Economics

States Bid to Lure in Amazon

It's a serious waste of taxpayer money.

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If you've been to the movies recently and stayed until the very end of the massive list of names that follows the film, you may have noticed the startling number of tax credits and other subsidies being doled out to producers by states and cities. The new Avengers movie received somewhere around $30 million in credits from Georgia. Captain America received some $20 million to shoot in California.

Such gifts are unbecoming, considering each of these films grossed hundreds of millions in profits within the first few weeks of its release. But nothing beats the forehead-smacking stupidity of the governments currently throwing billions of dollars in corporate welfare at the richest man in the world.

When Amazon in 2017 announced plans to open a second world headquarters (HQ2), the news came with a request that potential host cities show their love. Founder Jeff Bezos described the prize as consisting of over $5 billion worth of construction, as many as 50,000 high-paying jobs, and "tens of thousands of additional jobs and tens of billions of dollars in additional investment in the surrounding community."

Some 238 cities spent taxpayer money to prepare and make their offers, many of them unbeknownst to the taxpayers themselves. In January, Amazon announced that 20 candidates were still in the running, among them Boston, D.C., Montgomery County in Maryland, Miami, Dallas, and Toronto.

The bidding cities have all gone nuts, but the craziest has to be Maryland. In March, state lawmakers approved a $6.5 billion package in subsidies on top of whatever secret offer Montgomery County originally made. That's the largest so far—of those that have been made public.

My Mercatus Center colleagues Michael Farren and Anne Philpot did the math: The bid, when added to $2 billion in infrastructure spending also being promised, amounts to 3 percent of Maryland's anticipated tax revenue over the next 10 years.

That should fill residents and businesses in the state with dread. While there's no doubt Amazon's HQ2 would add something to the economy, a broad body of economic research has shown that targeted state subsidies to private businesses—while often promoted as a "market-friendly" means to boost growth, jobs, and development—have little to no net positive effects. And as George Mason University's Christopher Coyne and Lotta Moberg wrote in a 2014 working paper, such subsidies are in fact often damaging, because they misallocate scarce public resources while encouraging rent seeking, regulatory capture, and cronyism.

Legislators are punishing local companies and their customers, since taxpayers will get fewer public services while paying more for the privilege. With $8.5 billion, Maryland could instead reduce its corporate income tax by 96 percent, according to Farren and Philpot. Or how about paying for the state's highway maintenance needs for 26 years?

Unseen costs will result from Amazon choosing to locate in one of these cities as well. The company arrived in Seattle in 1994. Thanks to strict zoning laws and increased demand, housing prices have gone through the roof. As of last July, they had risen by 13.5 percent in a single year. By comparison, New York City, known for its pricey housing market, saw an increase of just 3.9 percent. That's great for current homeowners but a bummer for lower-income buyers who may now be priced out. As Seattleites have learned, having Amazon for a neighbor is great—if you have the means to pay for it, and assuming you aren't bothered by congestion.

Sustainable economic growth requires shifting away from policies tailored to benefit any one specific firm and toward policies that create a general environment in which all can flourish. But that shift is hard to make if you know your neighboring state is pulling out all the stops to attract a given business to its hills or shores.

That's why my colleague Matthew Mitchell came up with the idea of an interstate compact—an agreement in which state governments pledge to mutually disarm in the subsidy war. Properly structured, such a compromise could provide the right incentives for states to quit obsessively spending taxpayer dollars on conspicuous but unwise development "investments." Within a state that joins the compact, all firms face the same tax burden. That means no special privileges for Amazon, so we can get back to a place where companies serve individuals instead of the other way around.

NEXT: Brickbat: Taking Their Time

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  1. You shouldn’t describe it as disarming not around the gun fetish freaks at least.

  2. I have a much easier solution to this problem than trying to negotiate interstate pacts. Just require any politician who supports a corporate welfare package to kick in a tiny fractional percentage of their own money (from their salary or personal assets) in addition to the taxpayers’ portion. Since even pigs, er, I mean pols, need to eat, we could make it a very small percentage such 0.5% or even 0.01%.

    I guarantee you these proposals would vanish instantly. It is so easy ans pleasureable to go on a wild spending spree when not even a dime is coming out of your own pocket. Apart from a love of telling other people what to do, I believe recklessly spending other people’s money is the main thing that lures human leeches to a career in politics.

    1. Tax breaks are not ‘spending other people’s money’.

      Subsidies typically are taxpayer money which is ‘spending other people’s money’.

      Georgia has a lot of people on welfare. Luring business with low taxes has been very successful for Georgia. The companies bring some employed professionals and hire Georgians who can get off welfare. The state gets the taxes back in other ways and looses some people on its welfare rolls.

      Its a win-win-win.

      1. You’re right that tax breaks are not the same as spending, although these deals often (but not always) are also tied to some spending, such as on infrastructure or even grants to defray part of the employers’ salary costs.

