Ron Kim was in complete shock. It was November 2018, and the assemblyman had just heard details of the deal which would give Amazon more than $2 billion in taxpayer-funded subsidies to locate part of its second headquarters in Long Island City, Queens. A Democratic member of the New York State Assembly, Kim felt that giving taxpayer money to this trillion-dollar supergiant was “unfitting,” to say the least.
By inviting open bids in the search for a location for HQ2, Amazon ignited a year-long frenzy in which American cities fell over themselves to offer enormous tax breaks. In the process, Amazon didn’t just gain an enviable deal for its new headquarters — it also gained an incredible amount of corporate intelligence. “Amazon, which is a growing corporation, has now accumulated a massive database of what people were willing to offer to get a particular project,” says Steven Strauss, a professor at Princeton focusing on urban development who served as managing director of the New York City Economic Development Corporation under former Mayor Michael Bloomberg.
The then newly-elected Rep. Alexandria Ocasio-Cortez said she had been receiving calls from “outraged” Queens residents. New York Senator Kirsten Gillibrand tweeted, “One of the wealthiest companies in history should not be receiving financial assistance from the taxpayers while too many New York families struggle to make ends meet.” On November 27, protesters stormed Amazon’s store on 34th Street.
“You walk out in New York City, in any corner you can see people identifying a million ways to spend their money better than giving it to Jeff Bezos,” Kim told me. “Amazon doesn’t need our money. It’s a trillion-dollar company.” The phrase he kept coming back to — that most of the opponents of the HQ2 deal kept coming back to — was “corporate welfare.”
Corporate welfare — the practice of trying to lure companies to a location by offering incentives like tax breaks — is not new. The first documented example dates back to 1160, when a wool-weaving facility was offered tax incentives to locate in Biella, in northern Italy. In America, the first recorded example was in 1791, when New Jersey offered Alexander Hamilton — yes, that Alexander Hamilton — a 10-year tax abatement to locate his manufacturing plant in Paterson. It was controversial even then; critics said the incentive was “injurious to other states” and “unjust and arbitrary.”
But it was in the 1990s that corporate welfare took off. Over the last 20 years, the percentage of American municipalities offering an incentive program went from around 50% to above 99%. Exact figures, because many of the deals are secret, are hard to come by, but today America spends between $45 and $80 billion per year on corporate welfare — three times what it spent in 1990.
Studies found that two-thirds of companies had already made their investment decisions before factoring in tax incentives.
States and municipalities have founded economic development agencies: nonprofit groups formed with the express goal of attracting investment. These groups’ quasi-autonomous status means they are not subject to official oversight or to Freedom of Information Act requests from the media, which is why we still know so little about some cities’ bids for Amazon HQ2.
But do these incentives work? The answer, most experts agree, is no. Studies found that two-thirds of companies had already made their investment decisions before factoring in tax incentives. They based those moves on structural factors — infrastructure, human capital, local supply needs, proximity to markets, and more. In those situations where tax breaks did affect the decision, the offer was effectively too good to refuse, meaning the taxpayer is likely getting a bad deal.
Companies also game the system, operating until the breaks expire, and then moving on. In 2017, Carrier, an Indiana-based heating and refrigeration company, accepted $7 million in tax breaks in a deal which newly-elected President Donald Trump claimed would protect “close to 1,000 jobs” — then laid off almost 700 workers anyway. The same year in Wisconsin, then-Governor Scott Walker offered a $4.8 billion incentive package for the Taiwanese electronics manufacturer Foxconn to build a manufacturing plant in the state that promised to create 13,000 jobs. Walker and Trump took victory laps over the deal, but it unraveled in February 2019 when Foxconn scaled back its plans. The Wisconsin Foxconn facility currently looks set to employ only around 1,000 people.
So why are they still so common? It comes down to politics. Eddy Malesky, a professor of political science at Duke University who specializes in economic incentives, found in a series of studies that voters heavily reward politicians when companies move to the area. Corporate investment gives a hefty 20% poll bump to the incumbent, rising to 25% if that politician offered the company an incentive. Crucially, he found voters gave a 10-point bump to a politician who offers an incentive even if the investment does not come.
This means incumbent politicians are heavily incentivized to offer tax breaks to corporations even if the deal is terrible because there is effectively no political downside. “Even when they know in their hearts it’s the wrong thing to do, they still do it,” Malesky tells me. “It’s heads I win, tails the taxpayer loses.”
Politicians argue — as New York Governor Andrew Cuomo did with Amazon — that incentives represent money that wouldn’t exist without the deal. In a way, they’re right: Because the incentives are abatements of future tax revenue from the company the city is trying to lure, if the company doesn’t come, there would be nothing to tax. But there are hidden costs to the incentives that may not be fully understood until decades later: increased pressure on municipal infrastructure and waste management, education costs, more expensive housing, and so on. Often the economic boost a company represents doesn’t make up for the price of the incentives.
