In 2019, New York City became a centre of controversy when Amazon reversed a decision to locate its second headquarters, HQ2, in Queen’s Long Island City neighbourhood. The move was sparked by a local backlash to the nearly $3bn in tax breaks offered to the e-commerce giant.
“When Amazon, who doesn’t need the money, is squeezing the government for billions of dollars just to show up, we’ve got a problem,” said then New York state senator Michael Gianaris in a statement.
The tax incentives granted to private investors have struck a major nerve in US politics for years. Often at the crux of these tensions is what Joseph Parilla, a fellow at the Brookings Institution Metropolitan Policy Program, calls the ‘but for’ question: would a company have selected a location ‘but for’ the state’s tax incentives?
In the case of Amazon’s HQ2 decision, New York looked like a safe bet: at first glance, the city needed neither introduction nor to offer incentives. Yet other states tried to lure the company with appealing packages — Amazon reportedly received $7bn in tax breaks from New Jersey and $8.5bn from Maryland — leading New York officials to join the bidding war.
The subsequent popular uproar convinced the company to withdraw to Arlington county, Virginia, adding a contentious new chapter to the national debate on the use of public subsidies in economic development and investment promotion.
A prisoner’s dilemma
The US Governmental Accounting Standards Board made it compulsory in 2015 for state government and local governments to report tax abatements in their annual financial statements, specifying, in particular, the amount of revenue reduced or foregone as a result of these tax abatements.
The total amount of fiscal revenue lost annually nationwide to tax abatement programmes is put at between $14.5bn and $17bn in 2017–19, then fell to $7.3bn in 2020, according to data from Good Jobs First, a Washington DC-based non-partisan group tracking subsidies and promoting accountability in economic development.
The state of New York has reported by far the highest amount of foregone fiscal revenues, at an average of $4.3bn every year between 2017 and 2020 – about two thirds went to New York City alone – followed at some distance by Texas ($1.4bn), Louisiana ($0.67bn), Michigan ($0.66bn) and Pennsylvania ($0.59bn). New York City has drawn benefits from this, confirming its role as the choice of preference for foreign, as well as US-based investors between 2017 and 2020, fDi Markets figures show. However, the Amazon HQ2 debacle had observers questioning why a city renowned for attracting businesses without the use of tax breaks should be offering them.
Greg LeRoy, the executive director at Good Jobs First, tells fDi how public officials are often put in a ‘prisoners dilemma’ by site consultant agencies. “They knock on the door and say, ‘I might have 500 jobs for you. But what have you got for us? Show us your incentives.’”
He says despite the bidding wars that often see states vying for a company’s presence with competitive incentive offers: “Public officials don’t know that the only reason that conversation is happening is because they are already an inherently profitable location for the company. They’ve got the business basics. They've got the workforce, they've got access to the raw materials, the proximity of customers, the infrastructure and the quality of life — whatever it is that gives the company what it needs.”
The furore caused by Amazon HQ2 was not just about offering private companies tax breaks. Many local officials and members of the surrounding low-income communities considered it wrong to hand over public money for a project they would see little benefit from, since it was likely to offer mostly white-collar jobs and to risk inflating local rent levels.
As the national debate around incentives deepened to consider not only the sheer size of the tax break, but also the quality and economic development impact of the specific investment, researchers at the Brookings Institution, a Washington DC-based think tank, developed an inclusive incentives ‘scorecard’ to give policy-makers a better chance to make every penny count. This is even more vital for cash-strapped local authorities in the wake of the Covid-19 pandemic.
“An inclusive incentives scorecard can help cities better align economic development policies to drive inclusive growth,” researchers Lourdes Germán and Joseph Parilla wrote in a research note in May. “This tool helps decision-makers better target incentives to generate inclusive growth by focusing on four areas of business behaviours: good job creation; skills training and workforce development; job access and sustainability; business ownership and governance.”
No matter how finely targeted incentives are, they are pointless if the economics of the proposed investment don’t add up. Foxconn’s failed splash in Mount Pleasant, Wisconsin is a prime example. In 2017, the company pocketed more than $4bn in tax incentives to produce advanced LCD displays in a deal that then-president Donald Trump touted as the “Silicon Valley of the Midwest”.
However, the region lacked a local supply chain for LCD displays and eventually the project was dramatically scaled down in 2021 after years of little progress. The company reduced its initial committed investment of $10bn to just $672m, while state authorities reduced the incentive package accordingly.
“Incentives can serve as a powerful tool in the site selection process – but by no means are they a silver bullet,” says Jay Garner, president and founder of Garner Economics and chair of the Site Selectors Guild. “A competitive location must have the workforce, real estate, infrastructure and other essential elements required by the prospective company.”
Mark Williams, founder and president of the site selector firm Strategic Development Group, agrees: “Most site selection decisions are based on the fundamentals of a site, the business case of a site itself.” He adds, however, that after locations are narrowed down on the basis of these qualities, incentive negotiations begin and at this point they become a “very important means of differentiating sites from each other”.
When they succeed, incentives can produce very high returns on investment, as has been the case with with BMW’s production site in Spartanburg, South Carolina. In 1992, the state offered BMW an incentive package of $150m for the promise of 2000 jobs, including an extensive employee training programme. BMW would follow up by investing in another 13 projects in South Carolina between 2003 and 2021, creating 3455 jobs, according to fDi Markets data.
“When you look back, the return on that investment in the beginning has been made many times over in terms of economic output and jobs created,” Mr Williams says.
The debate around incentives continues. As competition for investment intensifies, incentives are a way for local authorities to add value to their propositions. However, failed cases such as Amazon’s HQ2, together with the fiscal distress left by the Covid-19 crisis, show a more targeted approach is needed. Though incentives may be less consequential than the business basics of a location when attracting investment across US states, depending on how they are used, they can profoundly influence the trajectory of a community, for better or worse.
This article first appeared in the June/July print edition of fDi Intelligence. View a digital edition of the magazine here.