The collapse of the Amazon deal in New York City has focused renewed attention on public subsidies for corporate relocations. My view is that local governments overuse such subsidies. Even so, I have been struck by the excessively polemical nature of this debate. The reality is that these kinds of subsidies are quite common, and their inefficiencies are usually small.
Consider, by way of illustration, entitlement and discretionary spending on the federal level. A program such as Social Security or Medicare is done entirely by formula, as it should be; large companies cannot lobby for higher payments or lower taxes for their workers. Much of discretionary spending, by contrast, is research grants and procurement contracts. One company or researcher wins, and the others do not. Furthermore, the government will usually offer different prices and terms, based on how much value it thinks the winning bidder can bring to the project. All of which is to say: Discretionary spending requires … government discretion.
Viewed in the context, critics of local development subsidies are also critics of government discretion. Or, to frame the issue in a duller way: They do not believe local governments should treat economic development as a procurement problem. That’s a defensible position, but it is not obviously correct.
Another analogy is with private shopping malls, which commonly charge much lower per-unit rents to anchor tenants, maybe even subsidizing them. That is based on the view that a famous retail chain or movie theater can help other businesses in the mall by attracting customers and burnishing the overall image of the place. When a local government offers tax incentives to relocating businesses, it is in a sense acting like a shopping mall, which treats tenant recruitment as a kind of procurement problem. Offering differential rewards to prospective tenants is standard practice.
Consider again the contrast between this Amazon debate and the one over federal spending. It has long been a centrist, bipartisan Washington consensus, with which I agree, that the federal government spends too much on entitlement programs, and that spending is eating into some very important parts of the discretionary budget, such as support for science or infrastructure. The criticism is essentially that there is too much spending by formula and not enough by procurement. In this setting, many of us find discretionary procurement methods to be just fine, albeit highly imperfect.
Many of the biggest critics of the Amazon deal are on the progressive left — the same crowd that tends to favor an industrial policy for America. Why, then, is industrial policy so bad for New York City? There are also critics from the libertarian right. For them the question might be, Why isn’t what’s good for Singapore good for New York City? Often cited as a model in many other discussions of economic policy, Singapore has offered differential tax and development incentives for most of its history, with great success.
One final note: There isn’t a tax system in the world in which all individuals or companies pay the same rates. Once you factor in depreciation, expensing provisions, definitions of profit, and much more, tax systems are never fully neutral or transparent. New York’s offer to Amazon was probably more straightforward than many other features of local tax systems.
What matters is the net tax companies pay, not just their published tax rate. When a large company is going to make a significant investment in an urban area, it is hoping for support in terms of infrastructure maintenance or improvement, and indeed it invests on that basis. The reality is that municipalities often have difficulty fulfilling their obligations anyway. (This also holds true, unfortunately, for even basic promises to ordinary citizens. Ridden the New York City subway lately?)
I still think New York made an error in offering Amazon tax breaks, if only because it looked bad. That led to the canceling of the deal, and negative publicity for both the company and New York City. But if you think the deal was uniquely outrageous, you need to look more closely at how governments actually operate.
Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include “Big Business: A Love Letter to an American Anti-Hero.”