Last year, the state of Georgia entered the competition for Amazon’s second headquarters. The state put billions on the table to woo the company and its potential 50,000-job, $5 billion investment.
This year, not long after Atlanta was named one of the 20 finalists for Amazon HQ2, Lt. Gov. Casey Cagle of Georgia lashed out at Delta Air Lines after it suspended discounts for members of the National Rifle Association. Mr. Cagle declared he would kill state tax breaks for the airline, and the Republican State Legislature followed through by removing about $40 million in tax incentives from Delta.
The Amazon offer was an effort to attract business, while the Delta punishment will probably have the opposite effect. But they are both really about the same thing: political theater.
Politicians are using public policies, from renaming a city to offering billions of dollars in grants, infrastructure improvements and tax abatements, to take credit for companies’ location decisions. If Amazon chooses Atlanta, politicians will point to all that they have done to attract it.
But in fact it is most likely the quality of the work force that will be the deciding factor for Amazon, not the billions in incentives. Proponents of incentives often claim that these subsidies pay for themselves, and voters often support these efforts, believing the promises of good jobs. But this is possible only if governments perfectly target the companies that require incentives and pay just enough, and not a penny more, to sway a company’s decision.
In all likelihood, incentives are overpaying firms, leading to lost resources that could be used for other purposes. If the incentives don’t pay for themselves, they must be paid for by either higher taxes or decreases on government spending. Local school districts are vocal opponents of incentives; they see their tax base being given away in the name of economic development.
Politicians can minimize blame for losing an investment. For the 237 locations that won’t get Amazon HQ2, putting a big offer on the table, such as decades of tax reductions for Amazon, can help state politicians say something like, “We did everything we could to get them.”
The frenzy over Amazon isn’t the only example of this political game. It is easy to forget the story of Carrier Corporation in Indiana. In the first days of the Trump administration, Carrier announced the company’s intent to close some Indiana operations and move production to Mexico. But politicians swooped in to save the day, and a deal was struck in which the state offered $7 million (over a decade) in economic development incentives. After a few photo ops with President Trump and other state politicians, interest in the story died down.
Today Carrier has already cut many of its Indiana jobs because the $7 million incentive wasn’t enough to offset the much lower production costs in Mexico. The incentive may have delayed Carrier’s decision long enough to confer some political credit, but many of the “saved” Carrier jobs are now lost.
Spending $7 million for no real impact may sound expensive, but other recent economic development offers are staggering, even for those of us who think we have seen everything. The State of Wisconsin is offering Foxconn $3 billion for electrical-component manufacturing operations. The price tag for Amazon HQ2 is unknown, but the offers will most likely be in the billions for many locations.
What is troubling is that these giant incentives may also be setting a new benchmark for companies. In Wisconsin, Gov. Scott Walker is offering Kimberly-Clark, the maker of paper-based products, a Foxconn-size deal (in cost per job) simply to help keep an existing business from closing shop — in essence, to do nothing.
The chairman of JPMorgan Chase, Jamie Dimon, recently said that he will be pushing for the same deal received by Amazon. And this is even before any announcement of where Amazon is investing and what is being offered. Mr. Dimon would like to pre-order some Amazon incentives.
Political pandering is behind this explosion. But there is also some of what Brink Lindsey of the Niskanen Center and the political scientist Steven Teles call the “captured economy.” In between these politicians and corporations are economic incentive consultants, tax professionals and lobbyists all providing ways for businesses to maximize their take, and getting a percentage of these incentives in return. Some consultancies are clearly offering valuable services to governments and companies attempting to manage the complex decisions and operations across various locations in the country.
Others are experts at extracting as many incentives from governments as possible, in some cases moving businesses a few miles away, say, from Kansas City, Mo., to Kansas City, Kan., to qualify them as new investments.
What is to be done? One call is to push for more transparency in these policies, requiring governments to provide details on the support they are offering business. If the Amazon HQ2 competition is any guide, many governments will use creative ways to avoid disclosing their bids. Contact your city government and ask whether it sent a proposal to Amazon. I bet the answer will be something like, “We offered some details but the actual proposal was sent by X, which isn’t a government agency. We don’t have a copy of the final proposal.”
The best hope is bipartisan reform of these programs. On the left, critics of economic development programs don’t like “corporate welfare” or the use of taxpayer money to reduce the taxes of select businesses; on the right, numerous groups have rallied against “governments picking winners and losers.”
There is a role for government in economic development. State and local governments can help businesses without access to finance survive and expand, provide worker training that is valuable to residents and companies, and invest in traditional education from pre-K to college. There are certainly worthy investments that can be made. But $7 million for Carrier, $3 billion for Foxconn and billions for Amazon is just using the public coffers for political theater.
Nathan M. Jensen is a professor of government at the University of Texas, Austin, and a co-author of Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain.