n Tuesday, Amazon ended a yearlong wait. Out of the 238 sites offered by cities throughout North America, the company announced that it would split its second headquarters between Long Island City, Queens, and Crystal City, Virginia, just outside Washington, D.C. In each case, the city and state governments will be paying Amazon billions of dollars in cash grants, infrastructure improvements, and tax breaks. But the federal government will be offering something as well.
Tucked into last year’s 503-page federal tax cut is the creation of program that provides federal tax benefits to help jump-start local economic development. The idea behind these “opportunity zones” is to bring private investment into disadvantaged neighborhoods. The program is designed to help the poor, but its design provides tremendous opportunities for politicians and companies—like Amazon and its new political patrons—to hijack it for their own ends.
While we tend to think of economic development in terms of helping people, the Opportunity Zone program is focused on helping places: the federal government specifies areas where there is a high concentration of poor residents, and lets states choose some of them to receive Opportunity Zone status. The workings of the program are complicated, but as Jim Tankersley explains in the New York Times, “Investors who pour unrealized capital gains into funds that invest in real estate or other assets that qualify for opportunity zone status can essentially avoid as much as 15 percent of the taxes they would have owed on their investment gains.” In the case of Amazon’s Long Island City headquarters, Tankersley points out, the beneficiaries won’t just be Amazon: “the bigger windfall will flow to the people who already own land in the zone or other zones nearby, and to the investors who will race in to build and open businesses in the area.”
The idea of “place-based” policies isn’t new, and the benefits and pitfalls are well documented. Neighborhoods with lots of poor people can indeed be badly in need of investment. But these places can be areas of high income inequality, with families of rich and poor co-existing in the same neighborhood. Gentrifying areas or student enclaves, meanwhile, may look poor, but they are likely not suffering from lack of investment. Even if a place does have highly concentrated poverty, it isn’t always clear that more private investment is the solution. Maybe what the poor needs isn’t private investments in their immediate neighborhood. They need good jobs in their city, public transit to travel to those jobs, affordable day care options, well-funded schools, and access to affordable health care. We could go on and on. In short, helping poor people by targeting the places they live is much harder than it sounds.
Supporters of the opportunity zones program do make a strong case that local inequalities are on the rise and that innovative solutions should be considered to address these problems. The real problem is that the federal government provides such a loose definition of an opportunity zone that more than half of all U.S. census tracts qualify. This gives governors, who select 25 percent of qualifying census tracts in their state to nominate for an opportunity zone, tremendous opportunity to play favorites. And even well-intentioned government officials have political pressures that can affect their policy choices. Evidence from the Urban Institute shows a wide variation in how well these zones actually map onto poor districts.
Indeed, the waterfront tract of Long Island City where Amazon will make its new home—where, as Tankersley points out, the median annual income is $138,000—is a perfect example of an area that doesn’t seem to need tax breaks to attract investment. Nor is it likely that its Opportunity Zone status was necessary to attract Amazon. The program itself was created after the original Amazon call for HQ2 proposals. Amazon’s own summary of the incentives it received for investing in New York doesn’t even mention the Opportunity Zone designation.
Amazon’s location decision in the D.C. area—long seen as an HQ2 frontrunner—gives some clues to the importance, or lack thereof, of incentives. By choosing to locate in Northern Virginia, Amazon will receive incentives worth over half a billion dollars. But the company could have chosen a bid from Maryland, a few miles away, that topped over $8 billion.
As anyone who researches tax incentives (as I do) can tell you, companies often choose a location first and then deploy consultants and tax divisions to maximize the benefits. Amazon walked away from billions to locate in Virginia. The same company invested in Queens and will receive Opportunity Zone benefits that weren’t even pitched in the winning bid and that Amazon didn’t even mention in its press release. It’s possible that an off-the-record promise to designate the area as an Opportunity Zone was necessary to secure Amazon’s decision, but it’s implausible.
New York community leaders and politicians are up in arms over the use of state and city finances to further reward billionaires and to subsidize jobs paying $150,000. But in some ways it’s the federal tax benefits flowing to Amazon’s new Long Island City digs that are most objectionable. The goal of Opportunity Zones is to bring new investment into poor areas of the country that otherwise would flow elsewhere. By these standards, HQ2 is as bad of an example of the misuse of an economic development program as we can imagine. Amazon received extra benefits for an investment that was coming anyway. And this one wasn’t just funded by New York taxpayers. This was funded by you.
Nathan M. Jensen is a professor of government at the University of Texas, Austin, a Senior Fellow at the Niskanen Center and a co- author of Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain.