs fail to materialize. The politicians are stumbling over each other to give taxpayer money away with no guarantees at all that they’ll get return on investment. Even for a huge spread like Amazon, they are likely to be taking many employees away from other local high-tech firms. The jobs aren’t all “added”, especially if the employer who lost the employee decides not to replace them (which often happens).

    I wish taxpayers would understand how much they are getting taken for.

  18. I can see what your saying… Raymond `s article is surprising, last week I bought a top of the range Acura from making $4608 this-past/month and-a little over, $10,000 this past month . with-out any question its the easiest work I’ve ever had . I began this five months/ago and almost straight away startad bringin in minimum $82 per-hr

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