January 26, 2018

Winning Amazon’s HQ2 Will Require More Than Just Tax Incentives

Michael Farren

Research Fellow, Study of American Capitalism

Amazon CEO Jeff Bezos must have been smiling recently when his company revealed the 20 cities in contention for its corporate headquarters expansion, “HQ2.” Miami was among the areas selected.

The announcement reignited a media frenzy over who will be selected for a $5 billion facility and 50,000 new jobs.

Local leaders are falling over themselves to attract Amazon’s attention—more than $22 billion in tax write-offs have already been offered, and that’s only counting the half of the bids that are available to the public.

There’s just one problem: Subsidies and trappings like it won’t determine where Amazon ends up.

History suggests that factors like a city’s geographic location, industrial mix, or workforce—which politicians generally have little control over—matter much more over the long run than tax breaks.

Take Newark and the state of New Jersey, which are offering the largest combined incentive package: $7 billion in tax breaks over 20 years. To New Jersians, that’s a huge subsidy—the state collects around $2.5 billion in corporate taxes each year, so they’re offering Amazon about 14 percent of the taxes paid by other businesses for the next two decades.

But to Amazon, it’s merely a nice perk that pales in comparison to the $175 billion it earned last year alone. That means the largest subsidy offered to Amazon amounts to only 0.2 percent of its current annual revenue.

And this proportion will drop even lower given Amazon's 20 percent annual growth, with revenue poised to top $1 trillion in the next decade.

In fairness, tax breaks affect profits more than overall revenues. But a location that streamlines business supply chains, enables cooperation with other companies, or offers a skilled labor force is more profitable in the long-run than a location that merely offers tax incentives.

Imagine that choosing the best location would allow Amazon to grow just one percent faster each year. Over 20 years that extra growth would translate into more than $1 trillion in extra revenue and over $17 billion in extra profits.

In other words, even the most generous subsidy can't beat the value of locating in the right place.

Adding insult to injury, subsidizing corporate profits hurts local residents: Public services suffer from a lack of funds, taxes are higher than they would otherwise be, or both.

Instead of offering Amazon subsidies, Chicago ($2.25 billion) and Philadelphia ($3 billion) could instead add 650 and 1,000 officers to their police forces—increases of 5 and 15 percent, respectively.

Alternately, the tax breaks could pay for the education of 145,000 students in Chicago this year or they could completely repave every street in Philadelphia—four times over.

Similarly, the $3 billion Wisconsin gave away to attract electronics manufacturer Foxconn last year could have instead reduced corporate income taxes by 21 percent for 16,000 businesses across the state.

The broader economy suffers when we subsidize one company at the expense of others, leading them to grow more slowly because of their relatively higher tax burden. And if economic development incentives did motivate companies to choose less-than-ideal locations, the resulting production inefficiencies would also lead to reduced economic growth.

Lastly, economic development subsidies often have strings attached which limit business flexibility, harming the dynamism of the economy. Moreover, the competition between local governments to attract jobs pushes politics toward cronyism. Giving special interest groups undue influence runs against the ideals of democratic governance—that government authority should serve the people in general, rather than just those with power and influence.

Amazon’s competition for HQ2 is a publicity stunt designed to pump up profits through taxpayer-funded handouts. It likely already knows where it's going and any tax break is just icing on the cake.

But it’s a convenient publicity stunt for politicians, too, who get to show voters they are “doing something” to improve the economy. In the end, Amazon’s smile only comes at the cost of taxpayer frowns.