Three possible solutions to “American cities and states spend[ing] up to $90 billion in tax breaks and cash grants” to companies

After discussing why American communities spend so much money and effort to attract companies, Derek Thompson proposes four solutions:

First, Congress could pass a national law banning this sort of corporate bribery. Mark Funkhouser, a former mayor of Kansas City, Missouri, envisions the law as the domestic version of the Foreign Corrupt Practices Act, which makes it illegal for Americans to bribe foreign officials.

It’s not entirely clear whether that would pass constitutional muster. The Supreme Court hasn’t ruled decisively on whether the Commerce Clause gives Washington the authority to ban interstate bidding wars. In the 2006 Supreme Court case DaimlerChrysler Corp. v. Cuno, Ohio taxpayers sued the state after it paid the automaker DaimlerChrysler about $280 million in tax exemptions and tax credits. The Sixth Circuit Court sided with the taxpayers, striking down Ohio’s subsidy as a violation of the Commerce Clause. But the Supreme Court avoided a final judgment on the matter by finding unanimously that the plaintiffs did not have standing to bring the suit.

Second, Congress could make corporate subsidies less valuable by threatening to tax state or local incentives as a special kind of income. “Congress should institute a federal tax of 100 percent” on corporate subsidies, Jack Markell, a former governor of Delaware, wrote in The New York Times. “This would not include investments in public infrastructure, work force development or other investments that can attract employers while also providing a significant long-term benefit to taxpayers.” Taxing subsidies would hopefully force cities to change their economic-development strategies, from importing other states’ companies to building their own—through investing in research universities, building more housing, and welcoming immigrants, since foreign-born Americans have the highest rates of entrepreneurship.

Finally, the federal government could actively discourage the culture of corporate subsidies by yelling, screaming, and penny-pinching. As Meagan Day wrote in Jacobin, “The federal government could withhold funds from governors and mayors who threaten to poach jobs from other states, or who won’t disclose their incentive packages.” Washington tends to look on quietly when cash-strapped states break the bank to welcome glitzy tech firms. But an attitude change at the top could trickle down to the local level. Donald Trump, or another president, could have made a national address after the HQ2 announcement slamming Amazon for soliciting taxpayer funds in a silent auction. He could have called a summit to encourage the nation’s mayors and governors to offer the same tax subsidy for HQ2—zero dollars and zero cents. Even a tweet could suffice: “7 BILLION FOR BEZOS?? Trillion-dollar companies in America don’t need our welfare! Bad!”

Interesting options. I have argued before that this practice leads to a race to the bottom between communities. They can even pit suburbs and cities within the same region against each other.I wonder if both businesses and communities would complain. Businesses would want to get the best deal they can. Why shouldn’t they be able to compare different offers? They may go as far as to argue that the tax breaks help them be more profitable which means they can then spread more wealth to workers and investors. Communities might prefer to keep competing because it gives them a chance to entice a business that otherwise might not move there. If tax breaks became less valuable, would certain industries and kinds of firms gather in a limited number of attractive locations? Open competitions for companies gives communities a chance to get their name out there and build a brand. Furthermore, these tax break opportunities allow local officials to show that they are making a concerted effort to bring jobs to an area.

I do not see this practice stopping soon even as we see the fallout of the Amazon race. While it may take time for the federal government to step in, communities could decide to opt out from such competitions. What would happen if in a situation like the Amazon one, the major contenders refuse to pander to the corporation?

Would new local taxes on large tech firms really cause them to leave Silicon Valley?

Several communities in Silicon Valley are considering levying special taxes on large companies, possibly affecting some of the biggest tech companies:

Cupertino, Mountain View and East Palo Alto have begun to ponder new taxes based on employer headcounts — levies that could jolt Apple and Google — and if voters endorse the plans, a fresh wave of such measures may roll toward other corporate coffers.

Alarmed by traffic and other issues brought on by massive expansion projects, the three Silicon Valley cities are pushing forward with separate plans to impose new taxes that could be used to make transit and other improvements…

A lot of factors point to this being a prime time for efforts such as these. San Francisco ranked fifth worst for traffic congestion in the world — and third worst in the U.S. — last year, according to INRIX Global Congestion Ranking. Record housing prices in 2018 boosted the median price of a single family home in the Bay Area to a record $893,000 in April, according to a CoreLogic report.

Federal tax cuts also have improved the balance sheets on an array of U.S. companies, large and small. Silicon Valley’s largest tech companies have contributed to the gridlock on freeways and soaring housing costs as they’ve grown rapidly in recent years, with brisk hiring and expansion in unexpected areas and mega-leases that gobble up huge swaths of office space.

