Amazon.com Inc.'s announcement Thursday that it's on the hunt for a $5 billion second headquarters to house 50,000 employees sounded the starting pistol in a race among states and local governments to lure the Seattle-based giant to their cities.
Bids for the project are likely to feature hefty tax breaks, but critics caution that such deals are often a mixed bag.
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Tax incentives for companies have soared in U.S. cities in recent decades. In 1990, tax breaks for a typical new facility were an average of 8.8% of gross state and local business taxes. That figure climbed to 30.1% in 2015, according to research conducted by Timothy Bartik, an economist with the Kalamazoo, Mich.-based W.E. Upjohn Institute for Employment Research.
Despite their popularity, these incentives can come with a variety of unintended costs for states, critics say, and don't always pan out as expected.
States often forgo the increased tax revenue just as more government resources, like education, public transportation and infrastructure, are required to meet the needs of newcomers these companies help draw to the area. And local governments don't always take into account the opportunity costs of such deals. By offering tax breaks for companies, there are fewer tax dollars to fund education, for example, which is a driver of long-term economic growth.
"If you overdo incentives, you end up spending a lot of money that could be used for other purposes that also help economic development," said Dr. Bartik.
Some say the potential benefits outweigh the costs. In Kentucky, the Toyota Motor Corp. plant that opened in Georgetown in 1988 is largely credited with helping the local economy. The company recently announced plans to invest another $1.3 billion to retool the plant and will receive over $40 million in additional tax incentives.
But as the pace of change quickens across industries, there's a risk that some businesses or products won't last long enough to provide cities and states a return on investment. In 2009, Dell Inc. said it was closing a plant in North Carolina just four years after opening with hundreds of millions in tax incentives. The plant produced desktop computers, as consumers were shifting to laptops.
"History is littered with deals that didn't pan out," said Greg LeRoy, executive director of Good Jobs First, a nonpartisan policy organization that is critical of tax incentives.
Similar concerns have been raised over a $3 billion tax incentive package for Taiwan's Foxconn Technology Group, formally known as Hon Hai Precision Industry Co., to build a plant in Wisconsin.
The plant is set to build LCD panels, but some state lawmakers worry the technology may shift before taxpayers can recoup their investment. A state fiscal analysis found that Wisconsin wouldn't break even on the deal until the 2042-43 fiscal year. The deal, touted by Republican Gov. Scott Walker and President Donald Trump, has already passed the Republican-controlled State Assembly, and the Senate is expected to vote on it next week.
Still, economists estimate that most tax breaks represent only a small portion of a company's overall costs. Other considerations, like quality of life, transportation and employment base take priority.
"The incentives are certainly significant and are part of the decision," said Kate Crowley, a tax-incentive consultant with the Chicago-based firm Baker Tilly Virchow Krause LLP. "But they come once locations have been evaluated and often can be the tie breaker."
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(END) Dow Jones Newswires
September 07, 2017 16:20 ET (20:20 GMT)