One example is Ferguson, Missouri, which famously exploded into civil unrest in 2014 following the killing of an unarmed black man, Michael Brown, by police. Ferguson is home to Emerson Electric, a Fortune 500 company with annual revenues topping $17 billion. But partly because of the incentives offered to it and other companies in downtown Ferguson — and the structure of the municipal bonds the city issued to pay for them — Ferguson was forced to lean on regressive taxes like sales tax, taxes on gas and electricity usage, and on fines, to cover its budget. In 2013, municipal fines — such as parking or speeding tickets — accounted for 20% of Ferguson’s budget.
“There’s almost nobody on the academic side that would say this is good economics.”
“There’s a bigger point in all of this,” Strauss told me. “Should states be competing [against each other] on tax breaks? Is this really a useful form of competition?” He pointed to Kansas City, where one metropolitan area is split by the state border between Kansas and Missouri, allowing corporations to play the states against each other for tax breaks in what became known as the “Border War.” AMC Entertainment — the parent company of the world’s largest chain of cinemas — went one way; Applebees’ headquarters went the other. Sixty-seven companies crossed the border one way or another, and more than $300 million was given in incentives — but no new jobs were created.
Nate Jensen, now a professor of government at the University of Texas at Austin, worked at Washington University in St. Louis during that time, and tells me the “extreme absurdity” of what he saw happening in Kansas City sparked his interest in the topic, which would become his research focus. State-by-state comparisons showed Jensen that the Border War wasn’t an outlier. Most incentive programs he studied demonstrated “no net impact” on jobs. “There’s almost nobody on the academic side that would say this is good economics,” he adds.
In New York, Amazon came under increasing — and unusual — pressure. Public outrage followed a February 2019 report revealing that Amazon, despite turning a profit of more than $11 billion in 2018, would pay exactly $0 in federal taxes for 2019 — for the second year in a row. Kim, the Queens councilman, introduced a bill to take back the subsidies offered. “What it would do,” he told me, “is divert the corporate incentive and subsidy money… and conduct a five-year phaseout of all those corporate welfare funds to focus on investing directly into the people of New York.”
On February 14, Amazon pulled out of the New York deal. The world’s richest man had taken his ball and gone home. “While polls show that 70% of New Yorkers support our plans and investment, a number of state and local politicians have made it clear that they oppose our presence and will not work with us,” Amazon said in a statement. (In fact, the percentage of New Yorkers who approved of the deal was 57%, according to Reuters.) The company still plans to go ahead with the other half of what was eventually the split winner of the HQ2 bid, in the northern Virginia suburbs of Washington, D.C.
Malesky found that cities with a directly-elected mayor are more likely than those with an appointed town manager to engage in corporate welfare, implying it is “a feature of the democratic process.” Interestingly, though, he tells me there is a mirror image phenomenon in authoritarian countries like China and Singapore. “There’s a similar pandering mechanism, but it’s not downward towards voters; it’s upward toward central politicians,” he says. “Local government officials are using incentives to lure companies so they can claim credit when it comes to promotion time.”
So what can be done about it? Malesky also found that when voters were informed about the full costs of offering corporate tax incentives — that sales tax might go up, or funding for education might be cut — the bump in voter support for the politicians offering them vanished. “The solution here is obvious,” he says. “Transparency.”
The real problem is the ecosystem pitting states against each other in an arms race to offer the best incentives to corporations.
Jensen agrees transparency is key, but the way HQ2 played out doesn’t make him optimistic. “A lot of cities that were known to be very good in terms of transparency and good governance — Pittsburgh, Indianapolis — completely hid their Amazon HQ2 bids,” he says. “Pittsburgh sued and sued to keep it secret until they finally lost; Indianapolis is still fighting to keep their bid secret.” He says that despite the attention paid to New York for standing up against HQ2, “that is going against the grain of many cities still going all-in on these programs — and even creating new ones.”
Still, there has been some progress. In 2015, the Governmental Accounting Standards Board — an NGO that acts as a financial watchdog and sets generally-accepted rules for business accounting in the U.S. — issued new guidelines aimed at enabling greater scrutiny of the true cost of tax abatements. Another potential solution is a federal “Main Street Fund” — proposed by Aaron Chatterji, a business professor at Duke — which would encourage state governments to forgo corporate tax incentives and invest in infrastructure and small business loans instead.
It is possible that in the end, the HQ2 saga will represent a watershed moment in how America thinks about the relationship between corporations and municipalities. Amazon’s imperious attitude made it easy to paint as the villain, but it was just responding rationally. The real problem is the ecosystem pitting states against each other in an arms race to offer the best incentives to corporations.
Kim realizes this too. “While we won this battle, we must not lose track of the bigger discussion regarding the misguided practice of handing out taxpayer-funded giveaways to corporations instead of investing in community needs,” he told me. Along with co-sponsor New York State Senator Julia Salazar, Kim has made his End Corporate Welfare Act part of an effort to create a multi-state pact to end the “race to the bottom” of intrastate competition.
Legislators in Illinois and Arizona have already begun processing versions of the bill, and others in Florida, Connecticut, New Jersey, and Massachusetts are considering it. Kim hopes more will join them. “Through cooperation with other states, we will end taxpayer-funded corporate giveaways and finally put people over corporations,” he said.