Government incentives and tax credits face new scrutiny, driven in-part by Amazon’s wishlist as it searches for a city to plant its second headquarters.
The company has a preference for cities offering incentives in exchange for the $5 billion HQ2 project, which Amazon says will bring 50,000 jobs and billions more in economic stimulus. The request is controversial — and a recent analysis of Amazon’s latest financial filing further inflamed the debate, revealing the company didn’t pay any federal income tax on its $5.6 billion profits in 2017.
Amazon has a history of avoiding taxes and a case could be made that the extra cash helped fuel the company’s meteoric rise in Seattle. Amazon has generated about 40,000 jobs in Washington state and injected billions of dollars into the regional economy. Setting aside the serious issues associated with rapid economic growth in Seattle, the Amazon test case raises an important question. Do tax breaks and government incentives make good investments?
Brookings Institution fellow Joseph Parilla would say that we don’t have enough information to answer that question.
He examined the local value of economic development incentives in a new report for Brookings, conducting original research and drawing on existing incentives studies. Parilla found that depending how you measure, incentives amount to an estimated $45 to $90 billion per year in the U.S. But many of those programs lack the necessary data and reporting to hold corporations accountable to the promises they make in exchange for incentives, Parilla found.
“Localities must commit to making incentives information publicly transparent, and then rigorously evaluate their impact on firm outcomes to determine what works,” Parilla writes.
That goal isn’t likely to be realized, at least in this phase, of Amazon’s search for a second headquarters. Although some cities have gone public with their incentives offerings for HQ2, many are keeping the details of their proposals secret. Parilla is concerned about what he calls the “Amazon effect,” where incentives are motivated by politics more than economics.
“As was just seen with that company’s HQ2 competition, a footloose corporation dangles a major investment in front of many cities,” he writes. “Political officials then find themselves in a classic prisoner’s dilemma. They know that they would all be better off simply competing on their natural advantages, not by offering incentives. But because many cities will use incentives, all feel they must.”
In many cases, government incentives are pitched as a way to bring jobs to distressed communities. Parilla analyzed specific economic development deals in Cincinnati, Indianapolis, Salt Lake County, and San Diego to find out whether those programs achieved that objective. He found that incentivized industries do pay 25 percent higher wages than the overall economy but people of color are underrepresented in industries that receive incentives. His research also showed that a low share of those incentives is directed toward worker training.
“Clearer criteria and more effective targeting should reserve incentives only for those firms that will advance broad-based opportunity, either by incentivizing opportunity-rich firms and industries, incentivizing firms to provide workers more opportunity, or by addressing place-based disparities in opportunity,” Parilla writes.
Economists are skeptical about the efficacy of incentives. There is disagreement about how much incentives influence a company’s location decisions and whether they actually provide a worthwhile return on the investment. The Brookings report also notes that governments don’t prioritize firms that could benefit the health of an economy longterm, like research and development and workforce skills training. But “even the most intense incentive critics acknowledge that they can be societally beneficial if properly targeted, transparently deployed, and rigorously evaluated,” Parilla says.
