Amazon’s decision to build big new facilities in New York City and Northern Virginia prompted a predictable outcry about the reported $2 billion plus in tax incentives and other inducements it received to do something it probably would have done anyway.
The critics are very likely correct, given the long, sad history of failed tax incentives. But the proposed solution of some – that the federal government step in and put a stop to this wasteful competition – is often poorly defined and likely to fail.
State and local officials have the right to make their own land use and economic development decisions, even bad ones. Curbing or even stopping them from doing so would be problematic based on the law and past experience.
The federal government could take a page from the state playbook and try encouraging cooperation among localities instead of competition between them. Ohio created a mechanism that makes it easier for cities and towns to come together to woo firms like FedEx and then share the resulting tax revenues. New York offers technical assistance and competitive grants for municipalities that pursue joint development projects.
Others say the federal government could do what some states have done and cut economic development funds or limit access to certain types of bonds and public private partnerships P(3s) for cities that try to poach jobs from their in-state neighbors. The advocacy group Good Jobs First maintains an inventory of 40 states that limit tax incentive eligibility for intrastate relocation. These limits might be easier to impose at the state level where cities are subordinate entities of the state, a relationship which isn’t the same between the federal and state governments.
But the most extreme proposed federal response – prohibiting state and local economic development incentives by making them akin to bribing foreign officials – seems dubious at best. It is true that some local decisions may have negative social consequences. But that doesn’t mean the federal government should – or even can – legislate them out of existence.
Others would kill Amazon-like deals by imposing a 100% tax on company-specific state and local relocation subsidies. Such a move would preserve general incentives for sectors like high-tech, such as tech-focused labor training programs. Proponents also would exclude public infrastructure, work force development and other investment that provide significant long-term benefits to taxpayers.
But where to draw the line? Is Amazon’s fancy footbridge to Reagan National airport a benefit for the general public or a firm-specific benefit? How would the federal government detect provisions apparently written for an entire industry that really benefit just one firm?
By the way, an underappreciated feature of the 2017 Tax Cuts and Jobs Act is that it made state and local economic development incentives paid to corporations taxable (at the 21 percent corporate income tax rate). This was following a stated intent in the House version of the bill to “remove a federal tax subsidy for State and local governments to offer incentives to businesses as a way of encouraging them to locate operations in a particular jurisdiction.”
The federal government also could try to withhold federal grants from jurisdictions that it believes engage in a beggar-thy-neighbor economic development competition. President Trump and the Justice Department threated to impose a similar arbitrary penalty on cities that they felt were going too far to protect undocumented immigrants from arrest and deportation. But their effort to punish Sanctuary Cities hasn’t gone so well in the courts.
Instead of trying to punish cities for what it considers poor economic development strategy, the federal government could play a more useful role by calmly laying out the facts and giving state and local officials tools to make informed decisions. The Council of Economic Advisers did this in 2015 by outlining the national economic costs of restrictive housing and land use regulations. But former CEA Chair (and my former boss) Jason Furman wisely noted “Land use regulations are largely, and legitimately, in the jurisdiction of State and local government.” Last I checked that was still the case.
