Financial Incentives To Lure Companies Waste Money

Good politics can lead to bad policy.

The search for a second corporate headquarters that will eventually employ up to 50,000 people lasted over a year. In the end, Amazon split the decision by picking not just one, but two locations: the New York City borough of Queens and the Crystal City area of Arlington in Virginia. However, some say the winners have much to lose.

In particular, the fiscal subsidies used by the two states to lure Amazon—$1.5 billion and $573 million, respectively—may not have even swayed Amazon’s decision in the end. While the e-commerce giant said it will invest $2.5 billion in each city and generate up to $10 billion in tax revenue over the next 20 years, research suggests that Amazon would have chosen these locations anyway, without taking any financial incentives.

“Most research suggests that very few businesses are swung by incentives,” says Nathan Jensen, professor of government at the University of Texas at Austin and coauthor of Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain. In a summary of US studies, Jensen says economist Tim Bartik at the Upjohn Institute found that only 2% to 25% of companies were lured because of incentives. “The other 98% to 75% were coming anyway,” he says. “Those incentive dollars are spent for no economic impact.”

The biggest problem with corporate subsidies, however, might be structural. Not only do they fuel crony capitalism and social inequality, but they hurt productivity and competition. The European Union has explicitly prohibited them. “These programs are expensive and they tend to result in two things,” Jensen says. “First, they lead to a decline in funding of services like schools or roads, or they lead to higher taxes on individuals or other businesses. Second, you are giving certain firms an advantage over other firms.”

Finally, Jensen argues, businesses are encouraged to lobby for special favors, which uses precious time and resources, both on the side of government officials and companies. “All of this human capital could be used in helping address affordable housing (government) or further innovation (Amazon),” says Jensen. Amazon founder, chairman and CEO Jeff Bezos is hardly the first to participate in such a game. Just last year, Apple was awarded more than $208 million in state and local tax breaks to open a data center in Iowa. A few months earlier, Foxconn announced it would receive over $4 billion to open a manufacturing plant in Wisconsin; and in 2014, Tesla orchestrated a bidding war similar to Amazon’s, which was eventually won by Nevada to the tune of $1.3 billion in financial incentives.

“This is bad public policy, but it is good politics,” says Jensen. “Politicians can use incentives to take credit for companies coming to their districts, even if often they are coming anyway.”