Amazon, Incentives, and Virginia’s Best Sales Pitch

The odds that Virginia can snag the Amazon HQ2 project strike me as exceedingly long. Not because our communities don’t measure up well against Amazon’s location criteria but because we don’t have the stomach in Virginia to assemble massive enough subsidies and tax giveaways to compete with metropolitan regions willing to stroke blank checks.

New Jersey’s Economic Development Authority and the City of Newark have offered an incentive package worth $7 billion over 10 years, according to William F. Shughart II and Thomas A. Garrett writing in The American Thinker.

Virginia’s reticence to hollow out its tax base is a good thing. As Shughart and Garret write:

If history serves as a guide, politicians will defend giveaways of taxpayer dollars to Amazon by claiming that the benefits flowing from new jobs and higher wages exceed the costs of financing a subsidy. The same arguments routinely are heard when it comes to building a new sports venue, hosting the Olympic Games or SuperBowl, and enticing other headline-grabbing businesses looking to move to greener pastures. Luring Amazon indeed will be a major publicity coup for local and state politicians who certainly will claim credit for a successful outcome in the runup to Election Day.

It turns, out, however, that the benefits of taxpayer-financed subsidies always are overstated. The economic costs of subsidy packages for private business enterprises are in reality much larger than their supporters admit, for several reasons. Among the errors in thinking the authors cite:

  • Politicians fail to account for the opportunity cost of business-location subsidies. The opportunity cost of any taxpayer-funded subsidy is the private-sector economic activity that would have been generated (but is lost) had the dollars financing it remained in private hands.
  • Politicians argue that new wage earners will spur economic growth through a multiplier effect as their larger incomes circulate around the regional economy. That is certainly true (although multiplier estimates are wildly overstated), but removing income from the private sector to finance subsidies means that the multiplier effect works in reverse. Politicians baldly assume that every dollar of subsidy is worth more to the economy than if the dollar remained in taxpayers’ pockets.

“Politicians,” write the authors, “believe that they know better than ordinary people how best to allocate resources to their highest valued uses. The historical evidence against that belief is overwhelming.”

If I were making the pitch to Amazon, I’d offer no incentives or tax breaks. This would be my argument: You’re making a long-term commitment when you locate your second headquarters in our state. You thrive if we thrive, and vice versa. You want a community capable of building the kind of infrastructure and amenities that your employees desire. The last thing you want is to parasitically feed off the community through subsidies and tax breaks, thereby rendering it unable to fulfill critical functions of government. If you locate in Virginia, you’re moving to a place where state/local government is fiscally sustainable over the long term. You won’t be regretting your decision a decade from now.

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One response to “Amazon, Incentives, and Virginia’s Best Sales Pitch

  1. As a supplement to this article, let me recommend the November 5 episode of John Oliver’s Last Week Tonight!

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