One year ago, Amazon announced the winning cities of their controversial campaign to find an expanded headquarters. Today, policymakers are looking for a solution to the subsidy arms race that HQ2 exemplified.
The anniversary of Amazon’s HQ2 decision reminds us to ask a broader question: are these subsidies worth it?
In total, three states (Virginia, New York, and Tennessee) and three cities (Arlington, New York City, and Nashville) approved $4.2 billion in subsidies to sway Amazon’s HQ2 decision. But Amazon’s press release announcing the decision, as well as later interviews by company officials, make it clear that talented workers, not subsidies, were the deciding factor.
Our research has shown that instead of those subsidies, the states could have funded a combined 14,000 full-tuition scholarships to state universities for 15 years. In addition, the cities could have improved public safety by adding a combined 400 police officers or paid for the education expenses for over 2,500 public school students for the same amount of time. Alternatively, the states and cities could have lowered corporate tax rates to encourage business growth across the board.
So why do politicians continue throw taxpayer dollars at big-name companies if subsidies aren’t a deciding factor in relocation or expansion decisions? It’s likely because policymakers face a prisoner’s dilemma when considering corporate subsidies—they can’t trust other states to ”play fair” in economic development policy, so every city and state ends up in a race to the bottom. And even if the subsidies don’t actually advance economic development, politicians believe their re-elections are helped by being seen as “doing something” to help the local economy.
And just as state and local politicians in Virginia, New York, and Tennessee subsidized Amazon HQ2 to bolster their electability, Wisconsin politicians sought the same with their Foxconn deal.
This week also commemorates the 2nd anniversary of Wisconsin approving $3.6 billion in state subsidies for Foxconn (in addition to another $1.4 billion in local government, utility infrastructure, and federal subsidies). Soon-to-be-released Mercatus Center research illustrates how Wisconsin’s economic growth might actually decrease as a result of the deal, and provides the math behind why subsidies are more likely to cause harm, rather than economic development.
Fortunately, there are ways to end the subsidy arms race. Forthcoming Mercatus Center research explains how existing anti-subsidy clauses in 49 state constitutions offer one means to restrain corporate handouts, while an interstate compact could facilitate a mutual disarmament that might end the economic development war.
Currently, 49 state constitutions have anti-subsidy clauses, meaning that many corporate subsidies are already technically illegal. These amendments were passed after a number of states suffered financial crises in the mid-1800s due their subsidizing railroads, canals, and banks, but over time, shifting legal precedent has eroded their effectiveness. A renewal of their original intent could solve the subsidy problem without additional legislation.
Meanwhile, multiple states are discussing an interstate compact to mutually disarm the subsidy arms race. Interstate compacts, although not widely known, are part of the original US Constitution, and each state is already party to dozens of such agreements. Their role is to provide solutions to supra-state, sub-federal policy problems, similar to treaties between countries, and interstate compacts are backed by the authority of the federal government.
Amazon and Foxconn scored a deal at the expense of taxpayers, but by increasing public frustration with corporate handouts, these corporate welfare debacles may have also sown the seeds of the end of subsidies.
Photo credit should read DON EMMERT/AFP via Getty Images