Economics, recent

We Can Put an End to State Bidding Wars

In a crashing finale to its corporate headquarters search saga, Amazon announced that it is withdrawing from its commitment to New York. Politicians have responded with mixed reactions, with some hailing the decision as a victory for the middle-class locals who came out in droves against the deal proposed by Mayor Bill de Blasio and Governor Andrew Cuomo. The deal, which was comprised of more than $3 billion in tax incentives for the company, reignited the debate over whether immediate incentives for large corporates were justified by projected taxes down the road. Amazon promised to bring over 25,000 news jobs to the city, as well as additional investment in local infrastructure and school programs. However, the agreement quickly became a political hot-button issue. Many on the left saw it as a giveaway to a multi-billion-dollar corporation when subways lines break down on what feels like a daily basis. Those on the right chided the government for falling prey to crony capitalism. It seemed to be one of the few times that both sides could agree on something.

Activists and federal representatives were nearly universal in their condemnation of Amazon’s benefits under the proposed deal. According to The New York Times, there was fierce opposition from “lawmakers, progressive activists and union leaders, who contended that a tech giant did not deserve nearly $3 billion in government incentives.” Many critics have argued that Amazon’s reluctance to abide by the city’s directives with respect to unions, zoning, and taxes was a symptom of the larger failures of capitalism to contribute to local communities. New York Council Speaker Corey Johnson released a statement that called for a conversation on “vulture capitalism and where our tax dollars are best spent,” and House Freshman Alexandria Ocasio-Cortez derided the company’s stance on unions and worker treatment.

But Amazon’s original decision to accept New York’s proposed tax subsidies is not an indication of the horrors of corporate greed. Like so many recent issues surrounding the supposed failures of capitalism, the outcome was merely a symptom of a larger problem that commentators on both the left and right seem to skirt but never actually address. The question isn’t whether companies should be allowed to request bids for their business from states across the country, or whether states should respond with generous terms. Rather, the proper question is why it’s necessary for states to bid for a company’s business and provide incentives for them to move or grow their worker populations in a new area in the first place. Framed this way, it becomes clear that Amazon was looking not just for tax incentives but a business-friendly climate; the tax subsidies were merely icing on the cake. Why would it move to the city in which politicians, activists, and unions were constantly increasing their expectations of the services the company should provide?

At first glance, the entire situation oozes of a company’s attempts to squeeze the most out of a host city. Although the negotiations were held behind closed doors, details of various competing bids leaked: Pittsburgh offered $9.7 billion; New Jersey was happy to give $7 billion. New York’s package was comparatively small at a measly $3 billion, but it included other incentives such as streamlined development approvals and positive political reception in the Big Apple. While the states fought among each other to provide the most generous package, Amazon sat high above the masses ready to give the thumbs up or thumbs down. It’s hard to feel sympathy for an emperor, especially when he stands to benefit economically from the gladiator’s efforts.

When politicians complicate local tax structures and vocally resent large businesses (or go even further to suggest that property in the city should be appropriated by the government), companies, both inside and outside of the state, begin to weigh their options. A city that increases the burden or engages in anti-business rhetoric looks substantially less favorable in the expansion calculus. Most (although not all) politicians recognize this; and in an effort to make their cities look more palatable, state governments will often offer incentives to entice companies to bring in their lucrative tax base. However, these packages are a tacit admission that local policies cannot compete with those of other cities on their merits. Andrew Cuomo suggested as much when he said, “God forbid the rich leave.”

And thus, the problem becomes apparent: states need to entice companies to come to their states, because they wouldn’t come otherwise. High taxes and excessive burdens placed on businesses do not make for a palatable environment. When a company as large as Amazon, or in a similarly controversial example from August of last year, Apple’s supplier Foxconn, asks states to bid for their business, they will fall head over heels to meet and exceed the company’s expectations. That any state would also willingly engage in secret negotiations is a testament to the lengths governments will go to appease taxpayers.

By raising taxes and allowing activists and unions to dominate the conversation, state governments are digging the political holes in which they are now finding themselves. That Amazon withdrew from the deal is not a victory for workers as Ms. Ocasio-Cortez suggests, but a failure on behalf of the state to come to terms with its own economic reality. For those that complain that New York gave Amazon nearly $3 billion in incentives, it is clear that Governor Cuomo and Mayor de Blasio felt that they had no other means to convince the company to develop in the city. That they are sticking by the deal in the face of local opposition is laudable, but it also represents an unwillingness to confront the detrimental policies that made it necessary for Amazon to require a bid from New York in the first place. Pro-business policies would tilt the equation in favor of the states: rather than politicians placating companies, the latter would come rushing to please the former. We’re seeing the negative effects of anti-business policies in states like New York and New Jersey, both of which are seeing net outflows of tax-paying residents.

That Amazon required states to bid for its business is no fault of capitalism. It is a failure of some state governments to recognize that anti-business rhetoric and policies force them to engage in these bidding wars. If activists and representatives don’t want to submit to companies in a winner-take-all competition, then they should consider making their policies competitive for all businesses. New York would not have needed to offer any financial incentives if the company saw that the city would help it thrive. Amazon would still have paid tax revenue, and, more likely than not, other tech startups would have followed, growing the taxable population even further. Capitalist policies would achieve the same goals politicians in New York claim to support

It is important to note that advocating for capitalist governance is not contrary to the positions taken by activists of both the left and the right’s respective political ideologies. While it might seem that this set of policies would be a capitulation to large companies to the detriment of workers, the reality is that large companies like Amazon need workers to thrive. Under a better regulatory scheme, the government would not need to provide incentives for any company, large or small, to come to the city. As businesses saw the benefits of living and growing in New York, they would expand into the city and invest in the community by hiring locals. The result would increase the number of available jobs, and the resulting taxes would increase government coffers that could then be used to solve many of the problems that are all-too-common in New York, including the rise in homelessness, the decrepit state of low-income housing, and the derelict subway system. There would be no massive corporate giveaways that divert precious funds from important projects, and no crony capitalism for the government to choose winners. Amazon would not have required a bid from the city to build a second headquarters there.

In the end, New York does not want to drive away jobs. It does not want to drive away innovation, or even the country’s massive corporations. Rather, New Yorkers wanted to end government giveaways and entice companies by giving them a chance to compete without government subsidies. It wanted corporations to contribute to their communities and pay workers fairly. Politicians should recognize that they could have avoided this entire fiasco by working with the business community from the beginning, and that this is their chance to stem the outflow of businesses and residents. New York should be a business-friendly city; and if it can assume its historic place at the center of the American economy, companies large and small will once again flock to the Greatest City in the World. Bidding war or not.


Chris Sabaitis works in finance and is a grad student in mechanical engineering at Columbia University. You can follow him on Twitter at @ChrisSabaitis.

Feature photo by Sundry Photography / Shutterstock.