Amazon recently announced the winners of its year-long, "The Bachelor"-style search for the location of its second headquarters, known as HQ2. City and state governments were tripping over themselves to lure Amazon and its mega-billionaire CEO, Jeff Bezos, with sweetheart development deals. In the end, it was New York City and Arlington, Virginia, that walked away with the grand prize, two new Amazon office complexes and 50,000 promised jobs.
As part of the deal with New York alone, Amazon will receive an estimated $2.8 billion in tax breaks and other business incentives. That's the equivalent of New York taxpayers paying Amazon $112,000 for each of the 25,000 jobs the tech giant has promised to create at its Long Island City headquarters. (New York offered twice as much in incentives as Virginia did.)
The logic of offering up such huge incentives to companies like Amazon is that it's a long-term investment in a city's economic future. According to Gov. Andrew Cuomo of New York, the state will collect $27.5 billion in new tax revenue over the next 25 years thanks to the Amazon deal. Cuomo's calculations assume that Amazon will directly create 40,000 jobs in New York (not the promised 25,000), and that local and state businesses will hire an additional 67,000 workers to service Amazon and its employees, known as the job-creation "ripple effect."
But plenty of commentators question the rosy figures pitched by politicians and are alarmed at the growing trend of huge corporations pitting state versus state to subsidize their expansions or relocations. The question is whether the very public and well-publicized Amazon HQ2 auction will signal a shift in the way states and cities think about the economic benefits of such sweetheart development deals, or will it simply embolden the next wealthy corporation to demand even more?
The Rise of Megadeals
Greg LeRoy is the director of Good Jobs First, a nonprofit, nonpartisan watchdog group that's been tracking corporate subsidies for 20 years. He says that cities and states have been wooing big companies with tax breaks for 80 years, but those deals typically went down behind closed doors and were relatively modest. But the past few decades have seen an exponential increase in what LeRoy calls "megadeals," defined as incentive packages totaling more than $50 million.
According to research conducted by Good Jobs First, there have been 393 such megadeals since the mid-1980s with the frequency and dollar value of the deals doubling every year starting in 2008. The biggest single deal was awarded to the aerospace giant Boeing, which threatened to leave Washington State and was offered $8.7 billion in taxpayer incentives in 2013 to stay (an opposing politician in Seattle called Boeing's tactics "economic terrorism").
Even before the HQ2 auction, Amazon had received 146 incentive packages, including eight megadeals, totaling more than $1.5 billion. The new pacts with New York, Virginia and Tennessee (Nashville is getting a new operations center), if paid out, will increase Amazon's taxpayer-fueled benefits by 200 percent.
"Amazon is a very savvy company," says LeRoy. "It's scientific in its approach to getting more and more tax breaks. Amazon even created a dedicated tax break department about six years ago."
Amazon and other large corporations have been so successful in winning tax concessions from states and cities because politicians are eager to be seen as job creators. With real wages stagnant for decades and the steady disappearance of traditional middle-class jobs in manufacturing, governors and mayors are scrambling for a big win. This fuels the competition for high-profile new factories, headquarters and operations centers. It also fuels the economically futile practice of "job piracy," when states steal jobs from each other by luring away companies with piles of cash.
LeRoy has been fighting against corporate subsidies for decades and watching as incentive packages grow more and more excessive. But he wonders if the Amazon HQ2 auction won't be the breaking point he and other economic activists have been waiting for.
"If there's ever been a moment when America seems ready to rethink this whole crazy system, it's now," says LeRoy. "[Amazon HQ2] was a very unusual public auction. Now that people understand what a rip-off it is for taxpayers, there's a big appetite to fix the system."
For example, notice that Amazon didn't end up choosing the biggest deals in total dollar value. Maryland, for example, dangled an $8.5 billion "carrot" in front of Amazon's nose, and New Jersey offered a package totaling $7 billion, but Amazon passed them both up. LeRoy says that Amazon's move exposes "the big dirty secret of incentives."
"Incentives almost never determine where a company expands or relocates," says LeRoy. "They're too small."
While $2.8 billion is a huge number to New York taxpayers, tax incentives represents a tiny fraction — less than 2 percent, says LeRoy — of the cost structure of a company like Amazon over the long term. Amazon and other large global corporations are going to make decisions based on local infrastructure (good airports are critical), the available talent pool and the broader business environment of the region.
So all of the money thrown at corporations in the form of free tax perks could be better spent building up the local infrastructure and investing in education and job training. Unfortunately, infrastructure and education are far less politically sexy than winning the economic development dating game.