Jan 7, 2020

Company tax incentives don't spur economic growth

Dion Rabouin, author of Markets

Illustration: Sarah Grillo/Axios

More than two years after Amazon announced its search for a second headquarters and cities around the U.S. bent over backwards to offer the megacompany as much free cash and incentives as they could, new research confirms what economists have been saying for years: Such programs are a waste of money.

Driving the news: A paper from researchers at Princeton and Columbia Business School found "no evidence" that business tax incentives given to individual companies increased broader economic growth at the state and local level.

Why it matters: It's not just Amazon's highly publicized HQ2 that has attracted massive tax subsidies from city and state governments.

  • Research shows states continue to offer up increasingly large sums of money to big-name companies in an effort that proves more effective at generating headlines than economic growth.

Details: In 2014, the study found that about $7 billion — or about a third of total state incentive spending that year — "went to .0072% of new firms and 1.41% of all jobs created by those firms."

  • An earlier study found that despite their ineffectiveness, incentives offered to individual companies tripled between 1990 and 2015.
  • The Princeton/CBS study estimates that state and local governments spend at least $30 billion a year on business tax incentives — well above the 2014 total.
  • About a quarter of all business tax incentives are given to a very small collection of firms opening offices in new locations — less than .01% of firms opening in new locations in 2014.

The intrigue: New York offered Amazon $800 million more in incentives than was previously known and was even prepared to pay part of some employees’ salaries, WSJ reported (subscription) Sunday.

  • Amazon has since announced plans to lease 335,000 square feet on Manhattan’s West Side without any special tax credits, and executives have said the HQ2 decision was based more on where employees would want to live than incentives.
  • Newark had dangled $7 billion and officials in Maryland had offered $5 billion, both far exceeding packages offered by Virginia and New York.

Between the lines: Co-authors Cailin Slattery and Owen Zidar wrote in the study that they found a slightly negative effect on housing markets for municipalities that attract new companies with incentives, "seeing, on average, a 4% decrease in house prices."

  • "This apparent decline in house prices provides some weakly suggestive evidence that the welfare effects of these subsidies might be negative on average."

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