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Did New York City Really Lose Out in Amazon Deal?

While Progressives in New York City take credit, or receive blame, for inducing Amazon to cancel plans to locate part of its headquarters there, it might be worth noting the conservative case for New York’s tax giveaway is pretty slim as well.

There are two types of tax competition between states (and cities). The first type of tax competition is based on generally-applicable tax rates within a state for generally-received services. Texas, for example, is a low-tax, low-service state. Massachusetts is a high-tax, high-service state. Competition between Texas and Massachusetts occurs over price for a given set of services. But similarly situated people and companies within each state get treated similarly.

The type of tax competition Amazon induced, however, creates discriminatory intrastate tax disparities. The problem with the sort of tax competition Amazon induced is that it doesn’t treat firms similarly, it provides special treatment for politically-privileged firms. The outcome is discriminatory fiscal treatment between mobile and immobile capital, and discriminatory treatment between mobile capital that is politically connected and mobile capital that is politically unconnected.

Numerous state constitutions include provisions with principles condemning outcomes from this second type of competition. But because courts generally construe the provisions narrowly, they usually don’t interfere with discriminatory tax deals cut for locating firms.

Nonetheless, state constitutional provisions prohibiting special legislation, and requiring uniform taxation, aim to prevent this sort of factious use of government power. Equal treatment before the law is a rock-ribbed principle of conservatism, and is violated by this second type of tax competition. The first type of tax competition, needless to say, is entirely consistent with the principle of equal treatment.

Given that judges routinely ignore, or narrowly apply, state-level anti-faction provisions—judges won’t say they’re ignoring these constitutional requirements, they instead say they’re applying “deferential review”—large companies holding mobile capital can induce states (and cities) to over tax abatements that discriminate in their favor. There’s nothing conservative about that.

Further, reports of the deal suggest a puzzle about the ostensible benefit for New York City of the deal.

When firms engage in price competition, competitive pressures dissipate economic profit (that is, profit in excess of “normal profit”). In the case of tax competition as Amazon induced, the same prediction applies. To attract the firm, cities would offer tax abatements equal to whatever surplus tax revenue, that is, tax revenue over cost, the firm would provide.

Actually, tax abatements need not even cover cost of governmental services. Cities would offer the tax-abatement equivalent of whatever value they place on any benefit the firm might bring to the city, whether monetized or not. For example, a city might value increased employment for city residents beyond the taxes those workers pay to the city.

The oft quoted figures for NYC is that Amazon would generate $30 billion in additional tax revenues over the next 25 years at a “cost” of $3 billion in tax abatement. In the standard narrative, NYC stood to gain around $27 billion from Amazon’s location decision.

To be sure, New York City offers amenities attractive to many folk, particularly young tech workers. Even granting that, however, another slightly less attractive city could have spotted Amazon, say, abatements in the amount of $15 billion—enough to compensate those same young tech workers for not living in NYC, and also to improve Amazon’s corporate bottom line. It would still be win-win for Amazon and for the city.

So what gives? The question is the tax-competition equivalent of Gordon Tullock’s famous question, “why so little rent seeking?” Indeed, giving how savvy Amazon proved in the actual competitive process (less so when it came to community relations in NYC itself), the question is why didn’t Amazon hold out for a substantially better deal than it received from NYC?

My suspicion is this: Despite what the nominal figures so often quoted suggest, the benefits Amazon would have brought to NYC roughly equal the abatement the city offered rather than the quoted figure of a benefit ten times the abatement figure. The deal makes little sense for Amazon otherwise.

First, the deal’s uncertainty and asynchronicity needs to be understood. Amazon would get tax abatements with certainty, while promised tax revenues were uncertain and in the future. Needless to say, any city worth its salt would substantially discount anticipated tax revenues, not simply for the time component but also more for the substantial uncertainties surrounding the realization of expected return.

Secondly, competition in the real world is never perfect. Classroom discussion “perfect competition” is a limiting case to explain competitive pressures. It critically assumes a homogeneous product. That’s rarely the case in the real world, and certainly not true with respect to cities and location decisions. As in any auction, NYC did not need to offer Amazon what the full value of Amazon would have been to NYC. NYC only needed to offer slightly more than the second highest bid.

Finally, the estimates seemed to assume all employees would be new to the city. Again, however, many, if not most, already live in the city. The true measure of the tax gain, however, is not the total of taxes Amazon employees would pay. Rather, it would be the difference between the taxes Amazon’s putative employees pay in their current jobs in NYC relative to the taxes they’d pay in their Amazon jobs. Additionally, there also would be some alternative users for the property Amazon would have built on; second-best uses that pay taxes without Amazon’s abatements.

