Development Incentives That Make Sense

The lesson from New York City's experience with Amazon: There are smarter ways to attract businesses than just dangling tax breaks.
February 26, 2019 AT 6:15 AM
Amazon Protests outside potential headquarters HQ2 building in LIC New York. - Image
(Shutterstock)
By Stephen Goldsmith  |  Contributor
Professor of practice at the Harvard Kennedy School and director of the Innovations in American Government Program

Every local elected official I know is laser-focused on creating good jobs for his or her constituents. In that sense, the celebration we're witnessing among many in New York City now that Amazon has announced it will take most of its proposed 25,000 headquarters-expansion jobs elsewhere is deeply perplexing.

At the same time, I can't stop dwelling on the fact that the highest-valued company in the world controlled by the richest man in the world, whose business model is largely built on undermining the traditional brick and mortar shops on Main Street, had its hand out trying to extract extraordinary financial incentives from cities across the country.

Many businesses ask for incentives, be they tax exemptions or credits. On the surface, there's nothing unseemly about this. But as the Brookings Institution's Amy Liu correctly spelled out recently in The New York Times, when it came to dangling incentives to attract Amazon Virginia got it right and New York got it wrong. Liu supports her argument with an evaluation of how the Northern Virginia incentives mostly would not go to Amazon directly but to local transportation, education and training. For Virginia taxpayers, the return on the total package was quite good.

For cities and states trying to lure the next Amazon, one thing should be clear: The best economic incentive is a well-run, safe city with good infrastructure, excellent schools and a competitive tax rate. All of the tax credits in the world won't matter if your infrastructure is crumbling and your schools are not graduating qualified future employees.

That said, even in the best-run cities there will often be a need for project-based incentives that include environmental remediation, street and sewer improvements, job training and transit expansion. A clear-eyed focus on how struggling neighborhoods and underemployed residents would benefit from the proposed investment must be at the core of these efforts.

In my career, I have seen many requests for incentive packages that made little sense. In most instances the company and its jobs were coming anyway, and there was no reason to advantage the company over those already producing jobs and tax revenues in the community.

Yet there are examples of smartly deployed economic development incentives that can trigger substantial follow-on investment and create new opportunities for struggling communities. I worked as chairman of a commission for then-Washington, D.C, Mayor Anthony Williams to redevelop the economically struggling area alongside the Anacostia River, including the property that became the Nationals baseball park. The mayor and the council required affordable housing, local hiring, and small and minority business support among other smart policies that ensured the local community, and not just property developers or suburban baseball fans, would benefit.

There's another dynamic in scrappy heartland cities, where a major new corporate headquarters can be more transformative and leverage more return than in the coastal hubs that more easily attract highly educated workers. Yet every request is not for a mega-HQ. As mayor of Indianapolis, I turned down dozens of requests for incentives, but I also approved those where the return on investment benefited a community. Particularly satisfying were the ones featuring an enlightened CEO who brought a manufacturing facility to a difficult area of the city with a pledge to hire local residents while also serving as the area's anchor tenant. Allowing the employer to use part of its future taxes to offset infrastructure investment, along with city participation in environmental remediation, made that kind of transaction work.

Corporations create jobs and cities need jobs. Making the investor the enemy is not helpful. Successful companies win when they engage cities responsibly as partners, not unsophisticated marks whose pockets can be turned inside-out in search of maximum incentives and subsidies. Cities, for their part, need to look more broadly at how the investment and its new taxes benefit more than just a single project area. City leaders need to better understand how they can create career ladders and an economic pipeline for those who would not otherwise benefit.

Amazon's decision to cancel its New York expansion is a failure for both the company and the city and state. If both sides had approached this deal with a clearer articulation of its benefits and a more reasonable set of incentive expectations, there would have been far fewer bumps in the road. Cities need new jobs and new tax revenues. Employers need a government that produces the right quality of life and one that fulfills its promises to both the company and to its residents.