Why cities should stop playing Amazon’s game and quit offering companies tax incentives

New York City should count its blessings.

Amazon’s decision to walk away from its plan to build a new headquarters in Queens stunned city and state officials, who had promised US$3 billion in incentives in exchange for some 25,000 jobs. They had never questioned whether the promised jobs and economic stimulus would actually appear.

In my own research as an economist studying corporate welfare, I have found and reviewed much evidence on the effectiveness of tax and other incentives. My conclusion: Incentives just don’t work.

Corporate ‘downsizing’

That’s in part because companies aren’t obligated to follow through on their promises. Just ask Boston.

In February, around the same time Amazon walked away from its NYC plans, General Electric announced it will cut back on jobs and investment in its new headquarters in Boston. Only three years ago, the company’s plan to relocate from Connecticut in exchange for $25 million in tax breaks was touted as a big deal for Boston.

Or consider General Motors, which in 2012 said it would build a new electric vehicle facility in White Marsh, Maryland, after receiving a subsidy of $105 million from the U.S. Department of Energy, $6 million in grants from Baltimore County and $4.5 million in state grants for economic development and job training. This past November, the automaker announced it will shut down the plant as part of a restructuring effort.

Or Foxconn. In 2017, Wisconsin Gov. Scott Walker announced that the electronics giant would build a new factory in the state. The $10 billion investment was supposed to create as many as 13,000 jobs housed on a high-tech campus the size of 11 Lambeau football fields. Walker, who was described, during the announcement, as “a picture of grinning, fist-pumping excitement,” offered more than $4 billion in tax incentives in return.

With only 178 jobs created as of January, now the plans for a large factory to build large TV screens are in doubt. Instead, Foxconn said it plans to work on a research and development facility in the state.

President Trump, Gov. Walker and Foxconn Chairman Terry Gou broke ground in 2018, when the company’s plans were still supposed to go ahead as promised. AP Photo/Evan Vucci

Business as usual

And for those that do stay, the benefits to the city or region aren’t all that great.

A 2016 study by economist Carlianne Patrick compared counties that won large new factories with those that lost out during the bidding process. She found that they typically did not generate more revenue for the local government than it spent on incentives, even if they did induce small increases in economic activity.

Another study by Patrick found that making it easier for local governments to offer aid to companies reduced employment in rural counties. And in 2018, the W.E. Upjohn Institute for Employment Research concluded that factories and offices that received an incentive had employment growth 3.7 percent slower than those that didn’t receive the inducement.