To The Teacher:
The online retail giant Amazon is currently in the process of choosing a city in which to build a second headquarters. Because the company promises to bring jobs to whatever metropolitan area it chooses, many cities have made dramatic bids to entice Amazon to choose them for its new home. Almost certain to be included in every package offered to Amazon are large public subsidies.
This lesson examines the Amazon story and invites students to think critically about the practice of providing public subsidies to private companies—a practice with sometimes questionable benefits for those who foot the bill.
The first reading explores some of the arguments for and against using taxpayer dollars or tax abatements to lure companies. The second reading considers ways cities can ensure that companies like Amazon hold up their end of the bargain through strategies such as "clawback" rules and "tracking" for public subsidies. Questions for discussion follow each reading.
Amazon Bidding War
Online retail giant Amazon is currently in the process of choosing the city where it will build a second headquarters. (Its main headquarters is in Seattle.) Considering that Amazon will bring many jobs to whatever metropolitan area it chooses, it is not surprising that many cities would welcome the company. But is it worth the price they might have to pay?
On January 18, 2018, Mark Strassman reported for CBS News that, as Amazon narrowed its search, the cities still in the running began designing packages to entice the company:
Cities all over America are competing to host a new Amazon headquarters and the jobs that go with it. On Thursday, Amazon whittled down the choices from 238 to 20.
Finding a home for Amazon's second headquarters -- the company calls it HQ2 -- became corporate catnip to a frenzy of suitors coast to coast. American communities courted the company with gifts of land and tax incentives worth billions. Stonecrest, Georgia, proposed 345 free acres and even offered to change its name.
Deliberations were secret, but Amazon had a type in mind -- a metropolitan area of more than 1 million people that's a hub for top tech talent.
Atlanta touted its airport, highways and business climate. The city made Amazon's final cut.
"The number of jobs and just how positively it could change the landscape of the city. It is a big deal," said Atlanta Mayor Keisha Lance Bottoms.
These 20 names on Amazon's new dance card fell heavily in the Midwest, Southeast and Northeast. Here's why: Amazon, the world's largest internet retailer, proposes spending $5 billion to build HQ2, and create up to 50,000 jobs that average $100,000.
It’s almost certain that every city being considered will offer Amazon a package that will include large public subsidies. Based on what we know about the bids from cities that were not chosen for the shortlist, the subsidies will be exceptionally large. St. Louis and Southern Illinois offered a combined incentive package worth $7.1 billion. Newark, New Jersey, offered a package worth about $7 billion. Maryland offered a combination of about $3 billion in state tax breaks and $2 billion in state and local transportation and infrastructure upgrades. The governor called the offer essentially “a blank check.”
Cities offering large public subsidies and tax breaks to corporations has become standard practice in recent times. For city government officials around the country, the prospect of attracting or keeping jobs and spurring economic growth justifies these outlays. But to some observers, the balance of power in negotiations tilts heavily towards corporations, who can play cities against one another by threatening to pack up and leave. As Louis Story reported for the New York Times on December 1, 2012:
A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties, and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.
The cost of the awards is certainly far higher. A full accounting, the Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid.
“How can you even talk about rationalizing what you’re doing when you don’t even know what you’re doing?” said Timothy J. Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich.
The Times analyzed more than 150,000 awards and created a searchable database of incentive spending. The survey was supplemented by interviews with more than 100 officials in government and business organizations as well as corporate executives and consultants.
A portrait arises of mayors and governors who are desperate to create jobs, outmatched by multinational corporations and short on tools to fact-check what companies tell them. Many of the officials said they feared that companies would move jobs overseas if they did not get subsidies in the United States.
Considering the desperation of the cities that remain in the race for Amazon HQ2, the benefits of whatever deal is ultimately struck with Amazon are likely to tilt overwhelmingly in the company’s favor, rather than toward the public in the chosen city. It does not have to be this way, however. As we’ll discuss in the next reading, the prospect of a new company coming to town need not spark a race to the bottom. Rather, it is possible for cities to push to get their money’s worth when companies like Amazon come to set up shop.
How much of the material in this reading was new to you, and how much was already familiar? Do you have any questions about what you read?
According to the reading, what is the rationale for giving public subsidies to private companies?
According to the New York Times report, the balance of power in negotiations between corporations and city governments often tilts in favor of the businesses. What are some reasons for this?
What do you think? Do you think private companies should receive public money? Why or why not?
Do you think it would be worth it for your city to spend tax money to attract the new Amazon headquarters? Explain your position.
How Can Taxpayers Get Their Money’s Worth?
As long as cities and states are willing to undercut one another to attract businesses, those businesses will hold the upper hand at the bargaining table. That is why some opponents of public subsidies argue that the government should intervene to curb this behavior and restore some balance to negotiations. As Emily Badger reported for the Washington Post on September 15, 2014:
[Good Jobs First director Greg] LeRoy doesn't realistically expect any federal law [against tax incentives] any time soon. But he suggests a more modest alternative. In the mid-1980s, the federal government threatened to withhold a share of federal highway funds from any state that didn't enforce a legal drinking age of 21. We should do the same today around economic development incentives, LeRoy says: withhold 10 percent of some coveted federal funding stream — maybe Community Development Block Grants — from states that actively poach jobs from each other.
He calls it the "small carrot model," although others would probably see his plan as wielding a sharp stick.
