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October 19, 2017

Battling for a bad deal? The pros and cons of Amazon’s headquarters competition

October 19, 2017

Amazon disrupted more than just e-commerce last month when it announced it was searching for a new corporate headquarters site.

Cities across the US have been scrambling to convince the retail giant to choose them for up to 50,000 high-paying jobs, 8.1 million square feet of office space, $3.7 billion in capital investment, and $38 billion in indirect investment resulting from the new wave of workers. Today is the deadline to submit proposals, and Amazon is expected to announce the location for its second headquarters, or HQ2, early next year.

Although this opportunity might seem like a boon for cities looking to emulate Seattle’s rapid growth (home to Amazon’s first headquarters), research shows these competitions can trap cities into offering tax incentive packages that take money away from more effective investments.

Below are pros and cons of competitions among cities looking to lure big firms. These issues highlight why economic development is about more than tax incentives.


Cities lean into their distinct advantages.

Cities are trapped in a race to the bottom.

Some research suggests that economic competition among local governments can produce benefits, including more productive public institutions and additional investments in public goods like infrastructure and education. This competition, in theory, encourages localities to improve the quality and price of their services—meanwhile, residents can choose communities that best meet their individual preferences.

But in many contexts, the same theoretical assumptions do not apply. Tax incentives and financial subsidies can create a prisoner’s dilemma where firms pit cities against one another. Cities will be incentivized to match tax rates and subsidy deals not just for Amazon but other companies. This can cause a net loss in the regional tax base and might not be economically efficient for the city, especially if promised jobs prove ephemeral. Amazon has set off the type of local bidding war that could result in damaging incentive packages if cities feel pressure to compete on a short-term basis. Cities can’t change their regional advantages in a month, so the only thing cities may feel they have available to them is their incentive programs. 


The city gains a new wave of high-wage workers.

A population surge raises affordability concerns and strains services.

Bringing in a lot of additional high-wage workers means housing costs will go up. That’s great for the city’s tax base, but there might be some considerations about affordability, and much of the economic benefit may accrue to out-of-area landowners. The city should think about affordable housing before recruiting firms.

Some studies have shown that fiscally challenged communities may not be able to sustain the short-term costs associated with aggressive industry recruitment packages. If more people come to the area and bring jobs, they’re going to bring kids who will need to be educated in the public school system. They’ll need to use roads and bridges and all the transit infrastructure more frequently. A population increase means more public safety spending increases. This is natural whenever more people move into any locality. Those are costs that the city takes on that might be less visible than a tax incentive or grant program.


Companies promise thousands of new jobs, high wages, and billions in indirect investment.

Companies may not follow through on those promises.

Tax incentives or subsidies can fail to produce the desired economic outputs if they don’t produce the jobs that were promised or don’t produce wages that are high enough to improve community well-being. Accountability measures and claw-back measures are key. If the firm doesn’t perform at the level they said they would at a baseline, at least the city can get its money back.

More states and cities are building good data and evaluation practices so they can understand if a program is working, who it is working for, how much it is costing, and what the trade-offs are. If they’re not collecting those data from firms, they won’t know how much funding they’re giving away that could go to public education or airports or highways. 


Competitions draw attention to broader questions of economic development.

Research shows cities should invest in long-term improvements rather than short-term competitions.

Research shows that the biggest influences in where a company goes are unrelated to tax incentives and are beyond a state’s control in the short run. In 2016, firms ranked access to highways, availability of skilled labor, and cost of labor as the most important business location factors. Smart incentives will include investments that help the region become competitive in those area and don’t undermine resources for broader investments.

Economic development is about more than tax incentives. We know evidence-based apprenticeship programs, workforce development programs, and good infrastructure support economic development. Cities might consider these long-term investments and shifting some of those tax incentive investments into evidence-based practices if they want to take a proactive role in their economic development.

For example, the General Electric headquarters deal included $125 million in bridge renovation and transit upgrades that have beneficial spillover effects for the entire community. Those investments don’t just go toward a particular firm; they improve mobility or the economic competitiveness of the city or region as a whole. Cities offering incentives should think about incentives that will benefit the broader community and benefit other firms, so that they’re leveraging that investment more effectively.

Although the political incentives and pressure on policymakers to offer tax incentives are strong, research shows that tax incentives are not the driving force behind where a firm decides to go. Cities should be cautious of offering luxurious tax incentive packages. Even if a city wins a big firm, the incentive may not have been the driving force behind the decision and may have been an unnecessary public expenditure that could’ve gone to another economic development investment, such as K–12 education or local infrastructure, that may increase a region’s competitiveness in the long run.

In this Monday, Oct. 16, 2017, photo, Zavian Tate, a student at the University of Alabama at Birmingham, pushes a large Amazon Dash button, in Birmingham, Alabama. The large Dash buttons are part of the city's campaign to lure Amazon's second headquarters to Birmingham. Photo by/Brynn Anderson/AP.


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