This article was updated at 10:10 a.m. ET on November 16, 2018.
The Amazon HQ2 saga had all the hallmarks of the gaudiest reality TV. It was an absurd spectacle, concluding with a plot twist, which revealed a deep and dark truth about the modern world.
Fourteen months ago, Amazon announced a national beauty contest, in which North American cities could apply to win the honor of landing the retailer’s second headquarters. The prize: 50,000 employees and the glory of housing an international tech giant. The cost? Just several billion dollars in tax incentives and a potential face-lift to the host city. Then last week, in a classic late-episode shock, several news outlets reported that Amazon would split its second headquarters between Crystal City, a suburban neighborhood near Washington, D.C., and Long Island City, in Queens, New York.
The rumored announcement has emboldened Amazon’s army of critics. Did the world’s smartest company really need 13 months, and applications from 238 cities, to reach the striking conclusion that it should invest in New York and D.C.? The former is America’s heart of capital, and the latter is America’s literal capital, where Jeff Bezos, chief executive of Amazon, already owns a house and a newspaper.
Was this national auction nothing more than a scripted drama to raise the value of the inevitable winning bid? And did the retailer miss an opportunity to revitalize a midwestern city by choosing to enrich the already-rich East Coast?
All good questions. But here’s the big one: Why the hell are U.S. cities spending tens of billions of dollars to steal jobs from one another in the first place?
Every year, American cities and states spend up to $90 billion in tax breaks and cash grants to urge companies to move among states. That’s more than the federal government spends on housing, education, or infrastructure. And since cities and states can’t print money or run steep deficits, these deals take scarce resources from everything local governments would otherwise pay for, such as schools, roads, police, and prisons.
In the past 10 years, Boeing, Nike, Intel, Royal Dutch Shell, Tesla, Nissan, Ford, and General Motors have each received subsidy packages worth more than $1 billion to either move their corporate headquarters within the U.S. or, quite often, to keep their headquarters right where they are. New Jersey and Maryland reportedly offered $7 billion for HQ2, which would be the biggest corporate giveaway in American history.
You might think, Don’t blame the companies. These businesses have a fiduciary obligation to make money, and it’s negligent to leave cash piles on the table while their competitors are raking it in. And you might even think, Don’t blame the local governments. Not bidding on an exciting new project feels akin to unilateral disarmament in a war for talent and business. Sometimes a big new firm can revitalize a downtown area and become a magnet for new firms.
But there are three major problems with America’s system of corporate giveaways.
First, they’re redundant. One recent study by Nathan Jensen, then an economist at George Washington University, found that these incentives “have no discernible impact on firm expansion, measured by job creation.” Companies often decide where they want to go and then find ways to get their dream city, or hometown, to pay them to do what they were going to do anyway. For example, Amazon is a multinational company with large media and advertising divisions. The drama of the past 13 months probably wasn’t crucial to its (probable) decision to expand to New York City, the unambiguous capital of media and advertising.
Second, companies don’t always hold up their end of the deal. Consider the saga of Wisconsin and the manufacturing giant Foxconn. Several years ago, Wisconsin Governor Scott Walker lured Foxconn with a subsidy plan totaling more than $3 billion. (For the same amount, you could give every household in Wisconsin about $1,700.) Foxconn said it would build a large manufacturing plant that would create about 13,000 jobs near Racine. Now it seems the company is building a much smaller factory with just one quarter of its initial promised investment, and much of the assembly work may be done by robots. Meanwhile, the expected value of Wisconsin’s subsidy has grown to more than $4 billion. Thus a state with declining wages for many public-school teachers could wind up paying more than $500,000 per net new Foxconn job—about 10 times the average salary of a Wisconsin teacher.
Third, even when the incentives aren’t redundant, and even when companies do hold up their end of the bargain, it’s still ludicrous for Americans to collectively pay tens of billions of dollars for huge corporations to relocate within the United States.
No story illuminates this absurdity more than the so-called Border War, in which the Kansas and Missouri sides of Kansas City have spent zillions of dollars dragging companies back and forth across state lines, within the same metro area. Several years ago, Kansas lured AMC Entertainment with tens of millions of dollars in incentives. Then Missouri responded by stealing Applebee’s headquarters from Kansas with another incentive package. Back and forth they went, until both states had spent half a billion dollars creating no net new jobs but changing the commutes of 10,000 Kansas City workers who got caught up in an interstate duel.
“We need a national truce, both within states and between states,” said Amy Liu, the director of the Metropolitan Policy Program at the Brookings Institution. “There should be no more poaching of private companies with public funds.” But how would the United States ban states and local governments from poaching jobs from one another, or from giving tax dollars to private corporations?
First, Congress could pass a national law banning this sort of corporate bribery. Mark Funkhouser, a former mayor of Kansas City, Missouri, envisions the law as the domestic version of the Foreign Corrupt Practices Act, which makes it illegal for Americans to bribe foreign officials.
It’s not entirely clear whether that would pass constitutional muster. The Supreme Court hasn’t ruled decisively on whether the Commerce Clause gives Washington the authority to ban interstate bidding wars. In the 2006 Supreme Court case DaimlerChrysler Corp. v. Cuno, Ohio taxpayers sued the state after it paid the automaker DaimlerChrysler about $280 million in tax exemptions and tax credits. The Sixth Circuit Court sided with the taxpayers, striking down Ohio’s subsidy as a violation of the Commerce Clause. But the Supreme Court avoided a final judgment on the matter by finding unanimously that the plaintiffs did not have standing to bring the suit.
Second, Congress could make corporate subsidies less valuable by threatening to tax state or local incentives as a special kind of income. “Congress should institute a federal tax of 100 percent” on corporate subsidies, Jack Markell, a former governor of Delaware, wrote in The New York Times. “This would not include investments in public infrastructure, work force development or other investments that can attract employers while also providing a significant long-term benefit to taxpayers.” Taxing subsidies would hopefully force cities to change their economic-development strategies, from importing other states’ companies to building their own—through investing in research universities, building more housing, and welcoming immigrants, since foreign-born Americans have the highest rates of entrepreneurship.
Finally, the federal government could actively discourage the culture of corporate subsidies by yelling, screaming, and penny-pinching. As Meagan Day wrote in Jacobin, “The federal government could withhold funds from governors and mayors who threaten to poach jobs from other states, or who won’t disclose their incentive packages.” Washington tends to look on quietly when cash-strapped states break the bank to welcome glitzy tech firms. But an attitude change at the top could trickle down to the local level. Donald Trump, or another president, could have made a national address after the HQ2 announcement slamming Amazon for soliciting taxpayer funds in a silent auction. He could have called a summit to encourage the nation’s mayors and governors to offer the same tax subsidy for HQ2—zero dollars and zero cents. Even a tweet could suffice: “7 BILLION FOR BEZOS?? Trillion-dollar companies in America don’t need our welfare! Bad!”
But no one is yelling and screaming. Instead, in a starkly divided country, corporate pandering is the last bastion of bipartisanship, an activity enjoyed by both Democrats and Republicans at every level of government. New Jersey and Maryland, both blue states, insisted that Amazon take $7 billion in tax savings just months after congressional Republicans passed a corporate income-tax cut that some analysts project will save Amazon nearly $1 billion over the next decade.
Corporate America is getting all the help it doesn’t need. You and I may not like it. But executives such as Jeff Bezos have no reason to care. They are winning by the rules of a broken game.