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Amazon’s HQ2 Ruse Exposes The Folly Of State Tax Incentives

Crony Capitalism: Looks like Amazon pulled a fast one on states with its promise of a big new HQ2. After getting states to cough up billions of dollars in special tax giveaways, Amazon announced it was changing plans, and splitting the alleged new headquarters in two. When will states learn that trying to seduce big companies this way is a losing strategy?




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Unless the news reports are wildly off base, Amazon plans to open its new “headquarters” in two locations — Long Island City, N.Y., and Crystal City, Va.

Wait. Didn’t Amazon (AMZN) make a huge deal a year ago about how it was going to open a second headquarters that would be “a full equal to our current campus in Seattle”? And that it would create 50,000 good-paying jobs, along with $5 billion worth of investments?

State and local governments sure thought so. They went on an embarrassing campaign to lure Amazon. Most of the offers are still secret, but some details emerged.

Maryland offered $8.5 billion in tax incentives and infrastructure projects to win HQ2. New Jersey was willing to give Amazon $7 billion in tax credits and incentives. Detroit offered $4 billion. Chicago, $2 billion. Washington, D.C., promised to create Amazon University to train future company employees.

New York Gov. Andrew Cuomo took the prize for obsequiousness, saying: “I’ll change my name to Amazon Cuomo if that’s what it takes.”

If Amazon ever was serious about opening a second headquarters “equal to” the first, it isn’t any longer. The new plan looks more like a generic expansion project, and the HQ2 promotion looks more like a ruse.

By dangling the prospect of a big, bold, gleaming new headquarters, Amazon got more than 200 cities to offer up millions of dollars in free information about their workforce, infrastructure plans and the like. They also told Amazon precisely how far they’ll go to get a piece of its business.

Amazon’s HQ2 Ruse

“Amazon now has insights into what cities would be willing to offer and possibly plans locations have for investments in infrastructure,” Jed Kolko, chief economist at job search website Indeed.com, told Bloomberg.

Amazon had every reason to expect that government officials would do just what they did, since this has become a game companies have learned to play well over the years.

Either a major corporation threatens to move unless they get more perks, or it announces plans to open a new facility and waits for the offers to come in. State politicians, meanwhile, are more than happy to dote on these companies, because they can then claim credit for “creating jobs.”

Cuomo went so far as to say that “businesses do not come to New York state without government incentives. Businesses literally shop states. … It literally takes money to make money.”

That might be true for a business-unfriendly place like high-tax New York. But these efforts to bribe businesses don’t do taxpayers, or state economies, any good.

Sure, New York might gain 25,000 Amazon jobs for its half of HQ2, in exchange for a “great incentive package.” But that won’t even make a dent in the exodus of other businesses and jobs. From 2010 to 2017, for example, 1 million New Yorkers migrated to other states.

A study by the Upjohn Institute for Employment Research found that states offered a total of $45 billion in various types of business incentives, but the incentive deals didn’t correlate with “current or past unemployment or income levels, or with future economic growth.”

The deals themselves rarely live up to the hype, and typically cost a fortune for each job created.

Lost Jobs, Lost Taxes

Washington state, for example, gave Boeing $8.7 billion in tax breaks after it threatened to build its 777X somewhere else. Boeing did build the jet there. But the state still lost more than 20,000 Boeing jobs.

North Carolina paid a relatively small sum of $240 million in 2004 for Dell Computer to open a manufacturing plant there. Less than five years later, Dell closed the facility.

The tax-incentive game is also hugely unfair to existing businesses. Michigan spends almost as much in tax incentives as it brings in through corporate income taxes. That means that most businesses in the state are, in effect, subsidizing the lucky few.

State governments would do their taxpayers and their economies much better if, instead of offering up special tax breaks for a select few big companies, they cut taxes across the board and created a climate that was welcoming to all businesses, big and small.

If the economic literature is clear on one thing, it’s that a more business-friendly state creates a more vibrant economy and a more prosperous people.

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