FOR decades American states and cities have offered companies incentives and deductions to encourage them to invest in their jurisdictions. Their fear of missing out has made it firmly a buyer’s market. The bigger the investment and the more prestigious the company, the more generous the proposals it receives. Take Boeing, which was granted the country’s largest corporate tax break in 2013, when the state of Washington chose to forego $8.7bn in revenue to ensure the firm built its new 777X there. At present, the most attractive investment going is the second North American headquarters planned by Amazon (its current headquarters, in Seattle, is pictured). The firm is promising to spend $5bn and create 50,000 highly paid jobs in its chosen destination. The company laid out detailed criteria in September and received more than 230 applications.
They were a mixed bag. Some were little more than publicity stunts. Tucson in Arizona sent a 21-foot cactus to the company’s boss, Jeff Bezos (it was swiftly donated to a museum). Stonecrest in Georgia offered to carve out a portion of the city and rename it Amazon. Others made extensive use of existing inducements, such as personal-income tax diversions (PITs), with which states pay back a fixed proportion of employees’ income taxes to the company. This is a pillar of Chicago’s bid, which includes a PIT scheme worth more than $1.3bn. Another common incentive is to reduce a company’s construction costs, perhaps through removing sales taxes from the cost of a new building. Among the Amazon contenders, Chula Vista in California was particularly brazen. Its bid offered up 85 acres of land, valued at $100m, for free.
However, two bids contained ideas that hinted at new developments in the way cities will court companies. Boston proposed an Amazon TaskForce, a group of public-sector workers who would be on hand to cater to Amazon’s whims and smooth over any “co-ordination” issues with the rest of the city. Fresno in California went further in blurring the lines between public and private. In its proposal, all taxes paid by Amazon workers would be diverted into a fund, 85% of which would be spent on projects approved by a panel split between representatives of the city and of the company. This would set a new precedent for the influence a company has over the area it occupies.
Given all these blandishments, it might be assumed that the economic benefits of such tax incentives and deductions were clear. This is not true. A study from 2017 by the W.E. Upjohn Institute for Employment Research found that the impact of tax incentives on state GDP was statistically insignificant. Research by the Pew Research Centre, a think-tank, discovered that not a single state “regularly and rigorously” tests whether its incentive schemes work. The strongest factor in determining whether a state offers lots of tax incentives is not its GDP or employment trends, but whether it did so the previous year. In the case of the new Amazon headquarters, though, such doubts may be at least partially assuaged. There is some evidence to suggest that winning a big plant can be good for a local economy, and the size and high-tech skills of Amazon’s workforce should generate spillovers for the local economy. The company’s shortlist is likely to include places like Washington, DC, Denver and Boston. Wherever it goes, it can be assured of generous welcome.