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Angling for Amazon

Something that has really been dominating the news lately is just how far local authorities are willing to go in order to attract Amazon’s second headquarters to their cities. You might already have heard about New York City lighting up some of its biggest landmarks in ‘Amazon orange’, or about a town in Georgia offering to change its name to ‘Amazon’ in exchange for becoming the host of HQ2 — attracting an estimated 50,000 high-paying jobs in the process. However, beyond the creative acts that the mayors of these cities have managed to pull off, something that has not been getting so much attention — perhaps because many people have kept it classified — is the tax reductions (also known as incentives) that the respective states are offering to Amazon. These can easily be described as the most important part of the deal.

So why are the officials of 238 cities so desperate to get Amazon’s attention? The answer is pretty simple: They all think of it as a source of economic development. A new company running in their area would create jobs and thus salaries, which translates to increased spending by means of consumption — in turn boosting investment even more in trying to meet this newly generated demand. Now, the logic behind these tax incentives is that by lowering both income, business, and property tax, local governments are making their states more attractive to businesses, claiming that they’ll be getting back the money that they would otherwise have earned through these taxes. However, the controversy about this issue concerns whether or not these incentives are as needed or effective as they seem to be.

For starters, this practice has generated a situation where cities try to outbid each other in trying to get a certain firm under their belt, making their offers extremely high. For instance, the highest bid revealed to the public has been from New Jersey, which offered Amazon approximately 7 billion US dollars worth of tax breaks. This becomes a huge expense for the city, as well as something that harms government budgets, since every dollar spent on incentives is taken away from other accounts, such as education and health — which are investments that give governments and citizens secured benefits, unlike incentives. To illustrate: Studies have shown that the economic impact that some of these companies bring to the cities could actually be smaller than the amount of money that states are setting aside in order to host them. In some cases, they are also reducing some of their costs by granting these benefits to new businesses, which drives the prices of their products down. This indirectly harms firms that did not acquire such benefits, pushing down the demand for their products. In such cases, one of the expected benefits of the economic development incentives is lost, since there would hardly be any extra job creation; instead, what happens is that workers are reallocated to the new businesses, as older ones need to reduce output in order to cope with the decreased levels of demand.

Moreover, these incentives have the purpose of encouraging firms to do something that they wouldn’t otherwise have done, but many people question whether or not these tax breaks are actually necessary for a business expansion. For instance, there are cases where incentives are not meant to make a business change location, but instead to make it boost expansion. Also, because companies tend to grow and expand depending on the needs of the market, not all investment or job creation can be attributed to incentives. This limits their effectiveness, since the state could have profited from that expansion. Let’s take the case of FedEx as an example. Back in 2016, they decided to move their business to Fargo, North Dakota, where legislators granted them 600,000 US dollars worth of tax incentives, even though FedEx representatives had openly stated that the incentive would not alter their decision to move to the city. In this case, the incentive becomes redundant, since you don’t need to encourage a person to do something that they were going to do anyway. Therefore, the city would also have benefited from more jobs, salaries, and tax collection without it.

Nevertheless, it is true that in many cases, cities and states sustain great advantages from a business expansion, especially one as big as Amazon’s. It is also true that a city without an appealing infrastructure or workforce can draw the attention of investors using these tax cuts. However, it is not always convenient for them to set aside so much money for uncertain benefits, especially when some of these incentives have proven to be unnecessary (and sometimes even ineffective) to earn back the taxes that are given up in exchange for new businesses in town.


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