Reflections on Corporate Incentives (or Are They Giveaways

 

A nonpartisan agency analyzed the Foxconn proposal and concluded that if the 13,000 new jobs were actually created, Wisconsin would break even after twenty-five years. Even if that growth target were not met and it takes decades longer for the cheeseheads to break even, state officials contend that what Foxconn has been promised is still a good deal for the state because the nonpartisan analysis does not include the 22,000 indirect jobs the factory will generate. The thought is that jobs will be created outside the Foxconn plant because the factory will buy from suppliers within the state and the new workers will spend money locally on consumer items like food and entertainment, and that will generate new jobs.

The notion of breaking even in a quarter century, however, ought to raise questions. Will the factory as planned continue to exist that long? How many factories built twenty-five ago are operating in the form in which they were constructed? Have many required large infusions of capital to alter the plants as the manufacturing world changed? Will Wisconsin have to give more incentives for the capital to be spent so the factory will still operate in the 2040s? Even more to the point, in the fast-moving technology world, what are the odds that a factory built to build flat screen TVs will exist in twenty-five years? What percentage of the factories building televisions in 1993 are still operating?

Amazon may be investing more in human and less in physical capital than Foxconn, but similar questions may also apply to the Long Island City deal. Amazon did not even exist twenty-five years ago. How sure can we be that it will be there in something like its present form twenty-five years hence?

In any event, while economists may calculate whether corporate incentives are a good deal for a locality, we should be skeptical about such projections because they contain many estimates and much guess work. As the famous philosopher said, “It’s not easy to make predictions, especially about the future.” We can’t truly know whether a package of corporate incentives makes sense until many years from now.

Many of the criticisms of the corporate incentives seem misplaced. What are usually taken to be government giveaways often include tax abatements. Thus, instead of paying an eight percent income or sales tax as others must, for example, the deal may be that the corporation will pay only four percent for, say, twenty years. If it is guesstimated that without the abatement the company would have paid $2 billion in taxes during that time, reports will say that the government has given the corporation $1billion in tax incentives. And the cry will go out, as it has in New York, that the money could be better spent on roads, public transportation, police, and housing.

This logic, however, ignores that the government has not shelled out $1billion that could have been spent elsewhere. Instead, it is money that the government does not get, and the complaints ignore that the government will receive $1billion it might not otherwise have received if the company had not come. The government is ahead if the corporation would not have come without the abatement. On the other hand, if the corporation would have come without the tax incentive, then the government has lesser revenue than it otherwise would have.

And that is the truly important question: Would the corporation have made the same location decision without the incentives? Cynics, or realists, say corporations first decide what move is best for them and then, without revealing their decision, go to the already-picked localities and ask them for relocation incentives.

Don’t blame the company for such chicanery. It exists to make money, but, of course, if the company would have made the move without incentives, then the government has wasted resources. Some commentators suggest that Amazon would have made the decisions it did without incentives to move to the Washington, D.C., and New York City areas. They note that the head of Amazon, Jeff Bezos, has a home in Washington and that Amazon would like to be near the nation’s capital. They also point out the inevitability of New York for an Amazon headquarters because that city is the nation’s financial center and has been increasingly attracting people with high tech backgrounds.

I take this certitude of what Amazon would have done without incentives with a grain of salt (which I am sure that I could buy on Amazon). With hindsight, many decisions look obvious. Surely, even if he has a home in Washington, Jeff Bezos, who is perhaps the richest person in the world, could afford acceptable accommodations just about anywhere. Corporations around the country and world raise money from Wall Street without physically being in New York. If Amazon had picked Miami, Minneapolis, or Missoula, commentators would have found reasons why the choice was obvious. (Except if it had been Indianapolis.) Unless corporate documents get leaked showing that the Washington and New York locations were picked before incentives were offered, we simply don’t know whether Amazon would have made the commitments without the governmental offerings.

