It’s official. Amazon’s second corporate headquarters, known to many as HQ2, won’t be in the Triangle. The news brought lots of sad faces around town. Me? I’m not one of them. While cities want the revenue, citizens tend to underestimate the size of the footprint companies like Amazon or Apple can have on local housing, schools and traffic. Even if Amazon added 50,000 employees to the local economy, such a move could potentially add an estimated 30,000 plus students to local schools. Think new schools; new roads and new traffic congestion.
So, what was the deciding factor on where Amazon would locate its new headquarters? One of the company’s main requirements was simply the availability of tech talent. The Wall Street Journal reported that earlier this spring Amazon realized no single city could possibly meet its requirements for a talent pool. Solution: locate HQ2 in two cities with already sizeable pools of tech talent. That decision realistically limited the discussion to a handful of large cities, and Amazon decided on New York City and Northern Virginia.
Of course, this makes the other 236 municipalities who spent a boatload of time, energy and staff time developing and sweetening proposals with tax breaks subsidies and incentives, feel empty. Didn’t Gary, Indiana and Boise, Idaho have just as good a chance of competing for HQ2 as New York City or Denver? Amazon would simply look at the best proposal and decide. That’s what we were led to believe.
However, it’s simply not true. A review of much of the literature on site selection tells you so. Most companies look at factors such as the presence of a skilled labor force, infrastructure, access to airports, impact on the supply chain and access to other needed professional and technical services, before deciding on where to locate or expand.
A new report by Michael Farren and Anne Philpot of the Mercatus Center at George Mason University, shatters the argument that tax incentives and subsidies matter to corporations when making decisions about where to locate. Farren and Philpot write:
Despite claims made by the corporations requesting tax incentives, subsidies aren’t a strong factor in their location decisions. The best research investigating business location decisions finds that other factors are more important to a firm’s productivity and profitability. These non-incentive factors include the following:
- The presence of a skilled workforce
- The local cost of living and trends in worker compensation
- Access to transportation or communication networks
- Synergies with other industries, especially production supply chains and professional services
- Consumer market accessibility
- The presence of competing firms
- Availability of natural resources
- Other region-specific factors affecting the cost of production or access to customers.
Local tax costs do indeed affect final profitability, but the aforementioned factors have a much larger impact on whether a particular location will be profitable in the first place. In fact, government bureaucratic hurdles, such as permitting delays and regulatory restrictions, bear a larger influence on firm location decisions than local taxes do.
The message our legislators need to hear is that taxes and tax subsidies are not the driving force in decisions to locate. They have been adept at pulling together packages to woo industry to North Carolina and when you pull legislators aside, they may even lament what they are doing and say, “if we don’t do it some other state will.” It’s a weak argument.
How can states break the never-ending cycle? Earlier this week, Veronique De Rugy offered a suggestion in her article on National Review. De Rugy rightly recognizes to achieve real long-term economic growth, we need to shift away from policies that favor specific firms and move toward policies that enable all firms to compete for consumer dollars on a level playing field. Of course, that’s difficult when neighboring states put together deals filled with tax incentives and subsidies to lure specific companies to locate in their states.
De Rugy credits her colleague Matt Mitchell with the idea of an interstate compact, where state governments pledge to mutually refrain from offerings subsidies. She writes:
Properly structured, such a compromise could provide the right incentives for states to quit obsessively spending taxpayer dollars on conspicuous but unwise development “investments.” Within a state that joins the compact, all firms face the same tax burden. That means no special privileges for Amazon, so we can get back to a place where companies serve individuals instead of the other way around.
Until North Carolina decides to move forward with a solution like an interstate compact, it will continue to fuel the madness by throwing all sorts of incentives at the feet of companies looking to expand or relocate, while the rest of us will continue to lose.