Extraordinary Incentives


As online retail giant Amazon narrows its quest to find a location for its second headquarters, local governments across North America are testing the limits of economic incentives.February 2, 2018By Avery Ryan_______Within the past few months, The race to host Amazon’s headquarters has intensified and is now boiled down to a list of twenty cities still in the running. Earlier in January, Amazon released a list of finalists, which identified the 20 out of the 238 bids from across North America that were still being considered for hosting the new headquarters. These finalists are Philadelphia, Boston, Toronto, Atlanta, New York, Washington, Miami, among others. The reason behind the fierce competition lies in the opportunities that hosting operations for a company such as Amazon would bring for a city and surrounding metro area.Being the location of Amazon's headquarters  bring a long list of benefits. As many as 50,000 new jobs would be created. The winning city would receive great publicity as well. Overall, acquiring Amazon’s headquarters is most American mayor’s dream come true.However, the race has turned quite serious in the past few weeks. Cities are going to extremes in order to get Amazon’s pick, and it may be doing more harm than good. Cities have offered billions of dollars in tax subsidies in order to attract the firm. Amazon CEO, Jeff Bezos, is operating this deal with a degree of secrecy, making it harder for city leaders to figure out how to best win over the $675 billion company. For example, New Jersey has offered $7 billion in tax-breaks for Amazon if it chooses Newark for the new headquarters. While Amazon's entry will bring more revenue and jobs, the city will have to take other risks into consideration. They must consider widening roads, hiring more teachers, and building more housing. The cost of all of these upgrades, according to the Washington Post, is going to fall on residents and small business owners of the city. Residents who will have to pay more in a state with already high tax levels may not be as willing to jump on board. Small and mid-size businesses will have to play a role in the repayment of these tax subsidies. Smaller firms, with Amazon being an unrivaled behemoth, will not be pleased that their tax dollars will be supporting their competition.An interesting deal may arise in the greater Washington, D.C. area, where 3 of the finalist cities are located. Muriel Bowser, the mayor of Washington, D.C. made a statement regarding how the headquarters of a company of such size would equally benefit her city, Northern Virginia, or Montgomery County, Maryland. Economists, along with public policy experts, agree that these three finalist cities should collaborate in order to convince Amazon to come to any of the three cities.PrecedentsThis race for a facility to be placed in a city in order to gain revenue and improve standard of living is nothing new. Sports franchises cause the same kind of competition between cities due to the enormous amount of revenue generated in this business. Cities will fight to acquire sports franchises, and sometimes are forced to spend large sums of money just to keep them in the city. Similarly to the Amazon situation, economists question whether or not this decision by city leaders is more helpful or harmful.Brad. R. Humphreys, an economics professor at West Virginia University , researches the economics of professional sports. In a piece for the Regional Science and Urban Economics Journal, Humphreys wrote about a change in viewpoint about the benefits of tax subsidies for the purpose of sports franchises. Between 1950 and 2010, an estimated $59 billion in 2006 dollars were spent on the building of sports facilities in the United States. Humphreys notes that the business done inside these stadiums is entirely private enterprise and the revenues generated from private sporting events are split between the employees, players, and owners. There are not many other private profit-generating firms that receive such large amounts of tax subsidies. Humphreys suggests that while it has been said that these facilities increase jobs, create higher incomes, and increase tax revenues in the past, that may not be the case anymore.Proponents of sports facilities are now justifying the subsidies with urban redevelopment. The bulk of this journal analyzes a spatial model that suggests that cities are giving out subsidies to these sports franchises despite the lack of evidence that the construction of these sports facilities create fiscal benefits for a local economy.The similarities between sports franchises and Amazon’s headquarters bring up an interesting question for cities that are still in the running for Jeff Bezos’ competition. Providing such large subsidies may be guiding cities in the wrong direction. However, the race is still on and the cities are still pushing. Whichever city finishes in first place will be the new home of Amazon’s second headquarters, and will experience the externalities--both positive and negative--of experimenting with incentives of such magnitude.________ Featured Image: Central Toronto. Toronto is the only city outside of the U.S. to be considered by Amazon to host its new headquarters. Photo Credit: Michael Muraz References, Brad R., and Li Zhou. “Sports Facilities, Agglomeration, and Public Subsidies.” Regional Science and Urban Economics, vol. 54, 2015, pp. 60–73., doi:10.1016/j.regsciurbeco.2015.07.004.