(Concluded January 21)

Reflections on Corporate Incentives (or Are They Giveaways)

 

After much fanfare, Amazon announced that it would place its second headquarters in suburban Washington, D.C., and in the Long Island City neighborhood of New York City. There is a nomenclature problem here. (An aside: I pronounce “nomenclature” with the accent on the first syllable pronounced GNOME. The spouse pronounces it with the accent on the second syllable pronounced MEN. I had not heard anybody else pronounce it her way, and I was convinced that she was wrong—for the first time ever, I might add. But then I heard a Britisher say it as she does. In spite of what you might think of Americans who adopt British pronunciations, let me assure you that the spouse is normally not pretentious.) Can there be multiple headquarters? An organism has but one head. Doesn’t a corporate entity have but one headquarters? And if it can have a second headquarters, can it be in two places?

Amazon, in announcing that headquarters 2A or 2B would be in Long Island City, did an amazing thing. It brought my governor and my mayor together in relative amity. It might seem that Andrew Cuomo and Bill de Blasio, Democrats from New York City with supposed liberal-to-progressive politics, would be natural allies, but both men have huge egos that they work hard to protect, and both are ethically challenged. Perhaps as a result, they seem to despise each other. However, they were together to announce, and take credit for, Amazon’s coming to Queens. Each beamed; each took a metaphorical victory lap. Neither sniped at the other. Seldom have two men looked more content and prouder of themselves.

The smiles, however, soon became forced. Perhaps the two pols expected universal praise for landing 25,000 new jobs at a reported median salary of $150,000. It turns out, though, to get something from Amazon, you must give something to Amazon. Many said that the city and state had given too much. The criticisms spanned the political and ideological spectrum, from the for-no-good-reason-that-I-can-see media darling and demon Alexandria Ocasio-Cortez (AOC achieved a surprise primary win in a Democratic district that assured her election to the House, but that was obtained with fewer than sixteen thousand votes; since she just taken her seat, she has yet to accomplish anything else) to the often mean and looney and wrong Wall Street Journal editorial board.

News reports indicate that New York, through tax abatements, infrastructure spending, and grants, will spend upwards of $3 billion to get Amazon. The briefly happy Cuomo and de Blasio couple maintain that this sum is a good investment because it will generate $9 of wealth for the region for every dollar spent. Others, however, said, “Pshaw,” and talked about phony math, contending that Amazon would have come to the New York area even without such largesse. The critics pointed out that Google and Facebook have been expanding their New York workforces and footprints without such subsidies.

I have been somewhat surprised at all the criticism. New York regularly gives tax abatements and other goodies to businesses, especially to the real estate industry. No single package of government incentives has been as big as what has been offered to Amazon, but surely the aggregate offered to the real estate moguls of New York City, including to Donald Trump before he was president, has been huge. Even so, while the practice of giving such incentives has drawn sharp criticism, the longstanding real estate incentives game has not drawn the ire that has spewed forth about the Long Island City development.

The criticisms also tend to ignore that New York is not alone in the let’s-entice-a-corporation-to-our-locality business. Moreover, the New York incentives are not necessarily out of line with what other governments have given to corporations. In fact, reports state that US cities and states spend up to $90 billion each year in tax breaks and grants to corporations. Not long ago, for example, Wisconsin was in the spotlight when President Trump and then Wisconsin Governor Scott Walker, with much fanfare, announced that Foxconn, a Taiwanese multinational corporation, was going to build a factory to make flat screen TVs in southern Wisconsin, bringing, perhaps, 13,000 new jobs to the Badger State. The president and governor downplayed that Foxconn really promised to hire only 3,000 workers, at an average salary of $53,000 over the following four years. The corporation merely said that there was a “potential” to create 13,000 jobs in the future. The politicians tried even harder to avoid mentioning that Wisconsin was giving almost $3 billion in incentives to Foxconn through income tax credits and sales tax breaks.

Wisconsin committed to $3 billion in incentives to get Foxconn to agree to bring a new factory into the state, a factory that would employ 3,000 at an average wage of $53,000, with a possibility that 13,000 jobs would someday be created at some vague future date. If Wisconsin made a good deal in luring Foxconn, then New York must have made an even better one since for the same amount of financial incentives Amazon says that it will produce more jobs with much higher pay in New York. But did the Badger State make a good deal?

(continued January 16)