Amazon announced last year that it would build part of its new second headquarters facility, dubbed HQ2, in Queens, New York. In February, Amazon abandoned these plans. The episode offers insights on government-business relations in America today.
The saga began in September 2017 when Amazon requested proposals from cities to host HQ2 and its expected 50,000 jobs. The 238 proposals were cut to twenty finalists in January 2018. In November Amazon announced a split of HQ2 between Long Island City and Arlington, Virginia.
Opposition in New York arose in part from the estimated $3 billion package of tax exemptions and targeted spending offered to Amazon. HQ2, for instance, would get its own heliport. Handing $3 billion in incentives to one of the world’s biggest companies and the world’s richest person, Jeff Bezos, understandably provoked anger.
Targeted incentives for select businesses are commonplace in America today, even though I prefer lower taxes and regulation for all businesses. The New York tax exemptions, $2 billion of the $3 billion deal, must be viewed relative to the $27 billion in taxes the city and state were projected to collect from Amazon. This makes the exemptions look more like a loyal customer discount than a straight giveaway.
Neither the city nor state had approved the incentives as of November’s announcement. For that matter, Virginia lawmakers also still had to approve their incentive package, which they did. The appointment of State Senator Michael Gianario, an ardent foe of the deal whose district includes Long Island City, to New York’s Public Authorities Control Board, which could block the deal, signaled a potential roadblock.
HQ2 suggests that incentive packages may not be vital in business location decisions. Newark, New Jersey, offered Amazon a more generous deal ($7 billion) than New York. And Maryland also outbid Northern Virginia. Academic research fails to find clear links between incentives and location choices. Businesses might be playing cities to get a better deal where they plan to locate.
Amazon’s pullout also illustrates the consequences of secretly negotiated incentive deals. HQ2 was relatively public, as the media reported both the 20 finalist cities and many details of the incentive packages. Often deal making remains more hidden. Alabama cities use code names for businesses being recruited, like in a spy novel.
I understand businesses’ desire for secrecy, but incentives still rightfully require political approval. From a strategic point of view, secrecy likely forces the hand of politicians not participating in negotiations. The deal announcement creates perceptions of a fait accompli and gives opponents little time or opportunity to rally support.
That Amazon desires an HQ2 outside of Seattle also makes sense, given the city’s recent anti-business measures. Most notable was 2018’s (eventually repealed) “Amazon tax,” a $275 annual tax per employee on large businesses to fund low income housing. Seattle has also enacted a special income tax on individuals earning over $250,000 a year and a $15 per hour minimum wage.
These policies could readily reflect West Coast liberal politics. Or politicians may be taking advantage of Amazon’s considerable costs of relocating. Amazon has 45,000 employees in Seattle, with families and lives making them reluctant to move. Businesses often bear burdensome taxes and regulation before moving, allowing politicians space to do things which they think will improve their city.
New York behaves similarly. The financial, banking, fashion, and art industries are unlikely to relocate, and the Big Apple offers a unique lifestyle. People accept the nation’s highest state and local taxes, laws preventing building which keeps apartments almost unaffordable, and burdens like their taxi regulations to live in New York. Why did Amazon think that life would be different in New York than Seattle?
After competing vigorously for HQ2, some in New York decided that the prize was not worth having. The bidding for businesses has been called an economic war between the states. Perhaps it is time to negotiate a peace.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
