Amazon.com Inc.’s announcement that it will build a massive second headquarters—”HQ2″— and stage a public competition among metro areas for it, has set off a national frenzy. Over a hundred cities from Chicago and Cincinnati to Tacoma and Tampa Bay (and even 23 different neighborhoods in New York City) have expressed interest in bidding for the headquarters, offering everything from massive tax incentives to a 23-foot-tall cactus to court the online retail behemoth.
It’s the trophy deal of the decade, if not the quarter-century. It’s also one ripe opportunity to expose and challenge the whole “economic war among the states” that is causing public officials to prepare extremely costly tax-break offers for a company valued at $450 billion and with a long history of tax avoidance.
Because Amazon has chosen to stage this auction publicly (a rare event, see also Tesla Motors and Boeing), public officials should feel emboldened to break out of the “prisoners’ dilemma” narrative that usually inhibits them. That is: Since one can easily determine who else is competing for the deal (mayors are tweeting!), and the company’s criteria are public knowledge, why shouldn’t governments communicate and cooperate to avoid getting fleeced? Why shouldn’t they agree on principles to which they will all adhere with Amazon?
With its sophisticated internal site location department that it launched five and a half years ago, Amazon likely already knows its short list of candidate locations, if not its top choice. But as I explain in The Great American Jobs Scam, even when companies know where the business basics dictate going, the postwar site location system allows them to create straw men, to up the ante for more tax breaks.
But this corporate-dominated system has overreached and is threatening to undermine public finance. Big companies are winning about two dozen “megadeals” per year, despite low unemployment. Their average cost? $658,000 per job, guaranteed losers for taxpayers.
Site Location 101: Taxes Are the Least of It
Looking at the transaction from the corporate side of the table: For the average company in America, all state and local taxes combined equal only 2% of their cost structure. The business basics–labor, occupancy, raw materials, business services, energy, logistics, etc.–make up 98% of companies’ cost structures and therefore almost always determine where they expand or relocate. Tiny changes in these big-cost variables dwarf anything one could do shaving some fraction off 2%.
The public doesn’t know this because America’s state-eat-state industrial policy, derived from our constitutional federalism and then monetized and honed by site location consultants over 80 years, intentionally and systematically confuses people about cause and effect. We are led to believe tax breaks matter. We don’t know that the only reason our community even gets asked to offer incentives is because it has the business basics; It is an inherently profitable location.
Executive Talent Pool: #1 Criterion for Corporate Headquarters
For a corporate headquarters deal, and especially one this large (there’s no precedent for a 50,000 office-worker project), the head-and-shoulders number-one criterion is the executive talent pool: the supply of people with engineering, marketing, finance, legal, and other specialized professional skills.
General Electric made that clear when it relocated its headquarters (and only 800 jobs) from Fairfield, Conn. to Boston, where it openly attributed its decision to the region’s talent pool created by 55 colleges and universities.
While Amazon has other baseline criteria (e.g., international airport, metro area of at least one million) which limit the possibilities, many handicappers correctly focusing on executive talent have short-listed cities with numerous corporate bases, including Atlanta (home to Coca-Cola, UPS, and Home Depot, among others).
Of course, having a large professional talent pool is of little use if a company cannot access most of it. Hence Amazon’s signal that its next base city should also have good mass transit. That’s why I can’t see sprawling Atlanta having a chance: It has low comparative transit ridership and notorious traffic congestion.
A Place to Draw the Line: Amazon Hints at “Special” Incentives
Instead of competing on who can give away the most, cities and states should agree on principles of stinginess and defend their tax bases so they can help all employers with the business basics that really matter.
Besides, many big incentives are automatic “gimmees.” That is, a deal this big will in most states automatically qualify for investment tax credits and/or employment tax credits that will obliterate Amazon’s corporate income tax liability for many years. The project will in many states automatically be exempt from sales taxes on building materials, machinery, and equipment. And while local property tax abatements won’t be automatic, there’ll be enormous political pressure to grant them (or to create a tax increment financing, or TIF, district so that Amazon essentially pays newly resulting property taxes to itself or to mainly benefit itself).
