After a long process, Amazon finally announced that it will locate its new headquarters in New York and Virginia. Following the announcement, Representative-elect Alexandria Ocasio-Cortez tweeted that “Amazon is a billion-dollar company. The idea that it will receive hundreds of millions of dollars in tax breaks at a time when our subway is crumbling and our communities need MORE investment, not less, is extremely concerning to residents here.”
As a result of her tweet, conservative commentators all over twitter and on shows like Fox Business’s Varney & Co. are making fun of her. They argue that her reaction is yet more evidence that she doesn’t get economics and that doesn’t want New Yorkers and Virginians to get the thousands of jobs that will be created there thanks to the new headquarters.
I can’t believe I’m saying this, but Ocasio-Cortez is mostly correct on this matter, and her conservative critics are wrong. Handouts like this to Amazon and other prominent companies are appalling in their cronyism, pure and simple. I agree that she doesn’t understand economics and that her socialist ideal is a recipe for fiscal and economic disaster. But her conservative critics reveal their own economic misunderstanding when they support targeted tax breaks as a means of creating jobs.
First, let’s be honest. Tax incentives aren’t anywhere near the top of the factors that a company considers when deciding where to locate. In all likelihood, Amazon first surveyed all available locations searching for factors that really matter most — factors such as the presence of a skilled workforce, adequate infrastructure and transportation options (airports and a vast subway network), as well as synergies with other companies for the purpose of enhancing production supply chains and access to professional services. Once, it had a list of places that fit its needs, it might have taken under consideration the tax incentives.
Indeed, the literature is clear: Tax incentives aren’t what sway companies to move. As my colleagues Michael Farren and Anne Philpot write in a new report:
Government finance expert Natalie Cohen interviewed site selection consultants and economic development experts in research conducted for the Brookings Institution, finding that [“]While corporate decision-makers’ top location concern is the availability of education and training, policymakers and lay people often think that tax incentives matter most. Tax incentives and tax packages are uniformly viewed as low priorities by location consultants, relatively unimportant to the basic decision.”
Tax incentives are generally considered only after the primary location analysis is conducted, and at that point the decision is between different municipalities in the same region.
Recent research by University of Texas professor Nathan Jensen found that fewer than 15 percent of companies receiving subsidies from the Texas Chapter 313 economic development program had their location decision swayed by the program’s handouts. A majority of the companies in the 86 case studies Jensen conducted were likely to locate in Texas regardless of subsidies—for example, oil and chemical companies that needed access to region-specific natural resources and ports did not need subsidies to sway their decision. Jensen concludes that “many of the companies involved were coming to Texas even before being authorized to receive the incentives.
This explains why New York is already the home of many tech companies. The Wall Street Journal reports:
The Wall Street Journal reported last week that the Alphabet Inc. unit will add office space for more than 12,000 new workers, an amount nearly double the search giant’s current staffing in the city, people familiar with the matter said. On Monday night at the Journal’s D.Live tech conference, Google financial chief Ruth Porat confirmed the company plans to double its New York City staff of 7,000 over a decade.
The same is true about Crystal City, Va.:
Crystal City, a 1960s-era office and residential development close to the Pentagon, has seen its fortunes wane over the past decade or so, as major tenants, including Defense Department and private-sector tenants, have pulled up stakes.
Its sheer size and proximity to Washington, Reagan National Airport, metro stops and other transportation, made it an attractive prospect for Amazon’s ambitious second-headquarters plan, according to people who have been involved in the discussions. Adding to its appeal, it is also largely in the hands of a single developer.
In other words, Amazon would have likely made the same decision with or without subsidies. It also explains why no amount of subsidies can drag a company to a place that isn’t economically vibrant or that is in the middle of nowhere. But face it: Amazon was never going to move to, say, Opelika, Ala., or Marfa, Texas, no matter how gargantuan the promised tax breaks there.
More importantly, while there’s no doubt that Amazon’s HQ2 will add something, including jobs, to the economy, it could have not only have added these jobs and economic growth from the economy without the subsidies, but the payoff to the local economy would have likely been larger absent the handout. There is a broad body of economic research that shows 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. George Mason University’s Christopher Coyne and Lotta Moberg wrote a review of the research and concluded that such subsidies are in fact often damaging because they misallocate scarce public resources while encouraging rent seeking, regulatory capture, and cronyism.
Farren and Philpot have an entire section reviewing the literature and the distortions such incentives create. Here is one small tidbit:
This parallels research by University of Maryland professor Dennis Coates, who found negligible and even negative effects of professional sports stadium construction—which is nearly always subsidized by public funding—on local economic outcomes, like per capita personal wages, wages per job, and total wage and salary disbursements.
In addition, blatant cronyism is unfair to local companies who face heavier tax burdens than the favored companies and, in addition, a future tax burden that is likely heavier as a result. I live in Arlington, and judging by the number of bonds on the ballot (i.e., requests to add to the county’s debt), I take it that Arlington could have used the cash it is throwing at Jeff Bezos. Unfortunately for us, our taxes will be raised to pay for all that extra debt they just approved.
It is worth asking what are the tradeoffs politicians are willing to impose on taxpayers in order to shower Amazon with privilege. Farren and Philpot look at this matter too. They have a great table on page 13 of their report that shows that New York, with the money that’s now going to Amazon, could have paid for three years of road maintenance or have reduced the corporate income tax rates by 5.42 percent, which would benefit ordinary companies without political favor. Virginia could have reduced the corporate income tax by 45.16 percent and maintained the roads for four years with that money. Congrats Amazon and sorry everyone else!
These tax breaks are wrong. Dead wrong. And your repeating until you are red in the face that they are great because a company will create jobs will not make these breaks ethically or economically acceptable.
If we want sustainable economic growth, we must shift away from policies tailored to benefit specific firms and toward policies that improve the general environment so all who can compete successfully for consumers’ dollars can flourish. But such a 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 Matt Mitchell came up with the idea of an interstate compact — an agreement in which state governments pledge to mutually disarm in the subsidy war. I wrote about it a few months ago:
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.
Until Mitchell’s idea sees the light of day, the swamp continues to seethe, and the unhealthy marriage between government officials and large firms flourishes.
Here is a list of all of the research on this issue by Mercatus Center scholars.