Amazon and Local Taxes
I don't have strong feelings about Amazon's decision to pull out of its plans to build a large office complex in Long Island City. It probably would have been good for the city, but the city does not really need it and perhaps it will be built somewhere that needs it more. [Edited to add: My cursory review of the Amazon proposal seems to indicate that the city would have been a substantial net winner from a financial perspective, which probably explains why NYCHA tenant leaders supported it. Of course as I observe below, there would have been losers as well as winners, but unless I'm missing something the claims about NYC "saving" $3 billion as a result of the project's cancellation seem to be highly misleading, comparable to the claims about how Britain could "save" hundreds of millions of pounds a week by withdrawing from the EU.]
I would like to make an observation about the politics of location decisions, though. It is easy to get angry about "big corporate giveaways," but they are often rational from the perspective of the community offering them, and getting rid of them would probably require complicated and intrusive laws.
One source of confusion is lack of clarity as to the net and gross benefits being conferred upon the corporation and the community in which it proposes to locate. Imagine a corporation that plans to build a facility that will generate $10,000,000 per years in taxes, while costing the town $1 million in additional government services. Imagine that the corporation is indifferent among three different locations for its facility. One town offers a tax rebate of $5 million per year, another offers $7 million, and the third refuses to offer anything on the grounds that corporate giveaways are bad. The corporation accepts the highest offer and pays a net $3 million in taxes per year, while costing the town $1 million in services. The town comes out ahead by $2 million. Nevertheless the headline may be something like, "Mayor Approves $8 Million Corporate Giveaway" (counting both the tax rebate and the town's expenditure on services), which may draw the ire of voters due to confusion between the gross amount of the rebate and the net amount of taxes paid by the corporation. Still, though, you can't say that the mayor made a bad decision for the city, and you wouldn't advise a civic-minded mayor to turn down such an offer (unless, I suppose, other corporations were making better offers and the city couldn't accommodate all of them).
There are three or four objections that I think you could mount against this sort of rebate. The first is simply that local officials may be bad at calculating the net effect of a business opening a facility in the municipality. If so, in a competitive bidding situation there may be a "winner's curse," where the bidder that makes the biggest upside error in calculating the benefits "wins" the auction and ends up overpaying.
The second (related) objection is that local officials may be corruptible, which exacerbates their tendency to overbid.
The third objection is the most subtle. If you allow corporations to get towns to bid for their presence, then you erode the ability of towns to generate tax revenue from businesses. In other words, you might say that even the most cost-justified tax rebate, with abundant net benefits to the city, is still regrettable because the corporation shouldn't be entitled to any tax concessions at all.
The fourth objection, which I won't address further, is that I've been speaking of the city's interests as if they are unified. In fact different people will be affected differently. If you are a homeowner or you are unemployed, you may benefit a lot from the presence of a new employer (higher house prices, lower unemployment). If you are a renter and you are already employed, the increase in rents may overwhelm any benefit you get from the city's improved finances. Racists may dislike the new employer if it brings in lots of non-white employees, or may support it if its employees are mostly white. Perhaps the city's new voters are younger than the average resident, changing the city's politics for better or worse. On some level I think you have to ignore these effects or you will get bogged down, but you might worry that incumbent politicians (the ones negotiating the tax rebate) are not neutral as between their constituents, systematically helping certain residents and hurting others. (But I mean... on some level this is an ineradicable problem that isn't confined to tax rebates.)
These objections are relatively difficult to address by law. The second is perhaps the easiest in theory. You could pass a law requiring all negotiations to be conducted in a particular way, with public scrutiny and with rigorous bans on any profit by the public servants negotiating on behalf of the city or state. In practice, though, it may be very difficult to detect the payoff made by the corporation, and in general I'm skeptical that U.S. anti-corruption laws are particularly effective.
To address the first objection, you might require all tax rebates to be contingent on the actual state of the world. For instance, if the promise is that the corporation will provide 1,000 jobs, then you would require it to demonstrate that its payroll is at least that large before giving it the rebate. If the corporation ends up under-performing on its promises, then it will face no legal penalty (shit happens, you shouldn't penalize the company for unanticipated shortfalls), but on the other hand it will not get any of the negotiated rebate. (This means of course that the government can't give cash up front, which is probably a prudent limitation to impose in any case.)
The third objection can only really be addressed with a highly intrusive federal law. It is generally difficult to root out "victimless crimes," that is, crimes where both participants have motives to seek each other out (e.g. drug sales). If you ban tax rebates, cities will provide tax credits. If you ban those too, they will provide loan guarantees or project insurance or free services. Or they will simply cut their taxes (are you really going to pass a federal law freezing local taxes in place?).
One fairly radical proposal would be to impose a federal tax on corporations replacing local and state taxes. The revenues would be ceded to the states, counties, and municipalities that would receive them in the status quo ante. You would harmonize tax rates everywhere and refuse to vary them for particular projects. Corporations would then make their location decisions based on other factors, and there would be no "race to the bottom." Corporations would stop being able to internalize their positive externalities, and states and cities would get more tax revenue.
But! "Harmonize" is a bit of a euphemism, since the federal government would now be setting tax policy for every municipality in the U.S. Some cities would find their tax revenue dwindling if the federal government chooses a lower rate than they were previously charging. Other cities would lose their employers as the only basis on which they could compete was low taxes.
And anyway Congress would never do this. But without doing it, I think tax competition is inevitable, and so the best you could do would be to require it to be done in a transparent way, with special ethical rules on the government negotiators.
