Are the New York subsidies to Amazon really so outrageous?
No, as I explain in my latest Bloomberg column, I do not think New York should have offered Amazon the tax break. Still, the polemical outrage over this proposed policy seems to me out of hand. It simply wasn’t that costly, unusual, or unfair. Here is one bit:
Consider, by way of illustration, entitlement and discretionary spending on the federal level. A program such as Social Security or Medicare is done entirely by formula, as it should be; large companies cannot lobby for higher payments or lower taxes for their workers. Much of discretionary spending, by contrast, is research grants and procurement contracts. One company or researcher wins, and the others do not. Furthermore, the government will usually offer different prices and terms, based on how much value it thinks the winning bidder can bring to the project. All of which is to say: Discretionary spending requires … government discretion.
Viewed in the context, critics of local development subsidies are also critics of government discretion. Or, to frame the issue in a duller way: They do not believe local governments should treat economic development as a procurement problem. That’s a defensible position, but it is not obviously correct.
Another analogy is with private shopping malls, which commonly charge much lower per-unit rents to anchor tenants, maybe even subsidizing them. That is based on the view that a famous retail chain or movie theater can help other businesses in the mall by attracting customers and burnishing the overall image of the place. When a local government offers tax incentives to relocating businesses, it is in a sense acting like a shopping mall, which treats tenant recruitment as a kind of procurement problem. Offering differential rewards to prospective tenants is standard practice.
And note this point about fixed assets:
When a large company is going to make a significant investment in an urban area, it is hoping for support in terms of infrastructure maintenance or improvement, and indeed it invests on that basis. The reality is that municipalities often have difficulty fulfilling their obligations anyway. (This also holds true, unfortunately, for even basic promises to ordinary citizens. Ridden the New York City subway lately?)
In other words, Amazon cannot walk away from NYC the way a street vendor can move to South Carolina and set up a barbecue shop. So they will be taxed harder ex post, if only in “in kind” terms, namely inferior services for the company and its employees. The lower tax rate upfront is in large part an offset to this expected time consistency problem.
By the way, Singapore, Singapore, Singapore. And I thank Garett Jones for the shopping malls point.