Despite the $3 billion/$30 billion numbers being bandied in the press, equilibrium suggests the amount NYC would have gained from Amazon’s location would actually be in the neighborhood of the abatements it actually offered to Amazon. Amazon could have, and would have, wrung more out of NYC if the numbers were as divergent as news reports suggested.

I guess I’m with the socialists on this one: I very much doubt NYC lost much in net by Amazon’s pullout.

Reader Discussion

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on February 20, 2019 at 08:58:57 am

The two sides probably calculated based on benefits beyond the simple netting of projected tax receipts/abatements, which figures themselves are probably open to dispute and remodelling and recalculation. For instance, the political income generated to the NY pols from having Amazon build HQ2 there. Paris was worth a Mass, remember, so why not HQ2? Also, perfect competition also assumes the impossible circumstance of perfect, symmetrically possessed information. And there is the time factor: modelling the decisions of each side in this case could probably sustain the publication requirements of 20 tenured professors for 20 years, but neither Amazon nor NYC can wait that long to learn where it is getting the best deal according to the models. Amazon needs HQ2 (presumably) to earn additional revenue and/or reduce expenses, and each day HQ2 is delayed is a day of lost revenue or unoptimized expenses. As for Massachusetts, it recently engaged in the same behavior Rogers asserts it doesn't in luring GE's HQ away from Connecticut (and GE is now returning some of that value to MA as it shrinks said HQ).

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QET
on February 20, 2019 at 12:24:58 pm

Hard to say whether NYC lost out with Amazon pulled out.

Yes, NYC likely calibrated its offer based on SOME estimate of net benefit, discounted for time and risk. But it is unclear to me that Amazon would have the same discount rate for time/risk. Given Amazon’s knowledge of its own firm, it presumably faces lower risks in estimating its future. But given Amazon’s range of alternatives, Amazon might well demand a higher return than NYC’s economic development office does. Economic development offices generally have very low expected returns. I can't say which factors would predominate.

Even if the government of NYC was largely indifferent to the deal, specific parties in NYC arguably won and lost. People who anticipated doing business with the new Amazon HQ (builders, employees, vendors, landlords renting to new employees, etc.) lost. People who did NOT anticipate getting such jobs, but who could anticipate competing with future Amazon employees for housing, parking, restaurant space, etc., presumably won.

In a world with low unemployment, I could imagine that politicians might anticipate that more New Yorkers would be harmed than helped by the new Amazon HQ. Thus, politicians might have seen advantage in killing the deal.

Finally, Rogers talks about how these economic development deals discriminate against firms with fixed capital. I wonder if this entire HQ2 deal is really driven by this dynamic—specifically, perhaps Amazon wants a second HQ in order to have a credible threat against Seattle and Washington that it scale back or abandon its first HQ if taxes got too high.

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nobody.really
on February 20, 2019 at 16:48:08 pm

"specifically, perhaps Amazon wants a second HQ in order to have a credible threat against Seattle and Washington that it scale back or abandon its first HQ if taxes got too high."

You hit the nail on the head!

Talk of an HQ2 appeared immediately following the Seattle City Clown-cil's attempt to impose a "head tax' upon large employers in the Seattle area as well as increased demands for more 'social spending", either voluntary or via taxation, from Amazon.

Also right re: those competing for housing with the prospective new amazonians. The area of the proposed HQ2, Astoria / Long Island city is currently undergoing gentrification. However, the mere fact of gentrification, in and of itself, does nothing to upgrade / improve existing housing stock. Most homes / apartment buidlings were built in this area in the 1920 - 1940's. Many of the single family homes are nearing 100 years of age.
In this market, a 2 bedroom apartment, perhaps 600 sq ft rents for $3000-4000. Gentrified or not - these are old and worn down. It would only have gotten worse for the untermensch of the neighborhood (editors note: some of my old goombas). Ultimately, they would be forced out.
But not to worry. I am sure Amazon would still find them in their new hovels and get packages delivered to them.

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gabe
on February 21, 2019 at 11:21:06 am

Its a win for America and civilization itself as those tax revenues will go to States with better governance (less corrupt) where Unions do not dictate what Companies can invest there and potentially tens of millions in tax revenues and Union rip offs (dues) do not go to prop up and empower leftist politicians. So in that regard this is a win, win, win for humanity as a whole. Thankfully, leftists do not grasp economics very well and cannot see they have shot themselves in the foot, ass and face on this deal.

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Jesse Sewell
on March 10, 2019 at 03:17:05 am

[…] Law & Liberty – Did New York City Really Lose Out in Amazon Deal? […]

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Auribus Arrectis

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.