Amazon HQ2: incentives are a bad way to choose location, says economics professor

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• Amazon is in
  the process of
  selecting the location for HQ2,
  and a decision is
  expected by the end of this year. 
• Multiple
  cities bid on the headquarters, offering incentives
  to entice Amazon to select their location.
• Amihai Glazer, an economics professor at the University
  of California, Irvine, argues that deciding where to choose HQ2
  based on incentives is actually a bad idea. 
• He shares four reasons why, based on historical
  information and his own studies. 

---

Amazon, you are in the process of
choosing the site for your second headquarters, with
promises of up to 50,000 jobs and $5 billion
investments.
Not
surprisingly, cities are eager to attract you, and are offering
large incentives — Maryland
offers $8.5 billion in tax and infrastructure incentives, and

Newark $7 billion.

But as an economics professor,
I’m here warn you to give little weight to the incentives in your
decision.

First, politics can turn on a
company that voters view as greedy.

Seattle, which sees Amazon as
largely responsible for its homeless problem,
proposed to impose a $275- per-employee tax on large firms.
And in August, Disneyland said it would not take tax
incentives from the city of Anaheim, perhaps to thwart a
ballot initiative that would raise the minimum wage on firms that
get tax incentives. As Disneyland Resort President Josh D’Amaro

wrote, the incentive agreements became “a flash point for
controversy and dissension in our community.”

And often public support for
subsidies is weak. 
For example, a study of bond issues for
construction of


big entertainment amenities showed voter support below
44%

, far less than the
roughly 70% support for water and sewer systems.

The problem can be especially
severe if the incentives have not received popular support. In
cities such as Miami, Austin, and Atlanta, the offers have never
been made public. A member of the Indianapolis City-County
Council says that he has been told
absolutely nothing about the financial incentives his city
offered.

Such secrecy means that a future
mayor or city council may be forced to reverse agreements, or
impose indirect taxes and burdens on the new headquarters. Recall
Woodrow Wilson’s admonition
against secret treaties: “It will be our wish and purpose that
the processes…shall be absolutely open and that they shall
involve and permit henceforth no secret understandings of any
kind.”

Second, even if a company chooses
one city over another because of the incentives, it may not
identify the city where it would best thrive.

In a recent statistical analysis
for a forthcoming study, I collected data on 82 firms that
invested in new plants and factories from 1982 to 1993, I found
that plants in states that offered higher tax incentives were, if
anything, a little less likely to survive within 17 years after
establishment.

Third, earlier high-profile
attempts to attract a new facility show that they can
fail.

In the 1970s, the first
automobile assembly plant in the United States by a foreign car
maker, Volkswagen, promised of as many as around
20,000 jobs. To attract the factory, Pennsylvania provided

incentives of about $75 million. The
state also spent $30
million on infrastructure, and local governments granted
five-year property
tax breaks. But the Volkswagen plant never hired anywhere
near 20,000 people — the peak was under
6,000 jobs — and by 1984, employment dropped to 1,500. The
plant shut down in 1988.

Fourth, you should worry about
why one city is offering larger incentives than others
are.

Is it because the city leaders
are desperate, thinking that they can’t attract other businesses?
Is it because they miscalculate the benefits of the new
headquarters, suggesting the same leaders will make serious
mistakes in running the city? That could really hurt you. Or, is
it that a city which 
thinks it can renege is willing to offer the
largest incentives? Or is the problem corruption?

Evidence

indicates that increasing the rate at which
government officials are convicted of federal corruption crimes
is associated with a greater chance that a community will offer
business incentives.

All in all, it may be best for
your bottom line by ignoring financial incentives.

Amihai
Glazer is a 
Professor of economics and Director of the
Program in Corporate Welfare at the University of
California, Irvine.

This column does not necessarily reflect the opinion of Business Insider.