“The stakes are getting higher and the deals are getting worse for the taxpayer,” said Amy Liu, director of the Metropolitan Policy Program at the Brookings Institution and a longtime critic of tax incentives.
More than 200 North American cities submitted bids for Amazon’s second headquarters, and the enthusiasm is hardly surprising. The e-commerce giant has said it plans to invest as much as $5 billion in the project and to hire up to 50,000 workers, most earning high salaries. Mark Zandi, chief economist of Moody’s Analytics, said the project could be “transformational even for a big city.”
But the project also carries risks. Accommodating Amazon’s thousands of workers will require hiring more teachers, widening roads and building more housing. The costs for those upgrades will fall on residents and existing businesses.
Gina Schaefer, who owns a dozen hardware stores in the Washington area, said she did not mind paying taxes, and had learned to deal with the bureaucratic hurdles that come with running a small business in the area. But she said it was frustrating to watch local governments — three of the 20 finalists for the Amazon project are in the Washington area — roll out the red carpet for a multibillion-dollar corporation. Suddenly, she said, her tax dollars could be flowing to one of her most daunting competitors.
“There are no incentives for those of us who are already here,” Ms. Schaefer said. Alluding to Amazon’s chief executive, Jeff Bezos, she added, “Why should the richest man in the history of the world get money to open his business?”
Indeed, tax incentives tend to flow overwhelmingly to big, established companies, rather than to the local start-ups that research has shown are a more significant source of job growth. And some who have studied the issue say incentives rarely work: Companies will play cities and states off one another to save money, but ultimately base site-selection decisions mostly on other factors.
Megan Randall, a researcher at the Urban Institute who studies economic development policy, said companies cared most about a talented work force, which requires good schools and colleges, and amenities like affordable housing, parks and public transit that make a place desirable. Tax incentives, she said, make those investments harder for local governments to afford.
“Those dollars are things that could go toward educating kids, building roads, investing in quality of life for your residents,” Ms. Randall said.
Many local officials acknowledge the downsides to incentives, and say they try to build in protections, such as clawback clauses that require companies to repay incentives if they do not hire as many workers as promised. But they say that refusing to offer incentives at all is the equivalent of unilateral disarmament.
“Nobody wants to get involved in it, nobody wants to have to do this, but we’re in a competitive environment,” said Dennis M. Davin, secretary of community and economic development for Pennsylvania, where two cities — Philadelphia and Pittsburgh — are among the 20 finalists for the Amazon project.
Still, until recently there had been signs that cities and states were, if not declaring a cease-fire, at least taking steps toward de-escalation in the incentive wars. Counties in Ohio and Colorado reached regional agreements to stop using tax breaks to compete with one another, and Florida’s Legislature voted to rein in that state’s business incentive program. Several states commissioned audits of their programs and took steps to make them more transparent.
And although megadeals never disappeared, the growth of incentives programs did slow for a period. Timothy J. Bartik, an economist at the Upjohn Institute in Kalamazoo, Mich., has compiled a database of state tax incentives dating back to 1990. The value of such incentives soared in the 1990s, Mr. Bartik has found, but has largely leveled off since the early 2000s.
“It really seemed like the incentive competition had kind of stabilized,” Mr. Bartik said.
Economists are not opposed to all incentives in all cases. Publicly funded transportation upgrades or job-training programs, for example, can help entice companies while also benefiting existing businesses. Tax credits aimed at revitalizing abandoned, polluted or blighted areas can encourage development that eventually expands a city’s tax base.
That is essentially the approach taken by New York, another Amazon finalist. Alicia Glen, the city’s deputy mayor for housing and economic development, said Amazon would probably get hardly any tax breaks if it chose to locate its second headquarters in Midtown or Lower Manhattan, the city’s two traditional business centers. But the company would get tax breaks if it selected less-established sites in Brooklyn or Queens. Those incentives, she noted, are available to any company that locates in those areas, although New York State could also offer its own tax breaks.
“We don’t rely on incentives, but we do have incentives in place to encourage companies to go to parts of the city that they might not otherwise consider,” Ms. Glen said.
Other cities, though, may already be buckling to the competitive pressure. After New Jersey announced its incentive package, Maryland countered with its own $5 billion package. Few packages rival those bids in scale, but other cities have come up with their own creative offerings. Columbus, Ohio, for example, would waive all property taxes for Amazon for 15 years, subject to certain conditions, and would give back a share of the income taxes paid by Amazon’s employees to the company in cash.
Many cities have kept the details of their bids under wraps, but have left little doubt that they are open to negotiations.
“We’re not going to be outbid on Amazon doing business here,” said Mike Rawlings, the mayor of Dallas. “We dream no small dreams here. We want to be the biggest and the best.”
But even in Texas, there are limits.
Nelson W. Wolff, the county executive whose domain includes San Antonio, said he would have loved to see Amazon open its new headquarters there, but he was not interested in breaking the bank to make it happen. In a letter to Mr. Bezos in October, Mr. Wolff and Ron Nirenberg, San Antonio’s mayor, said the city would sit out the process and instead invest its resources in education and housing.
“I knew it was going to be a big bloody incentive war,” Mr. Wolff said, “and I just didn’t think we’d be able to play in that kind of game.”
Correction: January 26, 2018
An earlier version of this article misstated the given name of Pennsylvania’s secretary of community and economic development. He is Dennis M. Davin, not David.