Source: Mercatus Center
George Mason University’s Mercatus Center does not like the deals struck by Virginia and New York to split Amazon, Inc.’s $5 billion HQ2 project. In a new commentary, the market-oriented research center raises a valid consideration rarely mentioned by politicians touting favored government expenditures of any type: alternate opportunity cost. Money spent on “A” is money not spent on “B.”
Write Michael Farren and Anne Philpott in The Bridge, the Mercatus blog:
Every dollar spent by a state or municipality on corporate handouts is a dollar that could have gone to lowering taxes or to a valuable government service like safety, education, or infrastructure, and many of these alternate investments have serious job-creating potential. To make matters worse, subsidies typically don’t sway corporate location decisions, meaning that subsidies are a waste of public resources. In fact, Amazon based its final decision on factors besides handouts—like the availability of tech talent in the local workforce.
By way of illustration, the authors say that with the money dedicated to Amazon job-creation incentives, Virginia could reduce corporate income taxes by 5.6% or pay full tuition for 2,700 University of Virginia students.
Their abstract point is incontestable. However, their argument is incomplete. Virginia has structured the deal so that sales and income tax revenue generated by Amazon and its employees will exceed the cost of incentives by a wide margin. Thus, according to the Northam administration, the Amazon deal will create more resources to spend on things like corporate income tax cuts, tuition subsidies, or whatever the General Assembly decides it wants.
However, that argument, too, is incomplete. True, an estimated 25,000 Amazon employees averaging $150,000 a year in salary will generate a boodle of tax revenue. However, those employees will demand state and local services as well. At the very least, they will increase the load on the regional transportation system, and they will increase the number of students enrolled in K-12 schools and Virginia institutions of higher education, which the state helps pay for. Any useful accounting of Amazon’s impact would provide a net benefit — tax revenues after deducting the cost of incentives and additional state spending. I have yet to see a calculation of that figure, and until we see it, it is impossible to have an informed discussion of the fiscal pros and cons of the Amazon deal.
If Mercatus scholars want to continue criticizing the deal, they cannot content themselves with simply pointing out the truism that alternate opportunity costs exist. They need to show that the net tax impact of the deal to Virginians is a loser. They may be right. Perhaps the deal is a loser. But they haven’t made the case.
Update: VEDP’s Stephen Moret says that the state has, in fact, conducted a net fiscal impact analysis.” With input from other state agencies, VEDP estimated that the Amazon project will net $1.2 billion in General Fund revenues over 20 years “after accounting for all potential related state expenditures, including company incentives, higher education investments for the benefit of the whole Commonwealth, and K-12 expenditures associated with increased school enrollments.” Also, the project will generate $430 million in transportation-related non-general fund revenues, “well in excess of planned transportation investments to benefit the area.” As a check on its state revenue estimates, VEDP also commissioned a third-party economic and fiscal impact analysis by the Fuller Institute at George Mason University.