        But I’d also point out that it’s rare for governments to deliberately give themselves a real revenue cut, which is what they are doing if they actually hand out a tax break and don’t make up for it elsewhere. So Giant Corporation X gets a multi-million dollar break and meanwhile you and your neighbors’ income or property taxes go up so the government doesn’t have to cut spending (as if that would ever happen!)

        The federal government is super happy to run ginormous deficits, but a lot of state and local governments have balanced budget restrictions. Since they are also largely allergic to cutting any spending, ever, any reduction in taxes must be made up for elsewhere?by higher taxes on the little people, or higher fees and fines, or even forfeiture. Thieves are generally not magnanimous, you know.

        1. You’re are correct. Spending is out of control and politicians rarely tie good economies with spending cuts.

          Part of me just wants high tax states to go bankrupt fast to get this over with.

          Sarcasmic is not going to wait forever for Anarchy-land.

        2. it’s rare for governments to deliberately give themselves a real revenue cut, which is what they are doing if they actually hand out a tax break and don’t make up for it elsewhere. So Giant Corporation X gets a multi-million dollar break and meanwhile you and your neighbors’ income or property taxes go up so the government doesn’t have to cut spending

          Hardly ever quid pro quo, cause & effect. They’re separate legislative acts that may be coincident. Which is the case for tons of legisl’n that you wouldn’t complain about. You gonna oppose a good bill because at the same time, but not as part of the same bill, there’s a bad one?

      2. The real trick is that any changes in laws to draw a business in need to apply to everybody. And they shouldn’t be soooo narrowly tailored as to ONLY apply to saaay one company.

        Like if a state wanted to offer 50% lower income taxes for manufacturing companies, I’m not that opposed.

        If they pass a thing where only Toyota gets a bunch of money, that’s not cool.

        1. Companies really should not be paying taxes anyway. They just pass the costs on to customers. Maybe low taxes to divide the local road burden or whatever.

          Getting a big employer like Toyota into Georgia gets jobs, taxes from various sources, and company spending in various supporting jobs.

          1. Sure, business taxes are always passed on. However they’re not always passed on in that jurisdiction. Think Boeing jets being exported. By taxing Boeing in the USA they must raise their selling prices, which in a way means we’re getting Saudis and Chinese indirectly paying taxes. I agree they should be lower than they are now of course, but having there be a little something getting kicked in isn’t totally untenable. Keep in mind I own businesses too, so I have skin in the game.

            As to your next point, sure Toyota coming in is good. My point is that if they raise other peoples taxes, or increase deficits, to JUST bribe off Toyota that is kinda BS. That puts others at a disadvantage, and is really unfair since it’s ALL just going to a single company.

            HOWEVER if they decided to change a whole suite of taxes/regulations in such a way that Toyota became interested and decided to move there, but it might also apply to thousands of other businesses as incentives, that would be better and more fair.

            It’s easy to see a big company moving in and creating 10K jobs, but those same regulatory changes applied to everybody might bring in 20K jobs from 100 different companies. You don’t notice it like with a Fortune 500 company, but it happens too. Think Texas which has goodish laws for everybody. California is an example of the reverse.

          2. In short “bribery” via taxes/regulation changes is fine, so long as it is available to anybody. That is what will create real stimulus anyway since major companies don’t employ the majority of the population anyway. It’s an army of ants versus an elephant type thing.

  3. If you’ve been to the movies recently and stayed until the very end of the massive list of names that follows the film, you may have noticed the startling number of tax credits and other subsidies being doled out to producers by states and cities. The new Avengers movie received somewhere around $30 million in credits from Georgia.

    Lowering taxes is not the problem. Giving companies subsidies can be a problem but the state and local government consider the other revenue from the company to counter balance the upfront subsidy.

    That’s why my colleague Matthew Mitchell came up with the idea of an interstate compact?an agreement in which state governments pledge to mutually disarm in the subsidy war.

    This is stupid and goes against what the Framers wanted- States that tried different things to get the best result.

    High tax states are losing and states like Georgia are winning this ‘war’. So, high tax states are upset and want all states to act the same. I want Georgia to attract business and move to lower and lower taxes for all business and all residents. The more employment in Georgia the most people that can get off welfare and there are a lot of people on welfare.

    1. I may be wrong but I’m pretty sure you get your healthcare from the govt.

      1. I think you are mostly right, which is the reason it is so damned expensive and rising much faster than inflation.

        1. And the customer service is so poor. I went to an ENT doctor yesterday. In the 50 minutes I was there I saw the health professional for less than 10 minutes.

      2. Government does not provide healthcare to most people.

        1. Be grateful that they don’t provide it directly yet, or you might be waiting a year or more for a scan or biopsy, so that the stage 1 cancer you had is at stage 3 by the time they get to your name on the list.

          Instead they are involved just enough in healthcare to make it completely FUBAR and make sure your health insurance premium is about as expensive as renting a very nice apartment.

  4. I’ve seen at least one journalist* make the case that Amazon Prime should be a free service because of all the breaks Amazon gets.