So what would happen in this new world without interstate (or inter-city) economic warfare?
"We had a world in which this didn’t exist," Funkhouser says. That world lasted up through about the 1970s, by his metric. "We invested in the Interstate Highway System. We spent money on stuff that actually does create jobs: investment in infrastructure and investment in education. You need to have tools, excellent port facilities, excellent highways, and you need a highly skilled workforce. We have taken that money and shifted it away from the real generators of economic wealth and we’ve given it to people to line their pockets.
"If a state said, 'No, instead of $3 billion for Boeing, we’re going to invest it in schools, and we’re going to invest it in highways,' they would win," he says. "Nevada did not win on Tesla."
Even if a complete end to the system of public subsidies may not be on the horizon, smaller reforms may be possible. Critics of subsidies argue that, when taxpayer resources are used to attract companies, we often have no way of knowing whether these companies produce the jobs they promise. That is because there is no requirement to track the results of public subsidies. And without this information, it is impossible to hold them accountable when they do not uphold their sides of the bargain.
As Masako Melissa Hirsch and Charlotte Keith report in a March 30, 2017 article for the Times Union, critics of subsidies in New York have advocated implementing a more robust system for “tracking” both the subsidies that are given out and the behavior of companies that receive the incentives. Hirsch and Keith write:
Indeed, study after study by watchdog groups, the state comptroller's office and Gov. Andrew Cuomo's tax-reform commission has reached the same conclusion: the way agencies track the subsidies they hand out makes it difficult to determine whether the programs are effective and companies have lived up to their promises.
"There are no real measures to determine if taxpayers are getting their bang for the buck," said Andrea Miller, a policy analyst with state Comptroller Thomas DiNapoli….
Last December, six good-government groups demanded reforms to the state's process of awarding and monitoring economic development contracts. They were responding to the indictments of 10 state officials and developers who were charged by state and federal prosecutors with bid-rigging and bribery in connection with the awarding of state contracts for projects in Buffalo, Syracuse and Albany.
"Until there are major reforms, billions of dollars in taxpayer handouts to businesses remain ripe for corruption and abuse. The public still does not know exactly who is getting our money and what they are doing with it — and Albany [political leaders in New York’s state capitol] seems to like it that way," said John Kaehny, executive director of Reinvent Albany.
Among their proposed reforms was the state's publication of a "Database of Deals," allowing the public to see the costs and benefits of all subsidy deals. A handful of states have robust databases, including Illinois and North Carolina, said LeRoy of Good Jobs First.
"Taxpayers should know if they're getting their money's worth," he said.
Going a step further, cities and states could demand that companies that do not live up to their promises to create jobs must give back funds to the public. Such a requirement is known as a “clawback” provision. Former Ventura, California, mayor William Fulton explained the process in a January 1, 2010, article for Governing:
Four years ago, Georgia made a tax-subsidy deal with Alltel Corp., a telecommunications company based in Little Rock. Under Georgia's "revenue and apportionment" program, Alltel received tax breaks totaling $13.5 million over five years—one of six companies (along with Turner Broadcasting, HBO, General Electric and others) to receive such benefits.
Even at that price, it would have been a good deal for Georgia. The agreement called for the company to produce almost 800 new jobs at its Alpharetta, Georgia, headquarters. That's about $17,000 per job, but Alltel promised the jobs would pay on average more than $60,000 per year.
Last spring, however, Alltel acknowledged that it hadn't met the terms of the deal. After instituting company-wide cutbacks in 2001, the company wound up with about 135 more jobs in Georgia than it had in 1998, according to one estimate. And there was no evidence that the jobs paid anywhere near $60,000 per year.….
[Georgia] might be able to get some of its $13.5 million back—if it chooses to pursue Alltel under the "clawback" provisions contained in the state's tax-subsidy law. The law isn't airtight; Georgia doesn't even get a compliance report from the company unless state officials ask for one.
The state may or may not pursue a settlement. But the Alltel case is the latest example of an emerging question in economic development: If a company getting tax breaks doesn't deliver the goods, should the government agency involved demand its money back?
Clawback provisions—the term is taken from tax law—are increasingly common and some givebacks are taking place. United Airlines returned more than $30 million to government agencies in Indiana last year after failing to meet its jobs goal for a maintenance hub at Indianapolis International Airport—a deal that gave the airline $300 million in tax breaks….
Nonetheless, enforcing clawback provisions still isn't the norm. By and large, the corporate-tax subsidy is still viewed as a one-way street in the United States.
On the surface, it makes sense to insist on a clawback. But whether it's realistic depends on how you view the true nature of a tax subsidy. It can be seen as a loan to a company: a financial liability that must be paid back if things don't pan out. Or it can be considered an investment: a financial bet by the government that the company will grow and prosper.
The competition for Amazon’s second headquarters indicates that the practice of using public subsidies to attract corporations is still alive and well. However, citizens do have tools they can use to hold companies to the promises they make.
How much of the material in this reading was new to you, and how much was already familiar? Do you have any questions about what you read?
Short of ending subsidies altogether, what are some measures the public can demand to make sure they get a worthwhile return on the investment of taxpayer resources in attracting businesses?
According to the reading, what are “clawback” provisions and how do they work?
What do you think? Would you favor greater tracking and accountability for public subsidies? What arguments for or against these measures do you think are most persuasive?