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Q & A

Tax Incentives for Amazon HQ2—When Winners End Up Losers?
By David Franco, September 26, 2018

America’s second most valuable public company, Amazon has grown across multiple industries over the years and is planning a second headquarters. The company has cited incentives, such as tax credits and reduced-price land, as a key factor in selecting a host city. Daphne Kenyon, an economist and fellow at the Lincoln Institute, and coauthor of the Policy Focus Report Rethinking Property Tax Incentives for Business , has shared her insights into what Amazon’s second headquarters could mean for the Boston area – one of 20 finalists in the competition to host Amazon. What follows is an edited interview by David Franco, a Lincoln Institute intern in spring 2018.

David Franco: How would the location of HQ2 in Boston impact the city?

Daphne Kenyon: Despite Amazon’s claim that HQ2 would bring 50,000 jobs and $5 billion in investment, it is not clear that having HQ2 in Boston would be a net benefit for the citizens of Boston. Housing is already expensive in Boston, and such an influx of new employees could further drive up the cost of housing, for example. Also, if the city of Boston gave up too much in taxes and other financial incentives, the negatives of HQ2 could outweigh the positives.

DF: What factors should a city like Boston consider when deciding whether and how to provide tax incentives to a business like Amazon?

DK: As a matter of good practice, before promising tax incentives a city should systematically weigh the benefits and costs of attracting the headquarters. Our report (p. 49) sets out a benefit-cost framework that reminds policy makers to consider the effects of any potential tax incentive deal on the city’s finances, labor market, local economy, and quality of life. In some cases, the costs of attracting a firm outweigh the benefits. This can be summed up by the phrase: “when winners end up losers.”

One way to characterize the results of a benefit cost analysis is by stating the findings in terms of the cost per job gained. Certainly, attracting a business when the cost per job gained is $10,000 looks much better than when the cost per job gained is $1 million.

DF: Based on your research, how important are tax incentives to a company’s choice of where to relocate? What other factors would they consider?

DK: We found tax incentives are not the most important factor in determining business location. Companies consider a host of factors including traffic, climate, and, most importantly, characteristics of the local labor market. This includes wages, skills, and the availability of workers. Certainly, as home to more colleges and universities than any other city in the United States, Boston stands out in that regard.

DF: What other costs should cities consider when a large employer relocates?

DK: Cities need to think about the cost of infrastructure. Does the city have adequate infrastructure for the additional workers or will improvements to infrastructure impose big costs on the city? Boston has an aging, poorly maintained public transit system. That system already needs upgrades, but renovations would be even more important and urgent if Amazon brings its second headquarters to Boston. Another cost of playing the incentive game is that other businesses may request or expect such incentive packages in the future.

Seattle’s recent failed efforts to impose a head tax on Amazon and other large employers raises another red flag. Does Boston want a single employer to be so important to the city that it has outsize influence over political decisions?

DF: How do Boston’s tax incentives compare to those of the other finalists in the competition?

DK: We don’t know specifically what Boston or other cities are offering. This competition has not been very transparent. At least two cities — Toronto and Austin — have said they are not offering a tax incentive package. Columbus, Ohio, revealed its local tax incentive package, but we don’t know what Jobs Ohio, the state development agency, is offering. We will likely know about the tax incentives offered by the winning city, but might never know what the other finalists offered.



This article was originally posted on the At Lincoln House blog.

Photo by kiewic / Flickr CC BY 2.0