Metropolis

Cities Should Never, Ever Agree to an HQ2 Contest Again

The billions that Virginia and New York are giving to Amazon will only worsen corporate shakedowns for public subsidies. Here’s how to stop the madness.

Jeff Bezos
Amazon CEO Jeff Bezos participates in a discussion during a Milestone Celebration Dinner on Sept. 13 in D.C.
Alex Wong/Getty Images

Earlier this year, when Amazon was still maintaining that 20 North American cities had a shot at becoming the home of its second headquarters, it received a bid from the Metro Denver Economic Development Corporation. The Denver pitch came with incentives “in excess of $100 million,” according to Metro Denver vice president Sam Bailey. Or maybe it didn’t. Like many of the pitches that American cities made to host Amazon’s second headquarters, Denver’s was submitted by a private organization, which protected its promise of public funds from public scrutiny. Similar arrangements were made in Austin, Texas; Indianapolis; and Miami-Dade County, Florida. Philadelphia and Pittsburgh are fighting open-records requests to reveal their proposals, even though at this point it hardly matters.

The good-faith reason for this discretion was that cities believed they were in competition with each other, and like school groups preparing for a class project, they didn’t want their rivals to see what they were doing. Specifically, they appeared to be under the impression that Amazon was evaluating the extent to which each place would bend its tax code to lower the company’s cost of doing business over the next couple decades.

But the people who run Amazon are not like those of us who shop there, searching for the greatest discount among 10 identical staplers. They never really imagined they might move 50,000 employees to, say, Tucson, Arizona, and may have even known all along that they would go to Arlington, Virginia, and Long Island City, New York, as the company announced Tuesday, after the news leaked to reporters last week. And so the yearlong public bake-off ended with a whimper.

In picking northern Virginia and New York City, Amazon has done what every other expanding, high-value company does—open a couple regional branch offices in cities with solid infrastructure, talented workers, and great amenities. But because the company framed it as a competition, it extracted an astounding public subsidy from taxpayers in Virginia and New York. (The company also announced Tuesday that it will send 5,000 corporate jobs to Nashville, Tennessee, to staff an “Operations Center of Excellence.”)

In the latter case, New Yorkers will reimburse the company to the tune of $1.7 billion for its choice. The state of New York will spend up to a half-billion dollars to build Amazon’s offices, just as other states build football stadiums for NFL teams. The state will also offer $1.2 billion in tax credits if the company creates 25,000 jobs by 2028, or $48,000 a job. Instead of property taxes, the company will use a city program called PILOT to pay mostly for improvements to its own new neighborhood.

Virginia fared slightly better. The state will invest a couple hundred million in Amazon’s new site and will offer $22,000 in tax credits per job.

While all of this may arouse latent Marxist sympathies in Washingtonians and New Yorkers, the problem with the kind of bidding war that got us here isn’t quite obvious. Leaders like New York Gov. Andrew Cuomo try to make the “but for” case—but for these incentives, no jobs would have materialized here. But that’s often not accurate. First, the company might locate in-state anyway. Second, the land and labor that the company uses might have gone into some other (fully taxed) endeavor—maybe even a local business. Third, because the company holds all the cards, states wind up overbidding—as New York apparently did here, offering an extra $600 million for one of America’s biggest companies to build on waterfront land in the heart of New York City.

But corporations like Amazon are less responsive to municipal wooing than we might think, according to Timothy Bartik, a senior economist at the Upjohn Institute for Employment Research. “My concern about both Foxconn”—which received an unprecedented incentive package to open an electronics factory in Wisconsin—“and Amazon is that will lead to an escalation,” he told me. “I call this the potato chip rule—you can’t have just one. Once you hand a deal to one company, you can’t hold back with another company.” Relocation tax breaks have been flat for the past 15 years, he said, but recent high-profile offers to Amazon, Foxconn, and Tesla (in Nevada) might revive corporate interest in making tax breaks more than a de rigueur part of negotiation with local governments, in effect creating an outright auction instead.

In February, for example, JPMorgan Chase & Co. CEO Jamie Dimon told investors that he would certainly push for his firm to get the same treatment as Amazon. “The second they give benefits to those people, you can damn well be sure I’m going to be calling the governor up.” It just so happens the bank is planning to raze a classic modernist skyscraper to build a new headquarters in Midtown.

New York, in fact, is a good example: The state has given out more subsidies than any other over the past few decades, and ranks fifth in subsidies per capita. “Businesses do not come to New York state without government incentives,” Cuomo argued this summer. But that’s not true: Just last week, Google announced it would expand its New York City footprint to make room for up to 12,000 additional workers—no subsidy required. A 2013 report prepared for Cuomo’s own Tax Reform and Fairness Commission criticized the state’s policies, noting that there was “no conclusive evidence from research studies conducted since the mid-1950s to show that business tax incentives have an impact on net economic gains.”

And yet, deals like Amazon’s reinforce the sense that businesses would be dumb to operate under the existing tax structure—that they should always hold out for a better deal.

This race to the bottom has not served state and local governments well, neither individually nor as a whole, though it did initially give a big advantage to Southern states trying to lure manufacturing out of union-run plants in Northern cities in the second half of the 20th century. Nowadays, there’s plenty of infighting between and within low-tax states, too, over how to lure a business across a state or county line. “This is a completely suboptimal job creation strategy that localities and states have undertaken for the past hundred years,” said Joe Parilla at the Brookings Institute, who has studied the subject.

But not everywhere suffers from the same predicament as Kansas City, where interstate poaching across the Missouri River is endemic, or Atlanta, where the Braves successfully exploited geographic boundaries to indebt county taxpayers.

Take Denver. The Metro Denver EDC—the same one that masterminded the regional Amazon bid—has a code of ethics for its partner cities, which include both big Denver suburbs and cities like Boulder and Fort Collins. Trying to lure companies from member cities, or even from elsewhere in the state, is “strongly discouraged.” And promotions that insult another of the state’s cities are strictly forbidden. The Greater Phoenix Economic Council has undertaken something similar, after a controversial subsidy lured the Arizona Cardinals from Tempe to Glendale. Locally, a détente in the subsidy wars is within reach, and these places have crafted an attractive model.

State by state, the news is middling. In 1987, Michigan introduced the idea of an interstate compact to limit relocation incentives in the Midwest. It didn’t take. Massachusetts tried the same. Economists regularly suggest that states could sign on to some kind of economic treaty to abolish one-off subsidy negotiations. This is basically how things stay civil in the European Union, where there are strict limits to prevent, say, Copenhagen and Malmö, Sweden, from getting into some Kansas City–style shenanigans. But while conservative and liberal wonks agree that corporate welfare is bad, an effective interstate compact seems out of reach.

Former Delaware Gov. Jack Markell has suggested tackling the problem from Washington, with a federal tax on state and local incentives directed at specific companies. Aaron Chatterji, an economist at Duke, has proposed a federal fund to reward states that don’t play the incentives game.

Otherwise, we are stuck with the status quo: up to $90 billion in tax breaks every year for companies who play hard to get and, in many cases, fail to fulfill their promises. As Derek Thompson observed, that’s more than the federal government spends on housing, education, or infrastructure.

But there’s no reason to be optimistic. That the current bidding-war standard remains popular is not just because solving it is a collective-action problem, but also because it suits leaders across the political spectrum so well, from Virginia’s Ralph Northam to New York’s Andrew Cuomo. In every case, they cut the ribbon—and if that means lost tax revenue, debt, broken promises, or simply the opportunity cost of a site that might have been used for something else, well, that’s the next guy’s problem.

This piece has been updated.