Monday, November 26, 2018

Amazon Should Not Receive Government Handouts

Last week, Amazon announced that it will build its highly sought-after second "headquarters" (HQ2) in two separate locations, agreeing to move to Arlington, VA, and Queens, NY. Taxpayers in Maryland and Montgomery County should be pleased that they will not have to pay the $8.5 billion offered to Amazon to induce it to build HQ2 in Montgomery County.
Without having to pay a dime, Montgomery County, which like Arlington borders Washington, DC, still should experience positive spillover economic benefits.

Amazon likely will use HQ2’s close proximity to Washington, DC, in part, to continue lobbying the federal government for various regulatory changes – some good and some bad. As one of the two largest companies in the United States, with a market cap that exceeded $1 trillion in early September, Amazon does not need and should not receive government handouts or special regulatory advantages. Instead, governments at all levels should reduce tax and regulatory barriers that stifle competition and reduce investment and innovation.
After receiving bids from 238 cities across the United States and effectively creating a bidding war, Amazon decided last week that it would locate HQ2 in Arlington, VA, and Queens, NY, with more than 25,000 employees in each location. Maryland offered $6.5 billion in tax incentives and Montgomery County threw in an additional $2 billion. But had Amazon agreed to place HQ2 in Maryland, taxpayers in Maryland and particularly in Montgomery County would have paid for Amazon’s new headquarters.
While perhaps you can't fault the company for attempting to get as many government handouts as possible, Maryland’s government should do what is best for the residents, not what is best for Amazon.
The argument in favor of offering tax incentives to Amazon is that HQ2 would stimulate the local economy and create more than $8.5 billion in long-term economic benefits. Sage Policy Group performed an economic impact study which found that HQ2 would create more than $17 billion in annual economic activity in Maryland. At the time this study was performed, it was assumed that Amazon would deploy one HQ2 with 50,000 jobs, as opposed to two headquarters, each with 25,000 jobs. But even assuming HQ2 would have created 50,000 new jobs in Montgomery County, one of the touted benefits in the study is that Amazon would contribute $280 million in annual county taxes and $483 million in annual state taxes. If Amazon accepted the $8.5 billion handout, it would have taken Amazon more than seven years to create a net positive tax contribution to Montgomery County and more than thirteen years to create a net positive tax contribution to Maryland.
Of course, had Amazon accepted the deal, it would have been under no obligation to pay back the tax incentives. What would have stopped Amazon from moving HQ2 to a new location after a few years? Taxpayers would bear all the costs with little benefits, particularly Maryland taxpayers who live far from Montgomery County who would not experience any of the increased economic activity created by HQ2.
Montgomery County and Maryland officials now have a combined $8.5 billion that can be allocated to services that will directly impact the state and local residents. Whether this means more funding for schools, roads, or tax breaks for the current residents, Maryland is likely much better off using this money in other ways.
Importantly, because Arlington, VA, a suburb of Washington, DC, will become the location of one of Amazon’s second headquarters, Montgomery County’s local economy will experience spillover economic benefits. Amazon’s move to the DC area will bring 25,000 new jobs and those new employees will spend their money on housing, food, and entertainment throughout the area. Sage’s study states that an HQ2 located in Montgomery County would positively impact DC, and Northern Virginia, as well as Maryland’s Anne Arundel County, Baltimore City, Baltimore County, Frederick County, Howard County, and Prince George’s County. So under the same locale-related assumption, an Arlington-based HQ2 should positively impact Montgomery County and other Maryland jurisdictions. Spillover effects do not stop at state borders, so Maryland should experience some of the indirect economic benefits of Amazon moving to the DC area without having to spend $8.5 billion in taxpayer money. Moreover, additional companies may consider the Washington, DC, area as a good home for their headquarters, and Maryland can use this opportunity as a way to reinvent its sales pitch to prospective companies – by lowering tax rates and eliminating costly regulations that stifle entrepreneurial and economic activity.
Despite a whopping $8.5 billion left on the table, I am not claiming that Amazon chose Virginia over Maryland due to its tax and regulatory policies. I don't have evidence for that. But that does not mean that Maryland’s improving but still sub-par business climate does not deter other companies from setting up shop within the state. (See these blogs here, here and here.) Instead of attempting to persuade companies – including one of the world's largest firms – to move to Maryland with promises of government handouts, the state and localities should remove, or at least reduce, barriers to entry. This will induce businesses across many industries to locate their headquarters in Maryland.