Economy

Amazon’s 50,000 new jobs? Why some cities don’t play tax-break game.

A shift in thought

Competition among cities to offer tax breaks, aiming for an influx of high-paying jobs, has been intense. But some mayors opted out, saying real development isn't about one-off deals.

Giant spheres are seen under construction just outside Amazon's Day One building in downtown Seattle, Sept. 27, 2017. The company set a deadline of Thursday for cities to make incentive offers as it decides where to locate a second headquarters.
Elaine Thompson/AP
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In early September Ron Nirenberg was one of the hundred-plus city mayors who felt their ears prick up when online retail giant Amazon announced its desire to set up a second headquarters outside of its Seattle home.

He is now one of just three who declined to throw their hat in the ring before today’s deadline to submit proposals to the company.

Attracting large companies to an area has long been viewed as a golden ticket to economic prosperity – such deals have ticked up in frequency and cost since the Great Recession – and Amazon’s “HQ2” project is the latest and shiniest of those. The company is promising to invest $5 billion in the facility and to create as many as 50,000 high-paying jobs.

Yet what bidders are being implicitly forced to provide in return – most notably, a more generous tax incentives package than their rivals – has seen some cities and economists questioning the wisdom and fairness of this bidding-war approach to economic development. Instead of letting megacompanies avoid their fair share of taxes, they wonder, why not focus on city improvements so that businesses show up even without special subsidies?

Amazon’s highly publicized HQ2 process has already become a platform for that conversation, alongside a wider scramble by cities that has been frenzied, and at times comical.

Officials in Tucson, Ariz., tried to deliver a 21-foot-tall saguaro cactus to Amazon’s headquarters. The city council in Stonecrest, Ga., voted to rename part of the city “the city of Amazon” if the company moves in there. Mayors from Washington to Danbury, Conn., have posted videos of themselves asking Alexa – Amazon’s intelligent personal assistant device – where the HQ2 should be located. The answer every time: that mayor’s city.

But the bids to recruit Amazon have involved much more than stunts. In particular, some observers believe the HQ2 incentives package could end up as one of the largest in American history. New Jersey, for example, is offering Amazon tax breaks worth over $7 billion over the next decade, an incentives package worth more than double what Wisconsin offered to Taiwanese electronics company Foxconn to build a factory there last month.

It was that race to the bottom that turned off Mr. Nirenberg, the mayor of San Antonio, Texas. Last week, he and Bexar County Judge Nelson Wolff (who’s jurisdiction includes San Antonio), wrote Amazon CEO Jeff Bezos to say they were pulling out of the HQ2 race.

Nirenberg says that trying to match the kinds of incentives being offered by other bidders would hamper the city’s goals of attracting companies like Amazon in the future.

“It’s a difficult proposition to contend with when a company [is] intending to get cities across the country to compete in an incentives arms race,” he adds. “We’re willing and open to negotiate with a big toolkit of economic development opportunities with Amazon, but we’re not willing to mortgage our future to do it.”

Nirenberg says his team had already been crafting their letter to Mr. Bezos when he read about Mayor Sam Liccardo of San Jose, Calif., making a similar declaration in a Wall Street Journal op-ed.

“It was heartening to see another city focus on the future [and be] not willing to play games with the future of its city,” Nirenberg says. “Hopefully that will begin to turn the tide of the expectations for economic development.”

A tipping point?

Siting deals like HQ2 have become increasingly common in recent years. The number of $50 million-plus deals between a company and a city or state has more than doubled since 2008, according to an analysis by Good Jobs First, a research group on development policy.

A long-term decline in entrepreneurship is the main reason these megadeals have become more attractive to local officials, says Greg LeRoy, the group’s executive director.

“That means there are fewer ribbons to cut, fewer deals for politicians to compete for, [but] a lot of pressure [to create jobs] because the economy is still soft,” he adds.

What people like Mr. LeRoy fear is that Amazon could bring a surge in population and income to a community without investing a commensurate amount in improving the city’s infrastructure and services. Then either taxes will go up or the quality of public services will go down.

Writing in Fast Company on Tuesday, LeRoy probed the option of another path. “Will Amazon’s hubris be met with public demands for community benefits instead?”

‘We can’t compromise that future’

Officials like mayors in San Antonio, San Jose, and Toronto (which decided not to expand existing incentives to win the HQ2 prize) are already making those kinds of demands of Amazon, and they represent a potential shift in how cities view economic development.

“Economic development in the old days used to be mostly about [creating] jobs, but now it’s [also] about communities developing high quality infrastructure, a skilled workforce, environmental stewardship and quality of life,” says Thomas Tunstall, senior research director at the University of Texas at San Antonio’s Institute for Economic Development.

Cities are starting to realize that “if you focus on high quality of life, develop your local workforce, those are the things companies are looking at anyway,” he adds.

Mr. Liccardo said that his how San Jose has been able to bring companies like Adobe, Google and Apple to the city recently “without a single cent of taxpayer money being used for subsidies.” Nirenberg is trying to get San Antonio to that point.

“That’s why the investments we’re making in infrastructure and education and housing are so important to us,” he says. “Our people come first. The jobs will be filled by those people. We can’t compromise that future.”

Professor Tunstall sees an obstacle to popularizing that approach. It’s easier for an economic development corporation to show that a specific recruiting deal brought jobs than to show how an improving quality of life is bringing families and companies to a place, he says.

And “quality of life” can be hard to define. When Tunstall asked city managers across Texas what it meant – as part of a study last year – “There was often significant discrepancy in the definitions,” he says. “One fellow who had moved to Texas from Louisiana said back there, it was defined more by crawfish boils and being close to mama.”

The role of the ‘intangible’

Tax incentives are unlikely to disappear, experts say. That is especially the case now, with entrepreneurship at such a low ebb, says Bernard Weinstein, an economist in the Cox School of Business at Southern Methodist University in Dallas.

But what may be changing is that incentives become a less decisive factor than they have been in the past, and more intangible factors like quality of life and a community’s social culture become more important.

That is a shift that could cost any Texas city the HQ2, experts say. Debates in the state legislature this year on controversial bills – including one related to transgender rights (which didn’t pass) and one related to local cooperation with federal immigration officers (which did pass) – have been cited as factors that could lead Amazon to look elsewhere.

This is perhaps why Joe Straus, Republican speaker of the state House of Representatives, announced last week the formation of a new committee to look at the state’s economic competitiveness.

“The formula isn’t as simple as it used to be – being pro-business isn’t just about tax breaks and cash incentives,” Rep. Straus told the chamber last week. “It’s also about education, tolerance, empathy, quality of life.”

That was music to the ears of Nirenberg.

“For a city that’s interested in partnering with a corporation, it would be ludicrous to compromise its ability to build the kind of city worth investing in,” he says, by agreeing to an unbalanced partnership.

Smart, big businesses like Amazon, he adds, “are looking for much more than a net gain on incentives. They’re looking for communities to invest and have a solid, durable, and equitable future, and that’s what we’re interested in.”

Amazon has said it will announce the winning site next year.

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