If this works the way that some would argue it does, then the local taxes will be viewed by the tech companies as an unnecessary burden for their operations. They should then consider moving elsewhere where they are not subject to such local taxes. Indeed, if they wanted to move sizable operations, they could probably get numerous communities to offer them tax breaks.

However, this assumes that the local taxes are the primary factor that determines where companies and organizations locate. Instead, there are a variety of factors that both support and work against staying in their current location. I assume these are important reasons for why Apple, Facebook, Google, and others are in this location: the construction and maintenance of large headquarters, proximity to other like-minded organizations, an talented employee pool nearby, and the proximity to major cities like San Jose and San Francisco. Are local tax issues more important than these other concerns? Probably not. And even if they are, it would take some time before a large organization could significantly alter their operations in response.

Could governments ever stick to “nonaggression pacts” involving companies?

As companies like Amazon look for good deals from local communities, one economist suggests non-aggression pacts:

It’s hard to draw conclusions about how much local economies gain from fulfillment centers and whether incentives are warranted from the experience of individual towns or counties, said Tim Bartik, senior economist at the Michigan-based W.E. Upjohn Institute for Employment Research.

Fulfillment centers likely do benefit the surrounding community, but the gains may be modest compared with other types of economic development projects that could generate more business for local companies, Bartik said. The jobs have modest wages, limiting the amount workers would potentially spend at local retailers, and warehouses generally don’t patronize local suppliers, he said…

He advocates states form “nonaggression pacts” to contain costs of incentives that simply shift jobs from one part of the country to another, though he acknowledges those pledges are unlikely to stick.

“The next company comes along, and they decide it’s an exception,” Bartik said. “We haven’t seen one that’s really survived.”

Here are at least four arguments I could imagine people making against such pacts:

  1. Competition is central to the American economic system. Why shouldn’t local communities be able to offer whatever they want to attract a company or development? Having and sticking to such pacts is collusion by communities.
  2. If companies cannot get good deals from communities, they will leave the country. This would not make much sense to me as the American market is a pretty lucrative one but it could apply more for certain companies or industries.
  3. Local officials need to be able to show local results, not that they are cooperating with other places. They want to be able to say that they brought specific jobs or benefits to their community, not that the whole region is benefiting (though this may be true).
  4. What is good for companies is good for communities and America. This is a tricky argument all around: thriving companies are important yet it is much harder to figure out whether firms are helping communities in the ways they should. (This is an open question these days involving Walmart, Amazon, and tech companies.)

Perhaps the best argument that could be made for such pacts is that the general public – in the abstract – wins if companies are unable to obtain massive tax breaks or incentives for certain actions.

For better or worse, the decision Amazon makes about where to locate its second headquarter will keep this issue in the spotlight for a long time.

Several of the large tax breaks offered by cities for Amazon’s HQ2

One reporter went digging into the proposals cities made for Amazon’s second headquarters and some of the offers are extraordinary:

Example: Chicago has offered to let Amazon pocket $1.32 billion in income taxes paid by its own workers. This is truly perverse. Called a personal income-tax diversion, the workers must still pay the full taxes, but instead of the state getting the money to use for schools, roads or whatever, Amazon would get to keep it all instead…

Most of the HQ2 bids had more traditional sweeteners. Such as Chula Vista, California, which offered to give Amazon 85 acres of land for free (value: $100 million) and to excuse any property taxes on HQ2 for 30 years ($300 million). New Jersey remains the dollar king of the subsidy sweepstakes, having offered Amazon $7 billion to build in Newark…

Boston has offered to set up an “Amazon Task Force” of city employees working on the company’s behalf. These would include a workforce coordinator, to help with Amazon’s employment needs, as well as a community- relations official to smooth over Amazon conflicts throughout Boston. (Surely Amazon can handle these things itself?)…

Fresno promises to funnel 85 percent of all taxes and fees generated by Amazon into a special fund. That money would be overseen by a board, half made up of Amazon officers, half from the city. They’re supposed to spend the money on housing, roads and parks in and around Amazon.

And he has not even been able to see a significant minority of the proposals. It is as I suggested: a tax break bidding war is underway. It would be great to hear public leaders questioned about these offers and why they are willing to give up so much. How might such offers change their communities? How much will a city really benefit from the second headquarters if they give so much away?

A side thought: what if Amazon’s call for a second headquarters is really a way to flesh out what big cities are willing to offer for a major headquarters? The project has to have enough size and prestige that cities would make big concessions. Once they fall over themselves for this, can’t other corporations ask for similar deals?

