The Amazon/New York debacle is nonsense and so are “tax incentives.”

American cities have a strange proclivity for offering individual companies bespoke tax cut packages in exchange for locating in their city, so naturally when a corporate giant like Amazon announces they’re looking for a place to locate their second headquarters every city in America goes nuts trying to outbid each other to attract Amazon. This is what American Mayors and city councillors have been told they’re supposed to do and so they obediently oblige. Unfortunately it’s absolute nonsense.

If you take a step back from the US systematic love of tax cuts and competition for a moment and consider the economics of the situation it’s easy to see why this just isn’t going to work. What is a company looking for when it locates somewhere?

Well low costs are definitely important and taxes are a cost so that must be the answer, right?

Except taxes aren’t the ONLY cost and costs aren’t the only thing companies consider. They also consider benefits. Let’s start with costs though for a second.

Imagine we have two possible cities to locate our company’s new complex and somehow they have exactly equal benefits. Now we’re just considering costs. Ok, so one has lower taxes than the other. What happens? Well, initially the lower tax city will win out… but, of course, if companies keep trying to move there and bring new residents with them for their workforce the city is going to very quickly struggle to accommodate them. It can expand but the further outside of the city you are the less the access to those initial benefits. Plus rents on land will go up and with that wages for your employees. Before long costs will rise enough to offset the lower taxes and now the two cities are equally attractive again… and that’s assuming we can hold benefits constant, which of course we can’t.

In the real world benefits matter too and lower tax revenue will limit a city’s ability to provide benefits. Tax revenue is, therefore, a tradeoff: higher taxes might bring in more new companies IF the benefits secured by those taxes are a bigger incentive than the taxes are a disincentive, or it may be the reverse: if the additional taxes are a heavier burden than the benefits they provide then they’ll be a disincentive. So it depends. Sometimes you might borrow to add new benefits in the hopes of attracting more people and businesses to your city and then raise taxes to pay off those debts, but it’s all still worth it because those benefits are so good. Other times you might decide it’s better to lower the taxes and attract more people and companies instead. It will vary city by city. All the time you’re doing that, of course, non-tax costs (like land, wages, etc) will be affected as well as benefits. It’s complicated and difficult and in no way as simple as “just lower taxes to attract more business.”

But this isn’t even what US cities are doing, of course, they’re offering bespoke deals to specific companies, not raising or lowering taxes overall. In the real-life scenario they’re subsidising some big corporation to come to their city by making everyone else pay more. Either that’s just a straight up loss of revenue or a straight up cost for other residents and business or, of course, it may drive other businesses away that aren’t getting the bespoke deal! It’s all very well saying “Amazon is bringing in 25,000 new jobs!” but how many were coming in anyway? How many do you lose by hurting other businesses?

And finally there’s land values. If a company gets a tax deal that attracts them in then that will push up land values in that area. On the other hand, if you refuse to give deals and other cities are winning out over you what happens? Their land values go up, adding costs for business, and yours go down, reducing costs in your city. So in that case companies will simply relocate to you anyway because companies care about TOTAL costs and benefits and not just taxes!

All of this makes individual tax packages for individual companies utterly bananas.

If your taxes really are the barrier to growth (as opposed to a lack of benefits like inadequate services) then just lower taxes for all companies, don’t pick and choose. Especially not to help a corporate giant.

A small endnote: Amazon says it isn’t opening a second headquarters somewhere other than New York but it is “expanding it’s existing New York offices”… so New York is getting the Amazon jobs anyway… and even if it wasn’t it’s New freaking York, any number of other companies will come there!

You might say at this point that therefore maybe small towns should do the tax packages- again no! If taxes really are the barrier lower them for all but don’t forget land values. A square foot in Manhatten is worth a tonne more than a square foot in a random small town for a reason. (I thought about picking some specific random small US town but I fear this might be an insult to whichever one I picked!) That higher land value is a disincentive in and of itself and conversely the cheaper land values in the smaller town is an automatic incentive. It’s really very unlikely that you can materially alter the ratio of costs between a small town and New York without altering benefits. If you try and keep benefits constant but lower taxes two things will happen: 1. You won’t be able to afford the benefits you have, they’ll wither and you’ll lose business. 2. If you do keep benefits constant land values will rise undoing any of the incentive you created by lowering taxes.

Governments should get out of the business of subsidising one business over another. Especially to fulfil US small government dogma because that is just too darn ironic!