The cities competing for Amazon’s second headquarters are falling over themselves to provide tax breaks and incentives to one of the richest corporations in the world. It happens every day – corporations use local governments’ eagerness for business development to extract concessions on everything from taxes to free acquisition of city-owned land. The governments get no guarantee of economic development or future tax revenue in exchange for this. Companies and sports teams can move on, leaving communities that did fiscal gymnastics to get them there broke and without the promised economic development.
Urbanist Richard Florida proposed that the semifinalists for Amazon’s HQ2 form a united front against such incentives. Such a pact would be hard to enforce. In this version of the “prisoner’s dilemma problem,” the city that broke down and gave incentives to Amazon would win the big prize – and all the others would get nothing.
No one can blame companies for seeking the best deal from competing jurisdictions. It is the nature of a market participant to seek out the lowest possible cost, and it is the obligation of a company to get the best deal for its stockholders. But the outcome as a whole is a market failure. The legacy businesses already located in an area don’t get the benefits of whatever deal is offered to the new entrant – their tax burden might actually increase, especially if the incentives mean that the costs of new infrastructure imposed by the new activity can’t be spread to the relocating firm. The amenities and infrastructure that attracted a business to an area may deteriorate if the incentives prevent the government from using any of the funds generated by the relocation for them. In addition, one-off incentives can serve as a Band-aid on outdated or illogical tax regimes. There’s less pressure to reform an old system if it’s possible to waive it when it gets in the way.
Finally, the nature of the deals – individually negotiated, under high pressure with little transparency – mean that they are not available to all businesses on the same basis. If governments shouldn’t be in the business of picking winners and losers, why are state and local governments constantly in the business of picking windfall winners of tax breaks and publicly-owned assets?
GASB's statement #77 - regarding disclosure of these tax abatements - is a start. What if we didn't just disclose abatements, but regulated competition FOR businesses the way we regulate competition IN business? Local governments need an antitrust law to stop this race to the bottom. The Fairness in Taxation Act would prohibit any state or local government from offering any tax break, abatement, subsidy, or asset to any individual or corporation that is not available on an equal and transparent basis to any applicant.
If tax incentives and subsidies are off the table, what about city-owned land and other assets, which are often key to relocation plans? This would not be intended to halt public-private partnerships for economic development. Local governments could still make deals with the private sector for use and purchase of city-owned assets – as long as it is done through a publicly-issued, transparent Request for Proposal. The RFP form could require contractual commitments instead of the “handshake deals” and promises of economic development that governments are offered now. They can incorporate aspects that are key government priorities, such as equity, inclusion, and resiliency.
Of course politics will intrude on an RFP process as well. But at least other firms – including existing local firms – will have the opportunity to compete for the assets being offered up to the new suitor. Knowing what could be on the table could inspire multiple local firms to team up and create an even more sustainable and resilient economic development than can be created by a single large employer relocating to a city.
How would the competition for HQ2 be handled if this were the law? Tax breaks and abatements would be off the table. Each government offering up a government-owned asset would have to offer it up publicly, not just to Amazon. A corporation seeking a new location could work through an unbiased intermediary (such as the National League of Cities) identifying its requirements. The intermediary could consolidate each city’s proposal into a common format for ease of evaluation by the firm seeking to relocate, as well as any other firms that might be interested in taking advantage of the public assets that are on the table. Each city would rank its proposals, as would the firm(s). The city and the relocating firm would match with each other, based on their priorities (similar to the matching process for medical residencies, where hospitals and medical students are matched based on their choices). In doing their evaluation, companies would be free to incorporate any other consideration they want into their evaluation (education level of workforce, quality of transportation and other infrastructure, arts community, airport access, etc.). They just wouldn’t be able to extract considerations with actual value.
For communities that might otherwise “sit on their assets,” entering a relocation competition could inspire creative thinking about what city-owned assets could be brought to bear. Maybe the Public Works department could park its sanitation trucks on a less-valuable piece of real estate, freeing up a large plot for development. Perhaps an unused stadium could be dedicated to housing or an office park.
Companies might not be as able to extract as many concessions when they move . But this process could be more efficient for them as well – especially for local and smaller firms that might not attract the universal interest of an Amazon or Apple.
Under the current system, at the end of the HQ2 search, there will be 1 winner – and 19 losers. Open, transparent RFPs would mean that one company’s proposed relocation could spur economic development in every area that puts its hat into the ring.