Lessons From Amazon’s Decision To Cancel New York City Headquarters

This piece first appeared on Forbes.com.

Amazon recently abandoned plans to build half of its “HQ2” in New York City. The company was going to receive about $3 billion in taxpayer subsidies for its New York office, and it appears that a small-but-vocal group critical of the subsidies had something to do with its change of plans.

This whole ordeal was a mess, but hopefully it’s taught companies and governments some valuable lessons.

First, giving tax breaks to specific companies is a bad idea. There’s substantial evidence that such tax breaks are largely a waste of money. They typically don’t have much influence on a company’s final decision and the promised benefits—more jobs, more economic growth—either don’t materialize or would have occurred regardless. Playing the tax-subsidy game is like betting against the house—everyone thinks they’ll win but in the end they’re left with empty pockets and little to show for it.

Second, companies need to think differently about where they locate. From an economic standpoint, New York City is attractive with its highly skilled labor force, dynamic and innovative environment, and huge market. But local economies don’t exist in a vacuum. For better or worse, local politics and policy can also significantly influence whether a business succeeds .

Amazon should have been aware of this considering its experiences in Seattle. Last May, Seattle tried to levy a $275 per-employee tax on Amazon, while several local officials have been vocal about the company not paying its “fair share.” Some also complain about Amazon’s contribution to Seattle’s high housing costs. This despite the fact that Amazon has generated billions of dollars in income for locals, as well as the sales tax and property tax dollars that go along with it.

In light of all this, one would think Amazon would want to hedge its bets by locating part of its corporate operations in a city more open to business. Instead, it doubled down by picking New York City, another city with several anti-corporation officials and community leaders. New York State Senator Michael Gianaris (D-Queens), for example, said that Amazon ruins communities and U.S. Rep. Alexandria Ocasio-Cortez (D-Bronx) praised Amazon’s decision to leave as a case of everyday New Yorkers defeating “…Amazon’s corporate greed.”

Of course, some of the backlash against Amazon was due to the tax breaks it was scheduled to receive, which is understandable. But that’s not the whole story. Many New York and Seattle officials think that big companies such as Amazon and their wealthy executives should do more to alleviate the problems that city policies often create or exacerbate.

Take homelessness in Seattle. Sure, it’s always going to take money to build housing in an expensive city. But the city’s zoning rules—heavily tilted towards single-family housing—also must change before enough housing can be built to truly bring down costs for residents. Simply raising taxes on companies like Amazon without allowing more apartments and other multi-family units is not a serious plan.

Or consider subway funding in New York City. Mayor Bill de Blasio wants to raise taxes on the wealthy to fix the dilapidated subway before addressing core problems like the system’s substantial inefficiencies. For instance, it costs about 67% more to move a subway car one mile in New York than it does in London or Paris. Again, any plan to fix the problem via more money alone is not a serious one.

So where might Amazon have gone instead? Several of Amazon’s 20 finalist cities are in the 10 most economically free metropolitan areas, as ranked by economist Dean Stansel in a recent study. These include Miami, Dallas, and Nashville. The New York metro area ranked 49th. Miami or Dallas may lack some of New York’s economic advantages, but from a policy perspective they are likely to be much less antagonistic.

That said, it’s hard to feel too bad for Amazon. It and other companies that clamor for subsidies are an important part of the problem. Amazon’s public announcement for HQ2 bids seems like a mistake now. If it had gone about its business quietly, its investment decisions probably wouldn’t be front page news today.

But public officials who insist corporations are responsible for society’s ills are also in the wrong. Corporations don’t deserve taxpayer money, but big problems like homelessness, deteriorating infrastructure, drug abuse, and joblessness shouldn’t be pinned on them either.

It’s easy for politicians to demonize rich corporate executives and demand they fund solutions. Most of us aren’t rich and thus won’t have to chip in, making for an easy sell. But a lack of money is often not the biggest problem, and solutions that ask more people to contribute force public officials to maintain some fiscal discipline.

It’s not clear how we get to a better place from here, but this Amazon fiasco has highlighted how terrible the current system is and that’s a start.

Adam Millsap

Adam A. Millsap is the Assistant Director of the L. Charles Hilton Jr. Center at Florida State University and an Affiliated Scholar at the Mercatus Center at George Mason University.

The featured image is from Amazon.com.

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