    *it was an op-ed so he may not have been a “real” journalist

    1. I like it. While we’re at it, I wouldn’t mind a free Tesla.

      1. You couldn’t afford a free Tesla – – – – – – –

        1. Meh, I’d just sell it anyway.

      2. Tesla owners save money on funeral bills because they won’t have anything to bury after the battery fire.

  5. Within a state that joins the compact, all firms face the same tax burden. That means no special privileges for Amazon, so we can get back to a place where companies serve individuals instead of the other way around.

    “Yeah, I’ll get right on that.”

    /Gov. Cuomo

  6. Best case; Trump sets the DOJ on all the politicians who are clearly soliciting bribes. Convictions or not, it would put an end to this madness.
    The politicians get personal benefits from the companies, at least during the ‘courtship’ phase, in the forms of campaign donations, dinners, starlet companionship, and the like. Sounds like a bribe to me.
    I mean, it’s not like Trump hates Bezos or anything.

    1. Oh, yeah. I forgot the cover story for Trump. “level playing field” & “interstate commerce”

  7. As somebody who has lived in Seattle for 13 years… I honestly feel sorry for whatever city gets HQ2.

    It’s going to WRECK that place. If they don’t go to NYC or Chicago (which may be big enough to not feel it too much) it’s going to totally overwhelm wherever they setup. The big tech companies really need to start opening more offices in more major cities. There is no reason they need to cram 50K people into a single city within the span of a few years.

    The disruptions are just mind boggling. My whole neighborhood has been bulldozed and replaced with crappily built town houses and ugly apartment buildings.

    You can’t fight the future of course, but it has really made Seattle a LOT less livable city.

    1. If HQ2 is not within 25 miles of the Potomac I’ll eat my Alexa.

      1. Amazon moving near D.C. would not surprise me but my bet for HQ2 is the Southeast.

        Stable weather, low tax base, low regulation, massive available cheap land, availability of technology infrastructure, and access to customers and professional employees.

        Outside Atlanta, in ‘Metro Atlanta’, is my guess.

      2. Be sure to get consent – – – – – – – –

      3. My money was on Texas from day one, Austin being the obvious one. I was surprised that they included an “uncool” place like Dallas on the list. Bezos seems to be more practical than I was thinking he was going to be! When they announced the finalist I was surprised at some of the choices. I can still see some of the southeast cities being the final spot because of their business friendly environments like Texas.

        DC area, IMO is a horrible idea. They are looking for lower operating costs and lower taxes etc. That is NOT the area around DC. They’d be better off just setting up a little salivate office with 1,000 lobbyists there and having their HQ2 somewhere sane.

        As I mentioned above the over concentration of tech work has been a mess in general. They should ALL be spreading things around more. Use a city for something it is suited to. Des Moines could be accounting, Atlanta could be mid tier programmers, Seattle/SF can be top level projects, etc. Old Fortune 500 companies did this kind of shit because it made business sense… Sooner or later tech has to start operating like real businesses and paying attention to the EXPENSES side of things.

    2. Seattle is a crappy city for many reasons and Amazon is only part of the problem.

      Anytime you try and jam a bunch of people into a small living area who think they are too good to get jammed into a small living area, its not going to work well. Seattle never spent money on good roads while that area was blowing up with population.

      Seattle wanted to attract hipster dipshits and they got their wish.

      At least in NY City, most peons accept that they need to live like sardines if they want to live in Manhattan.

      1. See: SF. I lived there in the 90s before the dotcom boom and even then it was mostly full of Iowans who wanted to live someplace cool but didn’t actually want to live in a real city.

      2. Yeah, Seattle IS crappy for a lot of reasons. Even when I first moved here it wasn’t that bad though. It’s amazing the difference a decade can make! The progs weren’t as insane back then, the taxes were actually quite decent even, and the general quality of life was awesome.

        Now it’s a hell hole. Hence I’m getting out. It is sad though. All the best places geographically have been ruined more or less.

        I wish 1 million conservatives/libertarians would move to Washington and tilt the state politics back to being more centrist at least… You can’t even just move to a smaller city here anymore because the state level politics JUST tilted hard left never to return. Which is why my future likely lies in Idaho. But it sucks giving up the natural beauty of this area just because too many shit libs moved in and ruined it 🙁

  8. Tax breaks are not subsidies. You people are as economically illiterate as Trump.

    If a company or film goes to a different state, the state gets no tax revenue from them in that scenario either. So tell me again how tax breaks “cost the taxpayer” something.

    1. Already answered above.

      1. But your answer’s wrong.

  9. I’m surprised there’s no link to the definitive report.

  10. The compact is a recipe for all states to raise corporate taxes together. Bad idea.

  11. The compact is a recipe for all states to raise corporate taxes together. Bad idea.

  12. The compact is a recipe for all states to raise corporate taxes together. Bad idea.

  13. The compact is a recipe for all states to raise corporate taxes together. Bad idea.

  14. The compact is a recipe for all states to raise corporate taxes together. Bad idea.

  15. TL;DR but tax credits are a saving of taxpayer $, not a waste of it.

  16. See stallman.org/articles/states-union.html
    for my proposal on handling this: the states need a union!

  17. But… FEDERALISM!

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