Lessons from the Amazon HQ2 Tax Break Race

November 13, 2018

Confirming previous reports, Amazon has announced New York City and Arlington, Va. as the locations for its new headquarters operations. In its announcement, the company also disclosed the state and local tax incentives offered by the two jurisdictions, showing the company could receive up to $773 million from Virginia and nearly $3 billion from New York in tax breaks.

States and localities give away billions of dollars annually in tax incentives, so Amazon’s situation is nothing new. But they’re an extremely inefficient way to provide tax relief or grow the economy. When incentivized firms relocate, incumbent businesses and individuals end up footing the bill for the increased demand in public services.

One Place Pays, Others Benefit

In the case of Arlington, nearby Washington, D.C. and Maryland will see some of the economic benefits from Amazon’s location choice without offering up any tax breaks of their own. Some Amazon employees may choose to live outside Virginia and commute to work, and many will use disposable income on entertainment in the nation’s capital or elsewhere. The same goes for local businesses that provide goods and services to the new Amazon location: some may be right in Arlington or in other Virginia localities, but others will come from D.C., Maryland, and elsewhere.

Unaccountable Spending

Tax incentives and economic development grants represent government decisions to dedicate resources to a specific activity. However, policymakers also rarely give tax expenditures and grants the same scrutiny and accountability as appropriated funds. This might be changing; more states are starting to evaluate the amount of revenue dedicated to economic development and whether these deals provide much of a return on investment.

But large tax incentive deals are still quite common, despite countless stories of companies receiving special treatment and ultimately having to cut back on the promised jobs and investments. It’s always better to diversify your local economic portfolio than to put all your economic eggs in one basket. Targeted subsidies facilitate the latter approach.

Real Tax Reform

So, if targeted incentives are bad policy, do taxes impact location decisions? Of course. Along with infrastructure, skilled workers, and education, taxes are among the factors businesses look at when deciding to locate or expand in a state.

To the extent that taxes play a role in business location decisions, states ought to focus on reforming their tax codes to benefit all taxpayers, not just a select few. The 2019 edition of the Tax Foundation’s State Business Tax Climate Index measures how well each state does that.

In recent years, Indiana, North Carolina, Kentucky and others have made their business taxes fairer and more efficient, moving up the rankings and decreasing their need to offer large tax breaks to new firms. Virginia is in the middle of the pack, at 22nd, while New York comes in near the bottom at 48th (despite improvements to its corporate tax in recent years). It’s no surprise that Newark, N.J., in the worst performing state on the Index, felt the need to offer Amazon a package worth approximately $7 billion.

Targeted tax incentives distort the market and favor certain businesses over others. They also represent an attempt to gloss over problems with a state’s tax code, which would be better addressed through comprehensive tax reform.

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