Amazon is building a new headquarters, and it wants you to pay for it. That’s the gist of Amazon’s solicitation of bids for its second HQ, which sets up a reverse auction encouraging cities to bid against each other with more significant targeted tax breaks for the retail giant. The economic benefits Amazon offers may appear at first glance to be appealing, but cities bidding against each other with targeted tax breaks will see it as a bad deal. While Amazon is hardly the first corporation to engage in this sort of cronyistic behavior, the responsibility falls on cities and states to avoid taking the bait.
The potential takeaway for Amazon from encouraging cities to bid against each other is substantial; Axios estimates the value of tax breaks that Amazon could receive from the “winning” locality to be around $10 billion. Amazon, for its part, encourages cities to pass “special incentive legislation,” or targeted tax breaks, in order for bids to be “competitive.”
The company has a history of successfully soliciting profitable subsidies. Good Jobs First, which maintains a record of large corporate subsidies, shows that Amazon has been handed subsidies worth over $50 million five times since 2011, each time from different states.
It is easy to understand why cities would jump into these types of bidding wars. Amazon offers statistics that make it easy for local politicians to sell the idea to voters — 50,000 jobs with an average compensation of over $100,000 and substantial economic investment in the area.
Unfortunately, targeted tax breaks are, at best, an inefficient way to secure economic development. At worst, they can actually be economically harmful. Targeted tax breaks often subsidize economic activity that would have occurred regardless. As many as 9 out of 10 hiring/investment decisions that were subsidized by tax incentives would have occurred without the presence of the subsidies. Amazon is going to build its new headquarters whether it is offered special subsidies or not, and cities should not let themselves be drawn into the subsidy competition.
Yet even when a subsidy is the deciding factor behind a corporation’s decision to invest in a city, the benefits are dubious. Tax breaks have to be paid for somehow, usually either by raising taxes or lowering spending. If statutory tax rates have to be increased in order to maintain revenue neutrality, the result is an increasingly complex tax code and higher compliance costs for businesses. If spending is decreased, investment in projects such as infrastructure can be reduced, which has an economic impact as well.
Targeted tax breaks also entail harms for other businesses. Local businesses that do not receive the targeted tax break are forced to compete on an uneven playing field. A 2009 study by Louisiana’s economic development agency estimated that about 90 percent of the “benefits” from new business created by targeted tax breaks to retailers such as Amazon was offset by losses to other retail businesses. Local small businesses often do not have the same political clout as large corporations. When tax breaks are based on access to legislators, smaller businesses lose out.
On their face, targeted tax breaks look like a way to pay for economic growth. In reality, they only pay a company to build where it likely would have anyway, in return for economic “growth” that is diverted from local, established businesses. If cities wish to encourage local investment with tax breaks that apply to all businesses rather than selective tax provisions that pick winners and losers in the marketplace, then they should do so. However, instead of making taxpayers and local businesses pay for Amazon’s new headquarters, they should avoid giving Amazon another handout that it does not need.