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.