Tax Breaks for Economic Development Are a Losing Bet
(Bloomberg View) -- A funny thing happened after Amazon invited cities to compete for its second North American headquarters. Somehow other corporations got the idea that they would be the winners.
There's been a disturbing trend in corporations seeing the tax breaks offered to Amazon and deciding they're entitled to the same when they pursue their own expansions or relocations. There's nothing inherently wrong with municipalities offering tax breaks in exchange for jobs, but it shouldn't be automatic. Municipalities should weigh the pros and cons, and in a labor market this tight, cities might conclude tax breaks are a losing bet.
Last month Jamie Dimon, CEO of JP Morgan, said he'd fight for the same deal Amazon gets for his own company. Wisconsin offered a big tax assistance package to Foxconn last summer for an economic development project. Once cities offer big packages to one company, it's hard to take a different position when another company comes calling.
The bizarre thing is the timing of this trend. Nationwide, the unemployment rate is 4.1 percent, about as low as it's been in decades. For workers with a college degree, the type of people tech companies like Amazon are looking to hire, the jobless rate even lower, at 2.3 percent. In some cities, the unemployment rate is even lower than that, and companies are scrambling to use nontraditional approaches to find the workers they need, as Bloomberg recently reported.
For places with low unemployment rates and subdued labor force growth, offering tax breaks for new job creation acts as a form of crowding out. Unless the area is bringing in workers from elsewhere, or inspiring people who opted out to join the labor force, the people hired by the new corporate campus will be poached from existing firms. If the jobs at those existing (taxpaying) firms pay similar wages, the net result will be no net job growth but a weaker fiscal position for the municipality as a taxpaying firm gets replaced by one paying less in taxes.
So let's say a city aims for tax breaks to attract new employers and counts on migration to bring in additional workers. In many metropolitan areas, where development has been constrained by local political opposition, housing is already in short supply, and a new corporate campus won't help. Rather than crowding out existing jobs, the new workers attracted from somewhere else will crowd out existing residents.
Consider the Amazon hypothetical: The company proposes to employ 50,000 people at its second North American headquarters. Those jobs could plausibly support the creation of 50,000 more positions indirectly -- jobs like restaurant staff and health-care workers. Those 100,000 workers would bring family with them. Let's call that approximately 300,000 additional people for the "winning" city to house, school and care for. Depending on the tax breaks and other inducements provided, it might not feel like much of a win.
Ranking the economic development challenges facing cities in 2018, finding gainful employment for well-educated residents is very far down the list. But the labor market could benefit from some attention. Labor-force participation, particularly for prime-age workers between 25 and 54, is lower than it has been at similar moments in prior economic cycles. Cities should be looking for residents who may not be in the labor force but could be -- for instance if they had better options for day care, elder care or transportation.
If they were calculating about economic development, many cities might find they're better off subsidizing or providing such services -- rather than subsidizing a new corporate campus. Cities could also look into workforce-training programs, to give lower-skilled workers the skills employers are looking for. (Of course, there's a legitimate debate to be had about why employers aren't providing that training themselves, if they need such workers. Public-private partnerships are a popular hybrid.)
Doing these things would expand a city's labor force, and would most likely reduce economic inequality as well. In a labor market as robust as this one, newly trained workers and people rejoining the labor force probably wouldn't be looking for work for long. Training programs might not grab headlines like offering billions of dollars to Amazon does, but it would be a wiser use of a city's resources and would more effectively address real problems.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Conor Sen is a Bloomberg View columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.
To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net.
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