Lawmakers Consider Ending Tax Incentives ‘Cage Match’ as Amazon Exits New York

Lawmakers in several states hope Amazon’s retreat from New York City will help ignite a broader rebellion against the “economic cage match” of cities and states offering competing tax breaks to lure companies.

The lawmakers acknowledge that a compact between states or regions would be necessary to prevent companies from playing off states against each other to get the best incentive package for a new plant or headquarters. But the “End Corporate Welfare Act” in New York, as well as similar bills in a handful of other states, aim to restrict or halt the states’ ability to offer tax incentives to companies.

Amazon — which held a months-long, highly publicized contest among states and cities for the right to host its “HQ2” site — announced this week it was abandoning plans to build one of the two sites (it decided to split its second headquarters into two) in New York City. The company cited opposition from local officials and community activists, who protested that the company would strain local resources like roads and schools and give most of its planned 25,000 tech jobs to newcomers to the area, not current residents.

Democratic Gov. Andrew Cuomo and the state legislature agreed to a $1.2 billion incentive package to lure the company, but the New York City Council and local officials had not signed off on the deal.

Amazon’s other HQ2 site, in Northern Virginia, is expected to proceed as planned. Virginia agreed to give the company $550 million as a direct incentive for creating 25,000 jobs, but expects the project to generate net tax revenue of $3.2 billion over 20 years. Even after investing in higher education, transportation and schools as part of the deal, the state expects a net tax benefit of at least $1.2 billion.
 
“We have positive revenue from day one,” Stephen Moret, president and CEO of the Virginia Economic Development Partnership, told state legislators late last year. “To the best of our knowledge, this is the biggest economic development project in U.S. history, certainly in Virginia.”
 
But New York Assemblyman Ron Kim, a Democrat from Queens, said nobody wins when states compete against each other to lure companies such as Amazon. 

“I think we have to do whatever we can to stop the economic cage match and race to the bottom so we can foster an open competitive market where small businesses have every opportunity to remain competitive,” said Kim, who, along with state Sen. Julia Salazar, also a Democrat, introduced the “End Corporate Welfare” bill.

Similar bills are being introduced in Connecticut and Illinois, and Kim said other efforts are ongoing in Florida, Massachusetts, Arizona and New Jersey.

Connecticut state Rep. Josh Elliott, a Democrat who is authoring a version of the bill in his state, said in an email that the efforts are “simply a symbol that people are fed up with giving help to huge conglomerates, while inequality is creating disparities in income that we have never seen before.”

“We certainly want state regulations to allow companies to relocate, and to provide for business-friendly spaces — but it cannot come from the pocketbook of the middle class,” Elliott said.

Asked about the difficulty of getting all states to agree on something as economically fraught as a ceasefire on incentives, Kim said momentum is building across the country for such a compact. He also pointed to the European Union, which exercises much tighter control on tax incentives than the United States.

The European Commission recently concluded, for example, that Ireland granted undue tax benefits to Apple, which is illegal under EU state aid rules because it allowed Apple to pay substantially less in taxes than other businesses.

“We want to cooperate, not compete,” Kim said.

Illinois state Rep. Michael Halpin, a Democrat, and several others are spearheading the “Keep Illinois Business Act,” which says that if a business that received tax incentives from Illinois leaves the state or the country, it has to pay back the “full amount” of any economic development assistance it received.

In a telephone interview, Halpin said his bill wouldn’t prohibit offering the incentives, but would prevent companies from state or country shopping.

“We have seen cases where companies received tens of millions of dollars and then left or planned to leave,” he said. “States are continually competing to offer the biggest incentive, and companies have an incentive after a couple of years to go back into the market and see what other states have to offer. This is a way to counter that.”

Halpin pointed to the Foxconn deal in Wisconsin, in which the company initially pledged to build a large manufacturing plant in return for about $4 billion in tax breaks and other incentives, but recently scaled those plans back and says it will hire mostly technology workers instead — and far fewer than initially estimated.

The company said it was cheaper to manufacture LCD panels abroad and then ship them back to the United States, rather than building them there.

Two authors from the conservative Mercatus Center at George Mason University argued in a recent paper that tax incentives are about politics, not economics.

“A politician can stand in front of a subsidized factory, cut a ribbon and take credit for all the jobs created there, whether they would have been created with or without the subsidy,” Mercatus analysts Matthew Mitchell and Michael Farren wrote.

Good Jobs First, a group that opposes tax incentives from the other end of the political spectrum, calculated that many cities and states give away more per job than they get back in taxes.

The group’s analysis of 386 deals worth at least $50 million since 1976 found that the average cost per job created was $658,427 — far more than cities and states could expect to get back from income taxes, sales taxes, property taxes or other revenue.

And Joe Bishop-Henchman, executive vice president of the conservative-leaning Tax Foundation, a Washington, D.C.-based think tank, said the move to eliminate tax breaks is an acknowledgement that tax subsidies don’t provide the broadly favorable tax environment many companies are seeking.

“If hefty tax burdens are deterring investment, that’s the problem that needs fixing. Subsidies will get you more of what you subsidize, but it will be fleeting,” he said.