Nov 13, 2018

With Amazon’s HQ2 Competition, When You Win, You Lose

Policymakers Could Make the Amazon HQ2 Rat Race a Thing of the Past
Andrea O'Sullivan Feature Writer , Christian McGuire Staff writer

American cities’ competitive courtship of Amazon to woo its next headquarters to their respective municipalities is all but done. The many suitors which pursued the tech giant’s HQ2 offices promised expensive gifts, like $7 billion in targeted tax incentives, $8.5 billion in subsidies and infrastructure development, and prime real estate. But these dowries were apparently not enough, and many “List of 20” finalists have been spurned by the object of their affections.

The Wall Street Journal now reports that Amazon made a late decision to split HQ2 between two cities, New York City and northern Virginia, with half the number of jobs and investments divvied between them. Amazon representatives say this will allow the company to recruit the best tech talent, and also ease congestion and cost of living concerns for current residents. Of course, the fact that the company could get access to two generous incentive packages probably doesn’t hurt, either.

We actually don’t know the specific details of many cities’ HQ2 bids. Sensational stories of mid-range cities climbing over each other to offer more and more extreme tax incentives came to embarrass the company. Amazon eventually required contenders to sign non-disclosure agreements to limit the unseemly optics. But given the state of play, it is a safe assumption that finalist cities have sufficiently sweetened up their deals to keep up with the stiff competition.

The assets that Amazon brings to the table—$5 billion in investment and 50,000 high-paying jobs—do seem irresistible at first glance. So irresistible that some 238 cities dedicated taxpayer money to attracting Amazon. Even if they were passed over, municipalities often spent hundreds of thousands of taxpayer dollars just to put together a bid: pure waste. An Amazon headquarters must bring unmitigated benefits that justify taxpayer-funded gifts to what is already one of the world’s richest companies, one would assume. One would assume.

The reality, which Veronique de Rugy points out in a column at Reason, is that not everyone should be thrilled by a tax-incentivized economic union. Housing HQ2 will be hard on many residents, who could watch as their own taxes fuel a rise in their cost of living.

It will also drain resources from Amazon’s competitors, such as local retail stores, to help fund the tech giant’s move. Local policymakers are therefore in danger of becoming reverse Robin Hoods—taking from small businesses and renters to give to an overwhelmingly successful corporation.

But more fundamentally, targeted incentives like those offered to Amazon rarely create more economic growth. Mercatus scholar Matt Mitchell, for example, ran a regression analysis to examine the relationship between corporate subsidies and economic growth. He found that there is no “statistically significant relationship between per capita subsidies and compound economic growth from 2009 to 2014.” The benefits and the costs, it seems, are roughly balanced.

Tax subsidies don’t beat convenient locations for Amazon, either. If Amazon chose a location that afforded it the opportunity to add even one percent growth per year, through access to an educated labor force, streamlined supply chains, or cooperation with other companies, the company would bring in $17 billion in profit over twenty years. While subsidies might sweeten the pot, market factors are more important for Amazon’s continued growth than government deals.

If Amazon doesn’t need them, they don’t grow the economy, and many local residents are disadvantaged by them, why offer corporate subsidies?

For better or worse, this kind of national corporate courtship is the standard. Municipalities engage in a subsidized race to the bottom, and corporations come to expect extreme incentives. There may be a positive feedback loop. The precedent that Amazon sets today may be the thing to beat when the next corporate giant goes on the prowl for a new pad.

There is a better path forward. Specifically, state and local governments could choose to stop this manipulative madness and recognize that it is in everyone’s interest to compete on pro-social margins. One potential tool is an interstate compact, where governments would agree to cease offering targeted tax incentives and subsidies to attract specific firms.

First, an interstate compact could prevent policymakers from engaging in short-term brinksmanship that leads to long-term problems for their residents. Even if this agreement did not have the force of law, acting as a mere Schelling point for expectations could do a lot to cut down on the temptation to “cheat.”

Next, such an arrangement could push policymakers to focus on truly pro-growth factors that would make their city an attractive draw. After all, there is much good that policymakers could do with the $7 billion in tax incentives that they may have been prepared to offer Amazon.

For example, cities could improve public services or lower tax rates across the board with those funds. These general improvements would not only make a city more attractive to a large corporation, they would be good for all residents. Cities could even invest in human capital. Mercatus research fellow Michael Farren has pointed out that the tax subsidies that Chicago offered to Amazon could have funded the education of 145,000 students that year.

Finally, and perhaps most importantly, an interstate compact would do away with the temptation to flirt with the self-harming scourge of corporate privilege. Amazon may be the hot young thing today, but we don’t know who America’s next sweetheart will be. It could very well be a startup in one of the cities currently angling for HQ2, and an unfair policy environment could quietly snuff tomorrow’s big thing out.

It is too late to prevent the wasteful and destructive pageantry of the HQ2 selection affair. But some good can be gleaned from it as a final straw to push for reform. Government leaders surely feel bamboozled to be sent home empty-handed after such an expensive chase. Taxpayers will be even less pleased to have footed the losing bill.

Smart policymakers can channel any discontent to push for a multi-state reform that will make this kind of national heartbreak a thing of the past. An interstate compact that bans targeted incentives would encourage a general pro-growth policy environment. Let’s stop letting ourselves get jilted and adopt policies that everyone will love.

Read more: Amazon HQ2 Is the Only Competition Where the Losers Are Winners, by Michael Farren and Anne Philpot

Photo credit: Robert Scoble/Flickr

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