Just over 106 years ago the Titanic sailed on her ill-fated maiden voyage. But by happy accident industrialists J. P. Morgan and Milton Hershey literally missed the boat. In more recent news, Denver officially learned Nov. 13 that it’s no longer a candidate for Amazon’s expanded headquarters, HQ2.
Perhaps locals should breathe a sigh of relief. The resulting subsidies could have sunk the city’s finances.
Sure, politicians from sea to shining sea offer corporate tax breaks and other handouts all the time. Paying businesses to relocate and allegedly create local jobs is good politics, even if the facts tell us it isn’t good economics. The sheer size of the Amazon subsidies makes an already-shaky policy potentially catastrophic.
Estimating the cost of the subsidy bids is difficult — in many places not even city councils knew what Amazon was offered. The few publicly available bids initially made by semifinalist cities and states averaged a staggering $8.9 billion over 15 years. Amazon eventually required non-disclosure agreements of all 20 semifinalists, so the clandestine final offers were almost certainly even larger.
Corporate handouts suffer from three fundamental problems:
First, they don’t actually work. Companies relocate for profitability reasons, and local tax policy is only one small part of that. The availability of a skilled workforce, access to resources, and opportunities to work with nearby industries usually outweigh any subsidies. Tax incentives are at best a tiebreaker and more often than not simply a waste of public money.
Even worse, the academic research on corporate subsidies generally finds that while they benefit the company on the receiving end — obviously — they don’t actually improve community welfare.
Second, giving tax privileges to one company imposes costs on other businesses and residents. Locals must either pay more for a given level of public services, or accept a reduction in service quality and quantity. The average publicly-available city bid ($2.15 billion) could instead fund 770 additional Denver police officers — a 52 percent increase—or pay for the cost of educating 9,300 public school students each year.
And since Colorado offered its own undisclosed subsidies, people across the state would have suffered these same kinds of tradeoffs. For the average publicly-available state bid ($6.75 billion), Colorado could annually fund 28,700 full tuition scholarships at the University of Colorado or pay for all highway maintenance for 14 years.
Or instead, why not cut state corporate income taxes by 84 percent over the life of the subsidy? Reducing taxes for every business is better for economic growth — and more democratic—than giving that entire benefit to a single company. Lowering the cost of doing business for homegrown enterprises would help them expand into the Amazons of tomorrow.
The higher taxes to fund the subsidy and the long-run costs of reduced public services generally outweigh any extra tax revenue that might be generated, meaning these schemes don’t actually pay for themselves.
Third and most importantly, special government privileges degrade our democratic ideals. Because we allow (and often encourage) politicians to offer special privileges, corporations and special interest groups have all the motivation they need to lobby hard for them.
Many politicians and economic development officials see the ruse for what it is, but they feel trapped because every other city and state is also doing it. Politically, they can’t risk letting their neighbors outcompete them.
Economists call this kind of problem a “prisoner’s dilemma.” Nobel laureate Elinor Ostrom illustrated that mutual cooperation is the solution, but it requires clear lines of communication and credible commitments from all parties involved. An interstate compact that forbids the use of public funds to privilege any business or industry — compelling policymakers to treat every company equally — offers one way out.
In the end, Colorado may be better off without Amazon — especially given the exorbitant subsidies offered — even if the rejection stings. Sometimes missing the boat is the best thing that can happen to you.
Michael Farren is a research fellow and Anne Philpot is a research assistant with the Mercatus Center at George Mason University.