Industrial recruitment poker

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Amazon’s campus in Seattle. Photo by Jordan Stead/Amazon

 

“So I said, ‘Tell ’em you’ll leave the state if that sewage treatment plant isn’t replaced.’”

A retired veteran of the New York’s Empire State Development was recounting how he’d secured state aid for an ailing treatment plant: He’d contacted a large local employer and persuaded him to pose as a “flight risk.” This story is unusual in showing complicity between a state official and private owner, but it illustrates a core problem with corporate subsidies. They are nearly all designed as “incentive” programs intended to encourage action that would not have occurred but for the incentive.

The “but-for” test has a history in criminal and tort law to characterize causation, i.e. “but for X, Y would not have happened.” It was adopted by the economic development community as a standard for conferring a benefit on a business, e.g. “but for the new sewage treatment plant, Village A will lose its largest employer.”

On Nov. 20, Kent Gardner was a guest on WXXI’s “Connections,” discussing the controversy over incentives New York gave to Amazon to bring HQ2 in Queens. Listen to the program.

This is high-stakes poker. Although Amazon says publicly that the Long Island City site for “HQ2½”—half of Amazon’s proposed second headquarters—was not determined by the incentives, this is surely not the message Amazon delivered to the state in private.  Granting a reported $1.2 billion in tax credits to one of the nation’s most influential businesses is controversial, too. I would search in vain for someone believing that Amazon deserves a handout.

Which leads us to the nature of the Excelsior Jobs Program tax credit. While the program is discretionary—New York has no obligation to offer credits to Amazon—the parameters are pre-baked and are not revised for every new deal. As the credits are earned “in arrears,” the “but-for” test is partly satisfied. The larger question is whether Long Island City would have won its bid without the incentives. The only hitch in the deal is that the Excelsior program’s cap will have to be raised to fit the massive Amazon deal.

The Excelsior program is not the largest of the state’s business tax credit programs. At an estimated $97 million, it is much smaller than the $410 million ESD film and commercial credits program and undead Empire Zone program. Passed during in 2001 during George Pataki’s reign, this program is costing twice the Excelsior program at $184 million.  Widely considered one of the most easily gamed economic development programs in recent New York history, its generous provisions will continue to pay benefits through 2020.

Given the Excelsior credits currently outstanding, the expected cost in 2018 is $97 million. Clearly that figure will rise dramatically as firms already awarded the credits begin to claim them and the 10-year Amazon deal rolls out. The state’s annual report on tax expenditures—taxes we agree to not receive—is here.

Michael Gianaris

So is this good policy? It is incorrect to judge the Amazon deal by the value of the tax breaks.  State Sen. Michael Gianaris: “To potentially give away vast sums of money when we’re in desperate need for our existing infrastructure cannot be justified.”

Gianaris implies that if Amazon doesn’t get the incentives, it will locate in Queens anyway, and the city and state will have more money to spend on other things. That applies to money that must be spent in advance of Amazon’s new facility opening its doors, such infrastructure investment. That’s the money at risk if the deal goes south. The tax credits, by contrast, are earned only for performance and are justified by the likely economic impact of Amazon on New York City and the entire state.

Dangling cash and credits before prospective new firms has been established practice in economic development circles for decades. I’d wager that a strong majority of states would love to end financial incentives and compete on fundamentals instead, things like labor quality and cost, physical and educational infrastructure, and location. Until that day comes, we’re stuck assuming that if New York’s offering to Amazon didn’t close the deal, the absence of the financial incentives would have taken New York off the list.

 

One thought on “Industrial recruitment poker

  1. It’s time to change the economic development game.
    Instead of giving tax breaks to new employers wishing to play the prisoner’s delema, governments should extract impact fees. The game of “give me breaks or I’ll go someplace else” that pits local communities and state against each other is out of control. Most of the big guys could develop a new site without government help.

    You want a new building? You’ll need to pay variety of impact fees for extending utility lines, pay for roads, new teachers, school bus drivers maybe even new schools, more wastewater treatment capacity, and extra turn lanes and traffic lights in the road in front of your new site. The possibilities could go on

    You want to move to Long Island City? It will cost you subsidies to NYC Transit for the impact of your new employee’s on public transportation, displacement fees related to your higher paid employees pushing lower paid people out of housing that just got more expensive because now you’re in the game.
    You must hire 75% local people for the jobs you’ll have here.
    Large employers and sports teams have made the rules for the game all at the expense of state and local governments.

    It’ time to have government really work hard to protect it’s citizens from higher taxes, rents, and other negative consequences of the perception of promises of new jobs.
    There’s a lousy track record of NYS or local governments accurately recording the number new jobs created compared to the new jobs promised.
    It’s time to change the game. It’s time for all communities to band together and “Just Say No!”

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