The recent debacle in New York over Amazon’s plan to open an office there under the hilarious marketing slogan of “HQ2” (or maybe HQ1.5, or maybe HQ2.14159?) gave finance journalists, who I’ve long insisted are the laziest people on earth, the opportunity to cluck their tongues about the poor state of “financial literacy,” and gives me the opportunity to debunk a few of the more absurd claims that are consistently trotted out when cities and states, and now even the federal government, offer tax incentives to attract business activity to particular areas.
Yes, economic development subsidies are a “real” cost
State and local economic development programs typically have three components:
- the government undertakes a massive buildout of infrastructure in order to make the site suitable for development. Sometimes this also includes regulatory waivers, like the environmental and labor regulation exemptions around the Wisconsin Foxconn plant (which, as a reminder, will never open). In the case of the Amazon office complex, “rather than going through the city’s extensive land use review process, known as ULURP, the state will take the lead and override local regulations on the lot, currently zoned for manufacturing space.”
- the target of the economic incentives then usually (but not always!) uses its own money to build out the commercial use of the site.
- finally, once the site is operational, the costs of the subsidies are supposed to be eventually “recouped” through payroll, income, and sales taxes generated by the new economic activity.
A lazy financial journalist looks at these three components and says, “economic development subsidies do not have a real cost, and stopping them does not save money, because they are provided against economic activity that does not currently exist and would not exist without the subsidies.”
But Indy Finance readers aren’t lazy financial journalists, so they ask some obvious follow-up questions:
- If a massive buildout of infrastructure is required in order to make a site suitable for development, why hasn’t it been done yet? If an area of one of the richest cities in the world does not have adequate water, sewage, or transportation connections to make it possible for businesses to open in that area, it represents a serious failure of governance that has nothing to do with any individual business’s willingness to operate there. An enormous number of people are eager to live and work in New York City, so leaving areas of the city underserved by public services is an active, ongoing harm that should be eliminated as quickly and efficiently as possible.
- If zoning and environmental regulations are preventing businesses from opening in an area, then they should be carefully considered to make sure the regulations are achieving their goals and are not needlessly obstructing development with little or no public benefit. This is true, obviously, regardless of whether any individual business is interested in operating there. After review, bad policies should be repealed and good policies should be retained.
- Once appropriate infrastructure is in place, and once appropriate zoning and environmental regulations have been decided on, why should policymakers care what (legal) businesses operate in the area? This is sometimes, wrongly, split into the idea of “good” (well-paid, college-educated, predominantly white) jobs and “bad” (poorly-paid, high-school educated, minority) jobs but this is not a distinction that makes any sense from the point of view of the government or the economy. Well-paid workers are well-paid because their employer finds it worthwhile to pay them well, poorly-paid workers are poorly-paid because employers can get away with paying them poorly. If an area supports well-paid jobs, the employees will be well-paid, and if it supports only poorly-paid jobs, the employees will be poorly paid.
At this point it becomes clear why economic development subsidies are a “real” cost. With or without economic development subsidies, the government can pay for a massive infrastructure buildout. With or without economic development subsidies, the government can right-size environmental and zoning regulations. But in one case, businesses choose to open in the area based on the commercial appeal of the area and pay their taxes in full, while in the other case, one or more subsidized businesses opens in the area based on the subsidies provided and pays just a fraction of the taxes they’d otherwise owe.
The difference between the “taxes-in-full” regime and the “subsidized taxes” regime is the real-world cost to the public of the economic subsidies, and it’s a real, budgetary cost that has to be paid with higher taxes, reduced public services, or increased debt.
But finally, and I know you saw this coming, the “subsidized taxes” regime serves as an additional tax on all the businesses that would love to operate in Long Island City but don’t get Amazon’s sweetheart deal. It doesn’t matter whether you’re a dry cleaner, a livery cab operator, a restauranteur, or a venture capitalist: New York wanted to set aside the land it had prepared, at taxpayer expense, for commercial use for a single business it had decided upon in advance. Everyone else who wants to open a business in Long Island City would have to pay their taxes in full, and compete for workers and resources against a $2.988 billion head start.
If New York City’s infrastructure is too bad, improve it. If New York City’s zoning regulations are too strict, loosen them. If New York City’s taxes are too high, cut them. But don’t tell me you can get a free lunch by subsidizing a single business promising to hire 25,000 people, when millions of people around the country and the world are dying to move to New York to live, work, start businesses — and pay their taxes in full.
Do you think the same would be true if it weren’t New York? For example if Amazon had chosen a more rural or less “desirable” location, do you think the State and/or local governments there should have courted Amazon with tax breaks?
I do not. Your question helpfully illustrates a broader point I am happy to make more explicit: I have no problem with a city or state “courting” Amazon or any other business. If Amazon is considering opening a warehouse, and goes to the local government and says, “we’d like to open a warehouse here, but the roads are too narrow,” and the government decides to widen the roads, that’s commonsense economic development policy. Now, obviously I’d like to see those decisions made in a transparent and democratic way decided upon in advance, and not on an ad hoc basis, and once those procedures are in place they should be followed, not deliberately avoided as we saw in the Amazon/NYC case. But responding to infrastructure shortcomings, whether it’s narrow roads, low bridges, slow internet, or contaminated water, is very close to the definition of local government’s function. A key point, though, is that after the road is widened, everybody gets to use it. After the bridge is raised, everyone gets to drive under it. After the internet is accelerated, everyone gets to use it. After the water is cleaned, everyone gets to drink it.
The problem is when incentives are targeted specifically at one firm to the exclusion of others; when Amazon is given an advantage over other businesses. Let me give you another example to make the point even more clearly: I lived on the East Coast in college and one of the nearby states, I believe it might have been Delaware, every year or so announced a “sales tax holiday.” On that day or weekend, everybody piled into their cars and drove to Delaware to do all their shopping. The state gave up its sales tax revenue that weekend, but people spent a lot of money, retailers made a lot of profit, they brought on extra staff, many folks stopped to eat on the way, so the theory was that all that additional economic activity (and the income and payroll taxes on it) more than made up for the missing sales tax revenue.
I don’t know if it was a good idea or a bad idea, but the key to the sales tax holiday was that all retailers were exempt from the sales tax. Not firms that had been open less than a year, not firms that hired 50 or more employees, not firms that paid more than $15 per hour, not firms that offered paid family leave, but all the firms. Maybe the sales tax holiday was good economic development policy, maybe bad economic development policy, but it was economic development policy that was implemented fairly.
That is why I say, if taxes are too high, they should be lowered for everybody. If zoning is too tight, it should be loosened for everybody. If infrastructure is too rundown, it should be improved for everybody. Targeted tax breaks are just as bad as targeted zoning changes, targeted environmental exemptions, or targeted drinking water (delivering bottled water to Michigan state office buildings in Flint, for example). If a policy is too bad for Amazon, it’s too bad for everyone else trying to start, run, or grow their business. And if policy is good enough for Amazon, it’s good enough for everyone.