Update 333: Bronx Cheer for Amazon in Queens
City Loses Site in Firm’s Preemptive Break-Up
In honor of the opening of spring training, we pause to remember the words of Casey Stengel, manager of the New York Mets, who played and mostly lost, compiling the worst record in baseball history in 1962, in Queens: “Come and see my Amazin’ Mets — they have invented ways to lose I never thought possible.”
In another New York moment, Seinfeld immortalized the strategy adopted by the Amazons in response to the Bronx cheer they received from the city: the pre-emptive break-up. What went wrong, who is to blame, who wins, who loses, and who gets the HQ in the wake of the break-up? Read on…
On February 14, Amazon announced it was pulling out of the $1.85 billion deal to build its second headquarters in Long Island City, in Queens, NY. Stimulating economic development using tax breaks — known as economic development incentives — has attracted vocal opposition from local and progressive politicians, as well as from constituents. The failed Amazon deal has raised questions about the state of public financing, specifically the use of these incentives in tax breaks to spur economic growth.
The Changing Face of Public Finance
Increasingly, state and local governments have focused on offering economic development incentives to large corporations as a means of stimulating economic growth, moving away from deficit-financed bonds. These incentives usually come with the promise of significant jobs and a boost to the local economy. Brookings estimates the total amount of state and local expenditures each year ranges from $45 to $90 billion.
Prominent examples in recent years:
- Foxconn: Wisconsin agreed to give $3 billion in tax breaks to Foxconn in exchange for up to 1,300 jobs.
- Carrier: Indiana agreed to give $7 million in tax breaks to Carrier in exchange for keeping 1,069 jobs in state. A year or so later, Carrier cut about 600 jobs.
Corporations were generally not taxed on these economic development incentives, but the TCJA included a provision to count these incentives as corporate income, taxing them at the 21 percent corporate income tax rate. The Joint Committee on Taxation estimates that this will yield $6.5 billion in additional revenue from 2018 through 2027.
This deal structure has been in place in states and municipalities for the last several years. Amazon’s public bidding war brought offers from states across the country, including $4.6 billion in tax incentives over 25 years from Pennsylvania and $5.86 billion over 10 years from Maryland. Eventually they agreed to bring 25,000 jobs to New York and Virginia in exchange for tax breaks of $1.85 billion and $819 million, respectively.
The Amazon Question
Progressives like Alexandria Ocasio-Cortez seem to be making a moral judgment on the idea of corporate incentives altogether, rather than looking at the economic outcome — be it good, bad, or otherwise. Fellow New Yorker Gregory Meeks called Amazon’s decision to pull out of the deal a “sad day for New York.” New York constituents themselves seemed torn: a recent poll showed that 58 percent of city residents supported the deal; 80 percent believed the city should have had more input in the deal-making process.
In a January hearing, New York City Council members took issue with Amazon’s anti-union stance. A company spokesperson signaled that Amazon would not commit to being neutral in any attempts to unionize among its workers in NYC. The reaction from local lawmakers came after the deal was already struck, leaving some wondering why collective bargaining did not come up during the negotiation process.
In addition to the anti-union aspect, Amazon’s deal raised two specific local issues: affordable housing and infrastructure capacity. State Senate Majority Leader Andrea Stewart-Cousins expressed concern about the lack of an infrastructure plan for HQ2 and affordable housing fears from putatively increasing rents. The deal was also struck without input from Queens residents or representatives, but could these issues have been overlooked in the face of 25,000 direct jobs and the creation of countless others through the multiplier effect?
In the wake of the Amazon HQ2 decision and the highly-charged and partisan Foxconn subsidy in Wisconsin, more voices in the Democratic and Republican Party are speaking out against economic development incentives for large corporations. Detractors of these incentives argue that such payments are an example of crony capitalism, but what do empirical studies show?
A March 2018 Brookings report looked at economic development subsidies in four cities across the country: Cincinnati, Indianapolis, Salt Lake, and San Diego. The study concluded that incentives disproportionately go to tech and export-intensive firms and that these industries typically pay roughly 25 percent higher wages than the economy at-large.
The report also showed that 57 percent of incentives went to communities with a greater-than-average poverty rate and concluded that minorities were under-represented in the incentivized industries, due to the advanced nature of the jobs created and the lack of job training requirements in the incentive packages.
2020 and Beyond
It is difficult to say what the collapse of the Amazon HQ2 deal means for economic development incentives, but it is clear that there is a growing and vocal minority of lawmakers, in both state and federal office, that view economic development incentives as immoral government handouts to billion-dollar corporate giants. On the other hand, presidential candidate Sen. Cory Booker made a blatant appeal for Amazon to locate their HQ2 in Newark, NJ instead. The real economic impact may be speculative just yet, but as the 2020 race heats up, this debate is far from over.