Good-government types are hailing the breakup of online retail giant Amazon and New York City as a long-awaited reckoning of the outrageous subsidies offered by states and communities looking to attract new employers.
Amazon, as you might have read between stories about President Trump playing golf during a supposed national emergency and Princess Meghan Markle’s lavish Manhattan baby shower, canceled plans this month to build its second headquarters in the Big Apple after increasing opposition by local officials.
It was a stunning split.
Amazon, the nation’s most valuable company run by the world’s wealthiest man — Jeff Bezos — had agreed to build a headquarters with the promise of 25,000 jobs in Queens’ Long Island City, in exchange for $3 billion in taxpayer subsidies.
Greg LeRoy, executive director of incentives watchdog group Good Jobs First, was gleeful in calling the Amazon-NYC divorce a major turning point in dismantling corporate welfare schemes that cost states billions of dollars in a zero-sum economic development game.
“We have never received so many calls from elected officials and civic leaders about the need for federal, state and local solutions to the ‘second war among the states,’ “ he said in a news release.
But don’t expect the war to end anytime soon.
States are hooked on tax breaks and other economic development subsidies that have long enjoyed bipartisan support by lawmakers. No state wants to be the first to give them up.
“The truth of the matter is that we need incentives to get projects done,” said Birgit Klohs, the longtime president and CEO of The Right Place, a local economic development agency in Grand Rapids. “We all play this game. If Michigan were to unilaterally disarm, it would push development to other parts of country.”
Some Michigan governors have tried to call a truce in the incentive wars. Former Gov. John Engler dismantled the state’s economic development office in the early 1990s, saying that it was just a political marketing arm for his predecessor, James Blanchard.
But after being heavily criticized when General Motors closed its Willow Run assembly plant and consolidated production at a Texas factory in the early 1990s, Engler rebuilt the state’s economic development apparatus.
The Michigan Economic Development Corp (MEDC)., which Engler created 20 years ago, continues to be a major player in the competition for investment and jobs.
Upon taking office in 2011, now-former Gov. Rick Snyder eliminated the state’s premiere tax incentive program, the Michigan Economic Growth Authority (MEGA), which handed out billions of dollars in tax subsidies to businesses under his predecessor, Jennifer Granholm.
“The use of tax incentives by government, in my view, is a terrible thing,” he said at the time. “I essentially view it as the equivalent of a heroin drip for government.”
Snyder didn’t make Michigan quit cold turkey, though. He tried to slow the drip by replacing most state tax incentives with a less-expensive program that gave businesses upfront cash and loans for new investment in the state.
But the subsidies euphoria was too much for Snyder to resist. Under pressure from the business community and local economic developers, he later created several new tax incentive programs for brownfield developments and large, “transformational” projects.
It anything, it appears Gov. Gretchen Whitmer is going to add new weapons to the state’s economic development arsenal. She said under Snyder, Michigan “unilaterally disarmed when it comes to fighting for and attracting good jobs over other states.”
Whitmer also has said she would undertake a 52-week “jobs blitz,” which apparently means she’s going to try to steal jobs from other states, a common political tactic of new elected officials.
Critics say the $90 billion local governments spend annually on economic development incentives is a zero-sum game that does nothing to grow the national economy.
There is a burgeoning backlash against big incentives being offered to wealthy corporations, including Amazon, Foxconn and GM, which is being slammed for cutting thousands of jobs a decade after its federal bailout.
But how do you go about defeating what LeRoy calls “America’s tax break-industrial complex”?
Some experts, including former Minneapolis Federal Reserve economist Art Rolnick, say the federal government could stop the incentive wars. They’ve long maintained that tax incentives are illegal because they distort interstate commerce, violating the commerce clause of the Constitution.
Others have pushed the federal government to slap a dollar-for-dollar tax on incentives that companies receive, effectively rendering them moot.
But these arguments haven’t gained much traction in Washington.
Klohs defended Michigan’s approach to economic development subsidies, saying they are performance-based, monitored and contain clawbacks that allow the state to recover money if job and investment promises aren’t met.
States also need to be smarter in the design of their incentive programs, said Tim Bartik, senior economist at the W.E. Upjohn Institute for Employment Research, who’s an expert on tax incentives.
Economic development expenditures are more effective when they’re at least, in part, directed at upgrading infrastructure and schools, and require companies receiving subsidies to hire local residents, he said.
Local governments also shouldn’t offer more money than is necessary, Bartik said. New York, which has a strong economy and didn’t really need an Amazon headquarters, appears to have made that mistake.
“New York developed its incentive system years ago when it was a basket case,” he said. “I think in some sense, it didn’t adjust to its new reality.”