Hey there, time traveller!
This article was published 22/11/2018 (356 days ago), so information in it may no longer be current.
Last year, Amazon dangled its new headquarters like a shimmering lure, and politicians everywhere rose like suckers to the bait. Winnipeg and many other cities assembled teams to polish their images as business-friendly locales with trained workforces and favourable tax environments — no doubt, we also noted our central location.
Setting aside the fact that if one rotates a globe while holding it in two hands, any place can be centrally located, the stampede to entice Amazon to locate in any specific city wastes tax resources and is quite unseemly.
Well, Amazon has announced the "winners": New York City and Arlington, Va., will become two new "nerve" centres termed HQ2 and HQ3, respectively, and Nashville will be an operations hub.
Winnipeg was out of the running from the outset, and given the incentives demanded by Amazon, we are lucky for it. We could have matched New York’s offer of US$1.5 billion by suspending, for one year, spending on infrastructure, justice and municipal affairs, but that may have encountered some resistance. Our shallow pockets saved us.
But are New York, Virginia and Tennessee really winners in their successful wooing of Amazon?
When the bill comes due, taxpayers in these three states will be on the hook for more than US$2 billion in tax breaks and performance incentives. My fundamental objection is that I really wish politicians would stop using tax breaks as a form of "free" money. The reality is that all taxpayers, corporations and households alike, will subsidize these incentives. It is one thing for taxpayers to underwrite roads, student loans and low-cost housing; offering tax breaks to a company with a total value close to US$1 trillion borders on obscene.
Large firms have become adept at extracting public support, usually by promising quality jobs and future tax revenues. For example, Amazon projects it will generate more than 25,000 full-time jobs for New York City. Sounds like a lot, until one realizes that the current employment for the city is 4.4 million.
Amazon’s operations will add 0.6 per cent to the workforce. If it can hire from among the approximately 180,000 unemployed workers in the city, this might be a good thing, but likely it will need to scour employees from a wider geographic area to secure the skilled workers needed by a high-tech giant.
Regardless, there will be some hiring from within the local labour market, and with the unemployment rate in New York at four per cent, a good chance exists that other employers will find it more challenging to find workers. Wages will rise, which is a good thing for workers, but so will costs for employers. This becomes a hidden cost of subsidizing Amazon’s operations.
Another common justification for subsidizing firms to relocate is that the new operations will generate tax revenue. In the case of Amazon’s operations in New York, this is projected to be US$10 billion over 20 years, which may appear to be a large gain over the subsidies offered. However, most of this will come from personal income taxes on the new workers.
Again, some context is useful. New York City added 50,000 jobs in the past year, which means existing businesses will eclipse the projected growth of Amazon’s promised employment and tax revenues without the need to offer any financial incentives.
The lemming-like response of politicians to Amazon’s request for proposals is a classic case of the prisoner’s paradox, which goes like this: imagine a detective has apprehended two bank robbers who are certain to have committed the crime and hidden the loot. No proof exists. Now, this is a wily detective who needs to use trickery to extract confessions, so the two suspects are seated in separate rooms and each receives the same offer: "Confess, and if your partner does not, you will get a year in jail and your partner will remain behind bars for 10 years."
The implication is that if you confess while your partner remains silent, you get out after a year and enjoy the hidden treasure. Of course, if neither of you confesses, both must be freed, while if both confess, each will go to jail for 10 years. The predictable result is that both robbers confess.
Just like the detective who played the robbers, Amazon has played the politicians. If no one rose to the bait to offer financial inducements, Amazon would have been forced to choose a location without subsidy. In effect. Amazon acted as an economic hostage-taker and New York, Arlington and Nashville blinked and paid the ransom.
Gregory Mason is an associate professor of economics at the University of Manitoba.