So absent reforms, Amazon is likely to pay few if any income or sales taxes, and to get big long-term property tax abatements or diversions. The company is also clearly interested in taxpayer-funded infrastructure improvements and/or land-parceling subsidies.
Yet in its Request for Proposals, Amazon asserts: “… a Project of this magnitude may require special incentive legislation in order for the state/province to achieve a competitive incentive proposal.” Translation: We want more than all the automatic gimmees.
What could Amazon be referring to? Perhaps it wants its employees’ state personal income taxes. Already in 17 states, more than 2,700 companies effectively keep some of their employees’ payroll taxes (though the workers’ pay stubs fail to disclose that fact). Call it Paying Taxes to the Boss; it could generate huge sums for Amazon and deprive a state treasury of a critical benefit to offset Amazon-driven costs.
Or perhaps Amazon expects to generate such huge corporate income tax credits that it would like to monetize them. Amazon could demand that such credits be designated “transferrable,” i.e., legal to sell to other companies that do owe tax. Tesla Motors gained that right as part of its $1.3 billion Nevada “gigafactory” megadeal and has already sold $20 million worth–to a casino.
Creating a lavish new tax break for one big company can have costly, long-term consequences. In 1989, Sears Roebuck (now Sears Holdings Corp.) threatened to relocate its headquarters from Chicago’s Loop to another state. It demanded a “greenfield” TIF district 29 miles away, and the state conceded, gutting its anti-poverty targeting rules. Today, Illinois has more than 1,100 TIF districts capturing over $1.2 billion a year, and Highland Park, Ill. is believed to be the only U.S. city with both a TIF district and a Porsche dealership.
Amazon no doubt knows all about these turbocharged giveaways and earlier this year was hiring more senior tax-break experts. Indeed, as of September 24, Amazon is still hiring for positions it brazenly calls “Senior Manager, Economic Development” and “Compliance Manager, Economic Development,” (whose job description includes “…monetization for Amazon’s corporate credits and incentives portfolio…”).
Time for an Organized Pushback?
Many economic development officials understand and dislike the “prisoners’ dilemma” system. The implicit threat that enforces the system is the belief that site location consultants would blacklist a city or state that refused to passively remain quiet and merely offer bigger tax breaks. But in this case, the transaction is so open and entire metro areas are being asked to bid. How would a site location consultant credibly blacklist an entire labor market?
Plus, Amazon may be a popular company, but in tax-policy circles it’s a villain, notorious for its role in undermining state treasuries by avoiding the collection of sales taxes until its Prime business model evolved, making it impossible for the company to avoid having “nexus,” or sufficient physical presence to enable a state to compel sales tax being collected. Amazon then became an aggressive seeker of economic development subsidies as it abandoned nexus and went on a warehouse- (and data center-) building spree, racking up more than $1.1 billion to date.
So given that Amazon has already been showered with tax advantages all of its life, when it asks for special incentive legislation for its HQ2, here are some principles we recommend public officials unite behind:
No sales tax exemptions; it’s payback time.
No transfer rights for corporate income tax credits (i.e., no negative income tax rates!).
No grabbing other people’s money (like Amazon employees’ state personal income taxes).
No property tax abatements; those revenues will be needed to address the costs of Amazon-induced growth: on schools, infrastructure, safety, and other public services.
Yes to community benefits. Instead of giving subsidies, governments should demand concessions from the company, just as I’ve recommended they should around Amazon warehouses. To offset gentrification pressures, Amazon should agree to and support inclusive zoning in housing around its campus, and make long-term contributions to affordable housing funds. When hiring, it should give local hiring preferences for both construction and permanent jobs (with targets for disadvantaged workers). There could be additional, specific needs such as environmental accommodations and university partnerships.
Let’s put this ruinous, so-called “buffalo hunting” in a museum where it belongs. I want historians to look back at Amazon in 2017 and say “That’s when America stopped racing itself to the bottom.”