I’m not ready to move on from the subject of yesterday’s post, which was triggered by the efforts of numerous cities to lure Amazon’s second headquarters.
Let me just share two additional observations, one from a recent study reported in Governing, and one emerging from a recent argument in Indianapolis’ City-County Council.
The Governing article shared a study done by the Urban Institute.
In choosing New York and D.C., Amazon opted for two cities that have led the economic expansion since the end of the last recession in 2009, far outpacing the rest of the nation in job growth. The decision drew the ire of politicians at the state and federal levels, along with others who had called on the tech giant to place its second headquarters in a city where it could play a more transformative role in the economy.
Yet a new study from the Urban Institute suggests that landing such a large corporation isn’t actually the best way to build a local economy and spur job growth.
If give-aways massive enough to “steal” large employers–to lure them from City A to City B (in what certainly seems to be a national zero-sum game) isn’t a sound growth strategy, what is?
Instead, the report says, cities should focus on growing existing local firms, not trying to lure out-of-town companies and poaching firms from other cities. “Most job expansion and contractions come from birth and deaths of homegrown businesses or expansion or contractions of existing home-based businesses,” says Megan Randall, a research analyst with the Urban-Brookings Tax Policy Center and a co-author of the report.
According to Randall, when so-called “marquee companies” locate in a new city, they tend to displace existing businesses, especially mom-and-pop stores. Supporting and expanding homegrown enterprises has been a more successful strategy for adding job growth.
Worse, giving up tax revenues to lure a new company puts a strain on local services, particularly schools.
As New York University business professor Scott Galloway put it in an email to Barron’s on Tuesday, the tax incentives from New York amount to “an elegant transfer of funds from municipal school/fire/police districts to Amazon shareholders.”
Cutting into services and school budgets makes the local workforce less attractive in the long run, and the location less alluring, the Urban Institute report notes….
Cities would be better served, according to Randall and other economic policy analysts, by improving schools and public services, and focusing on nurturing their existing network of businesses.
When a city offers tax giveaways to lure a company, the government goes into the negotiation with a marked disadvantage because of what economists call “information asymmetry.” The city doesn’t have all the information about what the company is looking for. In some cases, a company may choose a city it would have moved to anyway, pocketing the tax incentives even though they weren’t a deciding factor.
“Firms are in a advantageous position,” Randall says. “They know cities want to attract jobs and create opportunities for their residents. They know they are in the position to leverage a public benefit from what they have to offer.”
What the article calls “negotiation” is more often–and more accurately–described as extortion. And that brings me to a recent dispute in Indianapolis’ City-County Council.
Corteva is a company formed last year, as part of Dow Chemical’s mega-merger with DuPont. Delaware-based Corteva—which includes the local operations of Dow AgroSciences—is set to be spun off as a public company in June 2019, and it employs about 1,400 workers in Indianapolis.
The City-County Council approved 30 million dollars to “incentivize” the company to maintain operations in Indianapolis. Most Councilors weren’t happy about it.
The incentive deal authorizes the issuance of $30 million in economic development revenue notes to Corteva from the city of Indianapolis, which would be paid back with about $5 million annually in tax increment financing funds that the city had been passing through to government units such as schools, libraries, parks, police and fire protection. Those entities would no longer receive those funds while the notes are being paid off.
The council voted 18-7 to approve the deal. Democrats Zach Adamson and Stephen Clay voted against the plan as did Republicans Jeff Coats, Danielle Coulter, Janice McHenry, Jefferson Shreve and John Wesseler.
Even council members voting yes weren’t happy.
“It’s not the best deal; I’m not excited about it,” said Democrat Jared Evans. But he said the long-term benefit of keeping the jobs in the community outweighed the short-term harm to the taxing units.
Zach Adamson characterized the incentives as “nothing short of extortion;” he was exactly right. Far too much of what passes for “economic development” is better described as bribery and/or blackmail. “What will you pay us to come?” and “What will you pay us to stay?”
These deals steal money that would otherwise be used to improve the local quality of life. And as the Urban Institute study reaffirmed, the quality of life–good schools, good parks, convenient transportation, effective public safety, etc.–is what really drives job growth and economic development.
When you rob Peter to pay Paul, you just make both of them poorer.