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Michael Farren & Anne Philpot: Pittsburgh dodged the Amazon iceberg | TribLIVE.com
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Michael Farren & Anne Philpot: Pittsburgh dodged the Amazon iceberg

Michael Farren And Anne Philpot
| Saturday, February 2, 2019 7:00 p.m
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AP
Employees walk through a lobby at Amazon’s headquarters Nov. 13 in Seattle. Amazon ended its 14-months-long competition for a second headquarters that day by selecting New York and Arlington, Va., as the joint winners.
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If recent history is a good predictor, this year Pennsylvania politicians could dole out over $300 million in taxpayer money for corporate handouts. And cities like Pittsburgh that lost out in the sweepstakes for Amazon’s second headquarters (or “HQ2”) may be motivated to double down on the next big prize.

But Pennsylvanians should be skeptical when politicians try to woo a corporate giant. A deeper look at the Amazon dog-and-pony show explains why.

Sure, politicians offer corporate tax breaks and other handouts all the time. Paying businesses to relocate and allegedly create local jobs is good politics, even if the facts tell us it isn’t good economics. But the sheer size of the Amazon subsidies offered made an already shaky policy potentially catastrophic.

Corporate handouts suffer from three fundamental problems.

First, they don’t actually work. Companies relocate for profitability reasons, and local tax policy is only one small part of that. The availability of a skilled workforce, access to resources and opportunities to work with nearby industries usually outweigh any subsidies. Tax incentives are at best a tiebreaker and more often than not simply a waste of public money.

Even worse, the academic research on corporate subsidies generally finds that while they benefit the company on the receiving end—obviously—they don’t actually improve community welfare.

Second, giving tax privileges to one company imposes costs on other businesses and residents. Locals must either pay more for a given level of public services or accept a reduction in service quality and quantity. The now publicly available Pittsburgh bid ($938 million) could instead fund 325 additional Pittsburgh police officers — a 35 percent increase — or pay for the cost of educating 1,400 public school students for 20 years.

And since Pennsylvania offered its own subsidies, people across the state would have suffered these same kinds of tradeoffs. For its now-revealed state bid ($4.6 billion), Pennsylvania could fund 4,900 full-tuition scholarships at Penn State for 25 years or pay for all highway maintenance for two years.

Alternatively, the state could have reduced the corporate income tax for all businesses by 4.5 percent. Reducing taxes for every business is better for economic growth — and more democratic — than giving that entire benefit to a single company. Lowering the cost of doing business for home-grown enterprises would help them expand into the Amazons of tomorrow.

The higher taxes on businesses and residents to fund the subsidy and the long-run costs of reduced public services generally outweigh any extra tax revenue that might be generated, meaning these schemes don’t actually pay for themselves.

Third and most importantly, special government privileges degrade our democratic ideals. Because we allow (and often encourage) politicians to offer special privileges, corporations and special interest groups have all the motivation they need to lobby hard for them.

Many politicians and economic development officials see the ruse for what it is, but they feel trapped because every other city and state is also doing it. It takes political guts and a strong backbone to say no, like San Jose, Calif. Mayor Sam Liccardo did in a Wall Street Journal op-ed a year ago.

Economists call this kind of problem a “prisoner’s dilemma.” Nobel laureate Elinor Ostrom illustrated that mutual cooperation is the solution, but it requires clear lines of communication and credible commitments from all parties involved. An interstate compact that forbids the use of public funds to privilege any business or industry — compelling policymakers to treat every company equally — offers one way out.

In the end, Pittsburgh may be better off without Amazon — especially given the exorbitant subsidies offered — even if the rejection stings. Sometimes missing the boat is the best thing that can happen to you.


Michael Farren is a research fellow and Anne Philpot is a research assistant with the Mercatus Center
at George Mason University.


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