Amazon’s HQ2 announcement serves as a reminder that state and local tax incentives to attract employers are a mug’s game. This is true whether it is Republican or Democratic elected officials offering the sweetheart deals, and it has been heartening to see socialists and libertarians joining hands on this point, as illustrated by Veronique de Rugy’s warm words for Alexandria Ocasio-Cortez here at The Corner. Whether it’s Foxconn or Amazon that’s being wooed, state and local governments ought to resist the temptation to depart from transparent, neutral rules that apply to all business enterprises.
But they won’t, and the reason should be obvious: The creation of discrete, firm-specific economic development incentives allows politicians to claim credit for economic development “wins,” whether or not the incentives actually influenced an investment decision. There is good reason to believe that Amazon, for example, would have wanted to expand its presence in New York and northern Virginia even in the absence of incentives. In that case, however, Andrew Cuomo and Ralph Northam, the governors of New York and Virginia, would have had a harder time taking ownership. And as Nathan Jensen, a leading expert on economic development incentives, has observed, public outrage in response to this sort of blatant politicking has been muted, mostly because the tradeoffs involved — for example, the amount overall taxes could be cut or public services improved if the revenue losses from incentives were applied elsewhere — are typically obscured. Though one might hope we could put an end to firm-specific economic development incentives through, say, binding federal legislation or an interstate compact (an attractive idea floated by Veronique), the barriers are formidable, as the always-wise David Schleicher recently observed on Twitter. For one, how exactly should we define what counts as a “subsidy”? And if one politicians agrees to a self-denying compact on economic development incentives, how can we be confident her successors will stick to it?
Similar dynamics apply to the politics of infrastructure. Roughly speaking, let’s say half the cost of an infrastructure project comes in the initial phase of design and construction while the rest goes to maintaining it over time. Are politicians ever celebrated for preventing bridges and roads from crumbling? No, they are celebrated for cutting ribbons on brand-new infrastructure projects, regardless of their economic soundness over time. This is one reason I find Robert Poole’s argument in Rethinking America’s Highways so appealing. It is vitally important that we depoliticize infrastructure by turning state transportation departments into public utilities, a seemingly modest change that would have enormously beneficial consequences.
But putting an end to state and local economic development incentives? I fear that will be even tougher to pull off.