Hey, have you heard? Amazon is looking to build a second headquarters.
Of course you have. Amazon HQ2 fever has been sweeping the nation, as cities are eagerly preparing their proposals by October 19 to become the host of the second Amazon campus, promising their residents 50,000 local jobs and massive economic growth in the process.
But while municipalities are all but throwing themselves at Jeff Bezos’ e-commerce giant -in some odd ways, as CNN Money reports – it might be prudent for city officials to pause and consider if offering the farm for this privilege is a net positive for the public they serve.
Of course, the type of bidding war Amazon has incited is nothing new. In the last few months alone, Wisconsin enacted a $3 billion subsidy deal for Foxconn, while Iowa awarded $213 million to Apple. And with roughly 50 cities in the U.S. and Canada saying they’ll make a play for Amazon’s HQ2, it puts Amazon in line to receive another round of hefty tax breaks.
According to Good Jobs First, a nonprofit organization, this type of public financial support is common for Amazon. The company has received $1 billion in state and local tax breaks since its inception, with nearly a quarter of that amount being awarded over just two years, 2015 and 2016.
I recently spoke to Greg LeRoy, founder and executive director at Good Jobs First. He told me that, when it comes to companies making their decision on where to build, taxes and tax breaks are the least of their concerns. But that certainly doesn’t stop them from reaping the rewards.
“The big ticket items that companies have to account for – labor, occupancy, raw materials, logistics, energy, etc. – make up 98 percent of the average company’s cost structure in the US, while all state and local taxes combined are just two percent,” he explained. “So when companies are looking to expand or relocate, those big cost variables almost always dictate the decision. It’s only at the end of the process that companies play a few cities against each other to get some extra tax benefits to do something that, based on the business basics, they were going to do anyway.”
Sounds like cities are really getting the last second squeeze. But LeRoy says that it’s not entirely their fault. The modern day process is a construct of a multitude of factors – the rise of site development companies, the vulnerability of elected officials in a fluctuating economy, and the falling rate of entrepreneurialism – and these municipalities are making the only play they have left.
“They are doing the only thing the system has trained them to think they can do,” LeRoy said, as he explained, public officials can’t call around to see what other offers are on the table without the risk of being blackballed by site development companies. “At that point, the only role given to the public official is to figure out how much cash they can put on the table to get the deal done.”
So does it work? If cities give massive tax breaks to companies to bring them jobs, is there any evidence that the economics pass the sniff test for the surrounding area?
“There are studies about various deals, but it’s not a well-developed science, and often, the studies are done by bodies that are less-than-impartial,” said LeRoy, whose organization calculated the average cost of mega deals from 1996-to-2016 at $658,000 per job. “But there are ways to come up with credible calculations on whether the deal broke even or not.”
Amazon will very likely get everything they want in terms of tax incentives, but whether that will mean a positive economic outcome for the city that enters the winning bid remains to be seen. That uncertainty may be reason enough for municipalities to reconsider their strategy. The way things are shaping up, however, that doesn’t look like it’s going to happen anytime soon.
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.