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?

Should Baltimore provide $535 million in TIF funds for a new private development?

The CEO of Under Armour wants to develop roughly 260 acres of land in Baltimore but is asking for public funds. A large debate has ensued:

The problem is that Plank, despite being a self-made billionaire, wants a lot of help to make his vision for Port Covington a reality. To that end, his real estate firm, Sagamore, has asked the city of Baltimore for a record-breaking $535 million in so-called tax increment financing. TIFs, as these types of loans are known, are used to fund infrastructure by selling municipal bonds to private investors, and then property taxes generated by the new development are used to pay them back. Though beloved by titans of commercial real estate, TIFs tend to draw scrutiny because they divert so much money away from a city’s general fund. MuniCap, a consulting firm that Sagamore hired to analyze its TIF application, projects that Plank’s development would not yield property tax revenue for Baltimore’s coffers until about 2040, even as the site would require substantial city resources in the interim…

“[We are] outraged that, one year after the world bore witness to the decades of disinvestment in poor neighborhoods and communities of color, city leaders would respond by bending over backwards to back a $535 million playground for the rich,” Charly Carter, the executive director of Maryland Working Families, a progressive political advocacy group, says. “This is the new Jim Crow—black and brown families subsidizing wealthy developers while our own neighborhoods crumble.”…

The campaign to remake Port Covington has been aggressive and well-funded. Sagamore has already spent hundreds of thousands of dollars on marketing the development to the public, and its forceful slogan—“#WeWill build it”—suggests that the project is a fait accompli.

Which isn’t far off the mark. The Baltimore Development Corp., a public-private agency, approved Plank’s $535 million TIF request in March, and the city’s Board of Finance backed it in April. Now all it needs is the Baltimore City Council’s final approval, which could come as early as August. Activists have urged the council to postpone its vote to give the public more time to comb through the 545-page proposal. But according to Councilman Carl Stokes, who heads the body’s economic development committee, Sagamore wants the deal approved by the end of the summer.

This is often how such things are done: a wealthy business leader wants to make more money in real estate development and asks for a tax break from the city or state to help make it more profitable. (There’s nothing in this article to indicate that the Plank has threatened to move to another city.) The big city, often desperate for large projects that supposedly bring lots of jobs but also spruce up areas that few developers would be interested in, doesn’t want to hinder business. The approval is made, the money is diverted, the big development occurs, and the business leaders behind the scenes are the ones who profit the most. This is the essence of the growth machines model in urban sociology and it often involves tax breaks for developers.

What will be interesting to see is if such a project would be voted down or the money significantly cut. Again, most cities are not in the business of angering leaders of big business. But, it isn’t unheard of to negotiate for some changes to the development that might benefit more people or reduce the dependence on public funds.

Illinois tax breaks often fail to add jobs or keep companies

The Chicago Tribune finds that tax breaks from the state of Illinois often do not work as intended:

In the first comprehensive analysis of 783 EDGE agreements, the Chicago Tribune found that two of every three businesses that completed the incentive program failed to maintain the number of employees they agreed to retain or hire.

State officials can’t say how many jobs have been created through the job program; nor can they say how many jobs EDGE companies have eliminated. The Tribune, however, found that 79 current or former EDGE recipients have reported eliminating 23,369 jobs through layoffs and closures since entering the program.

Officials have long pitched tax breaks as a competitive tool that bolsters the state’s fragile economy, and the program has seen explosive growth as Illinois battles with other states to attract and retain businesses. Leaders of the EDGE program say it has been a lifeline for dozens of companies, helping to create new jobs and improve workplaces.

But the Tribune’s analysis suggests that tax credits often do little to help companies expand or create sustainable jobs. A pattern of deals emerges in which businesses lobbied for maximum rewards and minimum requirements — and the state said yes.

Tax breaks may help politicians claim they are bringing in new jobs and money but they don’t often benefit taxpayers as much as the political and business leaders suggest. See earlier posts here and here. And perhaps the biggest issue is that once come communities or state start offering tax breaks, everyone feels like they have to play the game as well just to get a hearing from major corporations. It can then become a race to the bottom: as governments offer more and more breaks, companies benefit more and more yet the local area gets less and less.

If the Tribune‘s analysis is correct, perhaps a better route for the state would be to improve business conditions overall rather than resorting to tax breaks to simply survive.