When Cities and States Underwrite Big Business

Corporate tax incentives are far more likely to boost a politician’s chances of re-election than the local economy.

Laila Kherallah

The internet retail giant Amazon likely expected glowing press coverage in November when it announced the location of its second headquarters. After all, it had turned its yearlong site search into a veritable reality show of city visits and media leaks.

But the opposite happened. The news that HQ2, as it was dubbed, would be split between the Washington, D.C., suburbs and Long Island City, New York, was met with denunciations from activists, lawmakers and the media, all rightly peeved that Amazon, after asking for and receiving HQ2 proposals from cities across the country, chose to settle in the nation’s capital and the world’s finance center.

The price, in particular, rankled many: half a billion dollars in incentives from Virginia and at least $1.5 billion from New York (possibly much more), in exchange for a headquarters that would likely drive up housing costs and displace low-income residents, built by one of the biggest, richest corporations in history. Enough opposition built among New York politicians and activists that Amazon abandoned the Long Island City site altogether.

Though HQ2 was a headline grabber, it is just the tip of a much bigger iceberg. Every year, cities and states across the United States spend tens of billions of dollars on corporate tax incentives in the belief that doing so will create jobs and boost local economies. They subsidize movie productions, sports stadiums, malls, casinos, amusement parks and “destination retail” outlets, not to mention corporate headquarters, in an attempt to juice economic development.

Here’s the bad news: None of it works. Given the economic realities, New York was right to chase Amazon away.

The good news? In an age of political polarization, ending these corporate giveaways just might be an issue that could unite people across the political spectrum. Wasting public money on corporate tax incentives is a bipartisan boondoggle. The largest offender in terms of dollars is deep-blue New York. The second largest in terms of dollars — and the largest by far in terms of per-capita spending — is deep-red Louisiana. Just about every state and big city, and many small towns, from the coasts to the heart of Trump country, is making the same policy mistake.

The reasons these incentives don’t work as advertised fall into two broad categories. First, moving companies and jobs to a different location doesn’t create anything new, it just shuffles economic activity from one place to another.

Moving a job from California to Texas doesn’t create a job. It just employs a Texan at the expense of a Californian. In a particularly absurd example, a so-called border war broke out in Kansas City, when Missouri and Kansas paid companies to move their facilities back and forth across the state line.

For every job these incentives really do create, the cost can be astronomical, climbing into the hundreds of thousands per position. It’d be cheaper for the government to hire people itself or give the money away on a street corner than it is to launder money through a corporate office.

Second, subsidy proponents generally don’t take something known as the “substitution effect” into account. Money spent on tickets and food at a baseball game in a publicly funded stadium generally isn’t new money coming into the community. It’s money that would have gone to something else were the stadium not there. After all, people tend to go out and do something on summer evenings. When a new stadium arrives, much of the spending that happens there occurs at the expense of the movie theaters, restaurants and other entertainment attractions in the area. The economic activity isn’t new; it’s just shuffled from one entity to another.

Though study after study shows all of the above to be true, these giveaways persist. Why? They’re good for politicians.

According to research by Nathan Jensen at the University of Texas at Austin, public officials who offer corporations tax incentives win more votes than those who don’t. The explanation is simple. Voters need and want to see that politicians are working on their behalf. Publicly courting businesses and the jobs they might bring, then showing up at the ribbon-cutting when those deals come to fruition, provide the foundation from which re-election campaigns are built.

So how might conservatives and liberals convince themselves to unite against corporate boondoggles? For conservatives — in the pre-Trump understanding of that label, anyway — tax incentives mean the government is picking winners and losers, creating crony capitalism that prevents the market from deciding which businesses succeed and which fail. For liberals, they’re a huge waste of resources that should be spent on things that actually improve people’s lives and the economy’s performance: education, infrastructure and a social safety net, for instance.

The opposition to Amazon in New York resulted in a victory for taxpayers. Unfortunately, wins like that are all too rare. The whole thing is a kind of prisoner’s dilemma. All states and cities would be better off if no one offered incentives. But each state and city believes it will be better off if it offers the giveaways, igniting a race to the bottom.

Yet, as someone who inevitably lives with the consequences of these bad deals, you should know that they’re not working for you.

Pat Garofalo, managing editor at TalkPoverty.org, is the author of “The Billionaire Boondoggle: How Our Politicians Let Corporations and Bigwigs Steal Our Money and Jobs” (Thomas Dunne Books, 2019).

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