I would like to make an observation about the politics of location decisions, though. It is easy to get angry about "big corporate giveaways," but they are often rational from the perspective of the community offering them, and getting rid of them would probably require complicated and intrusive laws.
One source of confusion is lack of clarity as to the net and gross benefits being conferred upon the corporation and the community in which it proposes to locate. Imagine a corporation that plans to build a facility that will generate $10,000,000 per years in taxes, while costing the town $1 million in additional government services. Imagine that the corporation is indifferent among three different locations for its facility. One town offers a tax rebate of $5 million per year, another offers $7 million, and the third refuses to offer anything on the grounds that corporate giveaways are bad. The corporation accepts the highest offer and pays a net $3 million in taxes per year, while costing the town $1 million in services. The town comes out ahead by $2 million. Nevertheless the headline may be something like, "Mayor Approves $8 Million Corporate Giveaway" (counting both the tax rebate and the town's expenditure on services), which may draw the ire of voters due to confusion between the gross amount of the rebate and the net amount of taxes paid by the corporation. Still, though, you can't say that the mayor made a bad decision for the city, and you wouldn't advise a civic-minded mayor to turn down such an offer (unless, I suppose, other corporations were making better offers and the city couldn't accommodate all of them).
There are three or four objections that I think you could mount against this sort of rebate. The first is simply that local officials may be bad at calculating the net effect of a business opening a facility in the municipality. If so, in a competitive bidding situation there may be a "winner's curse," where the bidder that makes the biggest upside error in calculating the benefits "wins" the auction and ends up overpaying.
The second (related) objection is that local officials may be corruptible, which exacerbates their tendency to overbid.
The third objection is the most subtle. If you allow corporations to get towns to bid for their presence, then you erode the ability of towns to generate tax revenue from businesses. In other words, you might say that even the most cost-justified tax rebate, with abundant net benefits to the city, is still regrettable because the corporation shouldn't be entitled to any tax concessions at all.
The fourth objection, which I won't address further, is that I've been speaking of the city's interests as if they are unified. In fact different people will be affected differently. If you are a homeowner or you are unemployed, you may benefit a lot from the presence of a new employer (higher house prices, lower unemployment). If you are a renter and you are already employed, the increase in rents may overwhelm any benefit you get from the city's improved finances. Racists may dislike the new employer if it brings in lots of non-white employees, or may support it if its employees are mostly white. Perhaps the city's new voters are younger than the average resident, changing the city's politics for better or worse. On some level I think you have to ignore these effects or you will get bogged down, but you might worry that incumbent politicians (the ones negotiating the tax rebate) are not neutral as between their constituents, systematically helping certain residents and hurting others. (But I mean... on some level this is an ineradicable problem that isn't confined to tax rebates.)
These objections are relatively difficult to address by law. The second is perhaps the easiest in theory. You could pass a law requiring all negotiations to be conducted in a particular way, with public scrutiny and with rigorous bans on any profit by the public servants negotiating on behalf of the city or state. In practice, though, it may be very difficult to detect the payoff made by the corporation, and in general I'm skeptical that U.S. anti-corruption laws are particularly effective.
To address the first objection, you might require all tax rebates to be contingent on the actual state of the world. For instance, if the promise is that the corporation will provide 1,000 jobs, then you would require it to demonstrate that its payroll is at least that large before giving it the rebate. If the corporation ends up under-performing on its promises, then it will face no legal penalty (shit happens, you shouldn't penalize the company for unanticipated shortfalls), but on the other hand it will not get any of the negotiated rebate. (This means of course that the government can't give cash up front, which is probably a prudent limitation to impose in any case.)
The third objection can only really be addressed with a highly intrusive federal law. It is generally difficult to root out "victimless crimes," that is, crimes where both participants have motives to seek each other out (e.g. drug sales). If you ban tax rebates, cities will provide tax credits. If you ban those too, they will provide loan guarantees or project insurance or free services. Or they will simply cut their taxes (are you really going to pass a federal law freezing local taxes in place?).
One fairly radical proposal would be to impose a federal tax on corporations replacing local and state taxes. The revenues would be ceded to the states, counties, and municipalities that would receive them in the status quo ante. You would harmonize tax rates everywhere and refuse to vary them for particular projects. Corporations would then make their location decisions based on other factors, and there would be no "race to the bottom." Corporations would stop being able to internalize their positive externalities, and states and cities would get more tax revenue.
But! "Harmonize" is a bit of a euphemism, since the federal government would now be setting tax policy for every municipality in the U.S. Some cities would find their tax revenue dwindling if the federal government chooses a lower rate than they were previously charging. Other cities would lose their employers as the only basis on which they could compete was low taxes.
And anyway Congress would never do this. But without doing it, I think tax competition is inevitable, and so the best you could do would be to require it to be done in a transparent way, with special ethical rules on the government negotiators.
posted by James | 2:25 PM
1 Comments:
So I personal liked the amazon move and am a bit sad it was cancelled. I thought the long term effect would have been a real investment in the quality of 7 train service and G train service. Rich tech workers simply aren't going to tolerate the same level of BS poor immigrants do; and the political system would respond to their demand.\
That said, stated numbers and hard to judge externalities aside; the deal was negotiated in secret by people that we know, or have good reason to believe, are corrupt. This means that it is reasonable to believe that the outcome of the negotiation was biased in such a way as to produce a clear winners curse. As a general good governance policy, reject all closed door agreements by corrupt parties isn't the worst heuristic to apply.
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