Update: Amazon announced on November 13th that it will split its second headquarters between Arlington, Virginia and New York City.
With the Super Bowl now behind us, America eagerly awaits the next big event: the announcement of the winner in Jeff Bezos’ contest to determine which combination of state and local governments is prepared to give him the most money to be home to Amazon’s new headquarters.
Narrowed from a field of more than 200 applications, 20 finalists now wait with bated breath for the news, expected sometime later this year. But while the politicians who join Bezos for the photo op are going to be treated as big winners, it is likely that the taxpayers they represent will be big losers, dishing out more to Amazon than they will ever get back in benefits.
Bezos’ “HQ2” contest is simply an extension of a game that corporations have been playing with state and local governments for the last four decades. Rather than making location decisions based on standard economic factors, like the availability of a skilled labor force, quality infrastructure, land prices and tax rates, they have persuaded governments to bid against each other with company-specific benefit packages ― usually a basket of tax concessions and sometimes even including commitments to build company-specific infrastructure like port facilities or roads.
However, most research indicates that the cost to state and local governments for these subsidies typically outweighs the benefits in terms of employment and tax revenue, including in the cases of Amazon’s growing network of fulfillment centers.
A new analysis by the Economic Policy Institute looking at employment in counties that managed to land a fulfillment center in the last 15 years found no evidence that overall employment increased, and in some instances employment even fell relative to comparison counties. The implication was that the commitments made to win Amazon’s facilities ― subsidies likely worth over $1 billion dollars in total ― usually were enough of a drag on the rest of the economy, either by imposing a higher tax burden or diverting resources, to more than offset any jobs and spending created by Amazon.
“Of course, Amazon is not new to shorting taxpayers. In many ways, the company’s prosperity is based on it.”
Nonetheless, politicians are unlikely to be deterred from such bidding wars, since the victory of landing a big investment is highly visible and immediate. A mayor or governor gets to take part in a big ceremony with the CEO of a major corporation touting the thousands of jobs that are being created. The costs in the form of lost tax revenue that may be needed to support schools, infrastructure and other essential services will only be seen years down the road.
Now, Jeff Bezos is taking the bidding war into the Internet Age with this highly publicized contest for Amazon’s next headquarters. He put out the promise of a new headquarters with “up to” 50,000 high-paying jobs, and then the country’s cities put in their offers. (Toronto is the one non-American city also in the running).
The structure of this bidding war is virtually guaranteed to ensure that the city that lands the new headquarters will end up paying out far more in subsidies than it gets back in benefits. Once a location is named as being in the top 20, political leaders have their appetite whetted. They want more than ever to be the winner and are prepared to raise their offers so that they don’t end up in second place. Bezos is using a standard tease as an inducement to keep people gambling, just like the $10 or $50 prizes in the state lotteries or the small jackpots at the slot machines. They give the players just enough incentive to want to keep playing.
In addition, to minimize the extent to which an informed public can scrutinize the commitments being made by their leaders, Amazon has encouraged city officials to keep the details of their offers secret. This means that there will be very little time between when city and state officials celebrate the big victory and when city or county councils have to vote on the package.
Of course, Amazon is not new to shorting taxpayers. In many ways, the company’s prosperity is based on it. For years, the company took advantage of a loophole in tax law so that it did not have to collect the same sales tax as its brick-and-mortar competitors. This created the absurd situation that as Amazon was growing into one of the largest retailers in the world, it was effectively getting a tax subsidy at the expense of many family-owned retail stores. Even now, while the company does collect sales taxes on its direct sales, many of its affiliates, who pay Amazon a portion of their revenue, still do not collect sales tax in many states.
This was not a small subsidy. The size of the sales tax in many cases is close to standard profit margins. The fact that Amazon did not collect the tax gave it an enormous advantage over stores that did. Recent research has found a very large effect from the imposition of sales tax on Amazon sales, especially in the case of large purchases like television sets. The findings implied that imposing a sales tax of 5 percent would lead to roughly a 20 percent decline in sales on large purchases.
Since Amazon has been only marginally profitable since its founding, a sales tax requirement that put it on a level playing field with its brick-and-mortar competitors would have seriously impeded its growth. It may still have survived and even prospered, but it almost certainly would be a much smaller company today.
The contest to find the stupidest mayor in America is best understood in this context, as yet another episode in Amazon’s efforts to shaft taxpayers. And judging by the quantity and enthusiasm of the bids, the taxpayers still haven’t caught on.
There is a reason that Jeff Bezos is considered a genius.