shadow

Beyond Amazon debacle, wider doubts about tax breaks as tools

Why We Wrote This

When New York City saw its deal for a corporate HQ collapse, some leftist politics was involved. But the bigger message may be rising scrutiny of whether tax breaks for employers make sense.

Mark Lennihan/AP
Housing units stand in the shadow of the Ed Koch Queensboro Bridge in New York. Amazon’s cancellation of plans to build a massive headquarters in the city drew mixed reactions, but economists say cities often gain little – or can even lose – by showering tax breaks on corporations.

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Amazon’s planned deal to locate a second headquarters in New York City looked like business as usual: Giant company dangles jobs, and host city offers big tax breaks to get them. But this deal went off script. Local critics, including a rising star of the Democratic Party’s left wing, kept lashing out at the plan. And ultimately Amazon felt the best course was to walk away.

Plenty of New Yorkers aren’t happy about that, but it could signal a healthy rise in scrutiny of the tax-break process. “It doesn’t do the things that we think it’s going to do,” says economist Peter Calcagno in South Carolina. “It doesn't lead to overall greater economic growth. It doesn't necessarily reduce unemployment.” And according to recent research, the incentives play a minimal role in companies’ location decisions.

A better model for how to swing such deals is northern Virginia, development experts say, which offered smaller incentives but landed a similar number of jobs as New York was promised. And Virginia touts the road and transit and school upgrades that local residents would get.

It looked more than a little weird: One of America’s most successful companies decides not to locate a headquarters in New York, and some of the city’s most prominent politicians cheer.

A week after online retailer Amazon announced it was pulling the plug on its New York plans – and with it the prospect of some 25,000 mostly high-paying jobs – the backlash against those Amazon critics is as loud as their own chants of triumph in making the giant retailer feel unwelcome.

But according to a broad spectrum of conservative and liberal economists, those politicians on the left have a point: Cities and states often lose when they give away tax breaks and other subsidies to lure any company to set up shop. And the debacle for Amazon could signal a shift toward greater public scrutiny of big tax-break deals for corporations.

The failed New York-Amazon deal sits at the nexus of so many crosscurrents – involving local and national political divisions, coastal versus heartland economies, and the realities of urban inequality – that the optics threaten to overshadow the facts. Nevertheless, the economics are clear: Luring companies with incentives doesn’t work very well.

“It doesn’t do the things that we think it’s going to do,” says Peter Calcagno, an economist at the College of Charleston in South Carolina. “It doesn’t lead to overall greater economic growth. It doesn’t necessarily reduce unemployment.”

From a national perspective it’s a zero-sum game, in which taxpayers bear a cost and corporations reap a benefit. And researchers say it’s hard to tell in many cases whether even the “winning” cities reap any long-run gains.

That’s partly because local and state incentives play a minimal role in companies’ location decisions, according to recent research. Nevertheless, corporations demand them and governments offer them because the opening of a new business is an almost irresistible lure for politicians.

“The instinct for politicians who face elections every few years is to go for that short-term gain,” says James Pethokoukis, a policy analyst at the American Enterprise Institute, a conservative Washington think tank. “They love cutting ribbons in front of new plants. That is a very tangible result of your efforts because you gave this subsidy, you have those jobs.”

And the prospect of thousands of jobs, paying well over $100,000 a year, offered by a fast-growing tech leader and the world’s most valuable company is still proving irresistible to many cities, even after the New York failure. Several cities who lost out to New York have contacted Amazon indicating their continued interest, even though the company says it will expand in existing locations rather than locate another headquarters. One Dallas development official admitted he’d watched six hours of TV coverage of New York City Council’s debate over the Amazon plan.

‘What does that say to working people?’

New York Mayor Bill de Blasio has lashed out against fellow Democrat Alexandria Ocasio-Cortez, a rising star from the city who used her perch as a new member of Congress to criticize Amazon’s plan. But, while saying the congresswoman didn’t understand the economics of the deal, the mayor also leveled a warning at Amazon – and by implication at other companies considering investments.

“They said they wanted a partnership, but the minute there were criticisms, they walked away,” Mr. de Blasio said on an NBC talk show Sunday. “What does that say to working people, that a company would leave them high and dry, simply because some people raised criticism?”

The optics of New York’s deal with Amazon were challenging from the beginning. The idea of a city giving a tax break to a company owned by the world’s richest man helped fuel what Mr. Pethokoukis calls a backlash against billionaires.

Also, the company was allowed to bypass oversight by the city council, stoking tensions with the mayor and the governor who headed up the deal.

And the up to $3 billion in incentives, while not unusual by New York standards, was approximately three times what other locales typically offer corporations on a per-worker basis, says Tim Bartik, an economist at the W.E. Upjohn Institute in Kalamazoo, Mich. And because Amazon had split its second headquarters proposal in two, northern Virginia was getting a comparable deal with only up to $800 million in state and local incentives.

Not only were the tax-break comparisons obvious, Virginia officials went about selling the Amazon deal by pointing to all the upgrades in road and mass transit infrastructure and educational offerings that local residents would get as a result, Dr. Bartik says. “From both a substantive and a political standpoint that package made a lot of sense. [Upgrading high school and education opportunities] means that Amazon is more likely to fill more of the jobs locally, which is good for state residents.”

Questions of inequality

Amazon’s failed New York deal also raises deeper issues about income inequality. For all its glittering success, New York, like most US cities, has not seen its economic growth help its poor, says Alan Mallach, senior fellow at the Center for Community Progress in Washington and author of the 2018 book, “The Divided City.” “Barring some major effort by Amazon and by the city, few of those jobs would go to local residents who did not already have the degrees and the skills….. And so in the end, as typically happens with these kinds of things in city after city after city, the people who really need a boost economically would probably have been left out in the cold.”

That’s a switch from the 1950s and ’60s when the opening of, say, a new manufacturing plant meant the creation of new, mostly middle-class jobs. At the time, unions had power to push for higher wages and US corporations, facing little foreign competition, could afford to pay them.

These days, by contrast, big companies tend to create a greater range of employment. Mr. Mallach says Amazon’s jobs fall into a barbell shape. Besides all those high-paying jobs at the top, the company pays many people at the low end to man its extensive network of distribution centers around the country. So far those jobs aren’t unionized. Last fall, the company announced it was raising its minimum pay for workers to $15 an hour.

“The problem is, $15 an hour is not enough to get you into the middle class,” Mallach adds.

But he is also leery of progressive activists, who have cheered the New York debacle as a blow against Amazon. “You need the growth, you need the investment, you need the jobs if you’re going to have any hope of changing things,” he says. “If you have a city where everybody is poor, you could argue that that’s more equal and less polarized. But it's not good.”

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