E-commerce and cloud computing giant, Amazon.com Inc., recently made waves when it announced plans to expand its North American footprint with a second U.S.-based headquarters. Dubbed “HQ2,” the company is shopping for the ideal location, sending state and local economic development gurus into a frenzy of excitement.
As well they should be. Estimates suggest that the new campus would generate in the area of 50,000 new jobs and an anticipated investment of $5 billion. What Amazon is accomplishing with its very public Request for Proposal (“RFP”) call, however, is more than simply a good corporate actor looking for space to grow. Whether witting or not, what has resulted is a corporate incentive and subsidy arms-race.
In fact, Amazon’s request states very plainly:
“A stable and business-friendly environment and tax structure will be high-priority considerations for the project. Incentives offered by the state/province and local communities to offset the initial capital outlay and ongoing operational cost will be significant factors in the decision-making process … Outline the type of inventive (i.e., land, site preparation, tax credits/exemptions, relocation grants, utility incentives/grants, permitting, and fee reductions) and the amount. The initial costs and ongoing cost of doing business are critical decision drivers.”
According to one study, the online shipping giant has turned capitalizing on taxpayer benefits into an art form, reeling in somewhere close to $1.24 billion, not including sales tax breaks, along with other tax abatements and land arrangements. In Texas alone, this includes 20 facilities subsidized to the tune of $66 million in taxpayer support.
The city of Frisco, Texas spared little expense producing a two-minute video replete with drone footage and Mayor Jeff Cheney touting his city’s many public-private partnerships, like one with the Dallas Cowboys to build a practice facility for the planet’s most valuable sports franchise (worth $4.8 billion), and where the city is paying the lion’s share of the costs.
To date, the Texas towns publicly vying for Amazon CEO Jeff Bezos’ affections are Houston, Dallas, Austin, El Paso, and Frisco. Some city officials, however, are attempting to save face by both courting Amazon and simultaneously acknowledging the writing on the wall. San Antonio’s democrat mayor Ron Nirenberg and Bexar County Judge Nelson Wolff wrote a letter to Bezos declaring their intent to withdraw from consideration, stating:
“We’ve long been impressed by Amazon and its bold view of the future. Given this, it’s hard to imagine that a forward-thinking company like Amazon hasn’t already selected its preferred location. And, if that’s the case, then this public process is, intentionally or not, creating a bidding war among states and cities. Sure, we have a competitive toolkit of incentives, but blindly giving away the farm isn’t our style.”
While San Antonio’s chances of landing HQ2 were a long-shot to begin with, what’s astounding is how refreshingly honest officials can be about a process that attempts to pick winners at the expense of taxpayers and established businesses. San Jose Mayor Sam Liccardo got in the game when he penned a commentary for The Wall Street Journal, admitting that “my city won’t be offering incentives to Amazon. Why? Because they are a bad deal for taxpayers.”
Liccardo goes on to note that a $145 million deal between Massachusetts and General Electric will cost taxpayers more than $181,000 per job, confirming what has been demonstrably true to anyone familiar with the economic incentive gambit: they’re not worth it.
The foundation upon which the entire economic incentive house of cards rests is the fallacious concept of the “multiplier effect,” which is a claim that X dollars of public investment will yield some greater amount of Y dollars in indirect benefits for the community. Claiming that directing public funds creates more economic activity than the amount invested is not only false, it misses a critical point. In addition to growing evidence that suggests a multiplier no greater than 1.0 (and typically less), supporters of economic incentives fail to acknowledge the greater benefits of allowing taxpayers and businesses to keep their money and spend it into the economy according to their own priorities and needs. You’ll never see a comparison with that multiplier.
Moreover, the jobs promised from incentive deals often don’t pan out. In the case of film incentives, most of the benefit goes to a small group of out-of-state producers, directors, and actors while most of the “promised jobs” are low-skill positions filled by people in the state who leave other employment. In the case of Amazon, it’s easy to imagine the legions of warehouse workers that Amazon likely has concrete designs on replacing with automation in the near future.
As Mr. Liccardo points out, San Jose doesn’t seem to need large corporate subsidies these days. Home to a highly-skilled tech workforce, the California city has seen a doubling of Adobe’s world headquarters and large expansions at tech giants Google and Apple, without one cent of taxpayer money for subsidies, tax reliefs, and land discounts.
And why would one of the largest companies on the planet, with annual revenues upward of $136 billion, need incentives? The plain answer is that they don’t, but whereas you might politely decline a free lunch for any number of reasons, corporations and their officers have fiduciary duties to improve the bottom line. Incentives, as identified in a recent move by auto manufacturer Toyota, amounted to financial “icing on the cake,” ancillary to their decision to relocate to Texas.
Instead of concocting special benefits to lure specific businesses to their communities, state and local officials should instead focus on building a more skilled workforce and creating natural conditions that attract businesses, crafting policies that give them economic certainty and an even playing field. Incentives, while well-intentioned, often fail economic analyses but also create both the appearance of—and atmosphere for—impropriety and self-dealing.