Roll out the tax break bidding war for Amazon HQ#2

Amazon want to build a second headquarters with some 50,000 workers. Expect the tax break war to begin:

Amazon is seeking proposals from local, state and provincial government leaders, and says it is focusing on metropolitan areas with more than 1 million people. It is also looking for areas that can attract and retain technical workers and “a stable and business-friendly environment.”

News of the search has unleashed a wave of speculation about where the world’s largest online retailer could set up shop. But experts say the company’s decision is likely to be as much about politics as it is about logistics and incentives. Bezos has been a vocal opponent of President Trump’s immigration bans, and earlier this week was among hundreds of tech leaders who urged him to reconsider his stance on the “dreamers” immigration program…

Among the criteria it will consider, Amazon says, are tax exemptions and other incentives, including relocation grants and fee reductions. “The initial cost and ongoing cost of doing business are critical decision drivers,” the company said in its request for proposals.

It added that the location does not need to be in an urban or downtown location, or a development-prepped site. The site should, however, be within two miles of a major highway and have access to mass transit. Amazon said it will give priority to existing buildings that are at least 500,000 square feet and undeveloped sites that measure about 100 acres.

Here is the actual language from page 6 of the RFP:

AmazonRFPp6

This may seem like a perfect scenario for locations (cities and states) to offer tax breaks: the company is growing, it is a major player, and it comes with a large number of jobs. Headquarters are a status symbol for areas but this one includes real jobs and a high-status company.

However, I would still argue a tax break war is a bad idea. Here are a few reasons why:

  1. There will be one winner and a lot of losers. Those who do not win may just offer even deeper breaks to the next possible company. When does this stop?
  2. A massive tax break will offset at least some of the benefits of the headquarters. While it is hard to pass up 50,000 jobs, significant tax breaks mean local governments and residents get less than they might otherwise.
  3. A bidding war puts Amazon in the driver’s seat and may have local governments begging for this. A victory would wipe out groveling but going all in on an offer and losing may reduce the status of a location. (Think of unsuccessful Olympics bids in the past.)

The locations involved could be many but this will not turn out well for many or maybe even all.

Naperville adds another corporate headquarters

It isn’t the full headquarters for the company – just the North American headquarters – but Naperville is gaining another impressive office as Chervon North America announced plans to move in:

A Chinese maker of power tools plans to bring more than 200 jobs to its new North American headquarters in Naperville over the next three years.

Chervon North America, the U.S. arm of Nanjing, China-based Chervon Holdings, confirmed plans to move workers from Michigan and several suburban Chicago locations when it opens a new headquarters in Naperville sometime in the spring…

Chervon also considered locations in California, Texas, Georgia, North Carolina and Tennessee, Turoff said. The company is not receiving any incentives from the Illinois or Naperville governments, Turoff said.

“In the end our decision came down to three key factors: proximity to talent, proximity to current and acquired employees (and) Naperville’s pro-business attitude,” Turoff said in the email.

No tax breaks needed. This has been the story of Naperville for several decades now: the community is attractive to a number of businesses. This started with the move of Bell Laboratories just north of the city in the 1960s along the East-West Tollway. Since then, white-collar firms have moved into the suburb, attracted by the quality workers and bucolic setting. These moves have boosted the reputation of Naperville even as it has helped attract even more residents. It is the sort of cycle that many suburbs would like to emulate but would have a hard time pulling off.

Going forward, it will be interesting to see whether this can continue for Naperville. There is increased competition for businesses. Naperville has a very limited amount of open land for new commercial or residential development (unless they make a major decision to build up). This space for Chervon opened up because another major company decided not to use the space.

Can you plan suburban growth around an Amazon distribution center?

Thanks to state tax breaks, Amazon will soon begin construction on a new distribution center in northeast Aurora. The new facility is said to bring 1,000+ jobs. The latest newsletter from the City of Warrenville discusses the new facility. The facility is located near the border with Warrenville and the city thinks this will be a good for Warrenville:

warrenvilletifamazon

Can an Amazon facility be an economic boon for a suburb, particularly in a portion of the community that is underdeveloped? At the least, the 1,000+ workers will have to live somewhere. Could there be certain facilities that pop up to serve the workers – fast food places? Gas stations? Dry cleaners? Tattoo parlors (wait, Warrenville has enough of those)? Adding students to the school system?

I’m sure the city is either working on estimates of this and it would be worth sharing with the public. Connecting the dots between a warehouse/distribution facility and other community amenities is not obvious and what is Warrenville willing to do to capitalize on this opportunity?