Local politicians run off Amazon - Economics

[jacob]

https://newrepublic.com/article/152836/ ... y-its-hell

Fair warning: https://mediabiasfactcheck.com/new-republic/

This is a story about the Centerpoint Intermodal freight terminal i Elwood, IL. If you live in the US, there's a good chance that your stuff from Amazon (and Walmart, HD, ...) goes through here. This is not about HQs but industrial logistics and out of the various chains, Amazon is the county's largest employer.

What happened here might illustrate the problem with why residents (IIRC there was a similar story in the Janesville book or maybe it was another one) are generally not as enthusiastic about using tax breaks to move in a giant/game-changing business as the corporation and the sponsored politicians are.

The "you give us a couple of decades of tax breaks and we'll build it here" is a typical deal. It sounds really good on paper. Earnings, taxes, etc. But the problem is the cashflow and these deals can literally bankrupt cities (although prob not NYC).

First, the area only gets richer is the employees spend the monies they earn locally. If they commute in and live somewhere else, they're not part of the tax base. They're also not part of the commercial/spend base: No new restaurants, supermarkets, ... will be built in the place that delivered the tax break if workers live 20 miles away. There's no multiplier on the economy. Note that to avoid this effect, either unemployed people already have to live in the area or housing ALSO has to be built for them to move closer.

Second, giant buildings with thousands of workers have a huge infrastructure footprint. IIRC, the main issue with the NYC building was sewerage. By getting the 10-20 year tax break, the existing residents are effectively subsidizing and paying for infrastructure maintenance for those years until the city begins to see money. In Elwood, they can't afford to maintain the roads under the heavy truck loads because the taxes that would pay for it aren't scheduled to arrive for the next many years. So they take out municipal loans to pay for roads and to upgrade fire services, etc. As the main traffic lines are perpetually "under construction", trucks have taken to driving through residential areas. Nice!

In conclusion, these deals are made because the corporation can get value now (the tax break, that is, the free use of infrastructure) in exchange for future promises decades down the line that may or may not materialize. It's the same as paying employees lower salaries in exchange for promises of higher future pensions. It's great on paper until the future becomes the present. TANSTAAFL.

[Seppia]

Is that true though? That argument is essentially that economic competition is a bad thing. And nowadays, the competition is not limited to intra-US competitors.

I think it is true.
Economic competition is not always a good thing, as individual incentives can lead to sub optima elquilibriums (think prisoner’s dilemma).
This to me seems like one of those cases.
The obvious best for society as a whole is nobody caves and amazon ends up opening HQ2 wherever they feel is best*.
They are profitable as hell and they can afford to open wherever they want.
This gets amazon their HQ and local communities their full tax revenue.

Instead a race where all local communities give tax breaks leads to amazon going to the same exact place, only local communities get less tax revenue.



*the USA is very obviously the best place on the planet by a mile to create new businesses: all the largest and most successful new companies are either from the USA or subsidized by China.
If anything, the USA should have taxed corporations MORE

[Jason]

Queens is next to Manhattan. A $150K salary in Manhattan is next to worthless. Amazon workers will look to live in Queens. Anyone who so much as owns a phone booth in Queens will instantly become a multi-millionaire. It happened in Hoboken, NJ, than Brooklyn.

https://nypost.com/2019/02/14/local-bus ... nightmare/

A Pirate ship landed on the shore and said "We will spend a shit load of stolen money here if you make the conditions right for us. If you don't, you can continue to live out your shoe strings lives and we will head out to other shores until someone agrees." The landowners said yes, the plantation workers said no. The workers won and a dying way of life is preserved.

[Gilberto de Piento]

The Foxconn plant in Wisconsin isn't exactly the same situation as the Amazon HQ but there are some lessons there: https://en.wikipedia.org/wiki/Foxconn%2 ... nsin_plant. When it was announced by Gov. Walker (then running for reelection) and Donald Trump it was going to be a great boon for Wisconsin despite billions in government subsidies. Now it seems like every few months it gets scaled back, though I only see it when the announcements make national news.

The nonpartisan Wisconsin’s Legislative Fiscal Bureau estimated that the Foxconn plant would not break even on the investment until 2043, and that was in the best-case scenario.[13] Others noted that Foxconn had in the past made similar claims about job creation in various localities which did not turn out to be true.[2][14][4]

[Campitor]

Let’s not forget the huge amount of money that flows into Amazon as a result of monetary policy.  Bezos is smart but he has help too. It’s not a free market.

Don’t hate the player, hate the game. Bezos is playing by the rules created by the local, state, and federal politicians hence the “huge amount of money that flows into Amazon.” And yes it's a free market. Bezos is under no obligation to build anywhere and local and state politicians know this. So to incentivize large employers to build in their own states, some of which have the highest tax rates, state politicians promise tax rebates which help defer the cost of building new property, the initial corporate real estate tax, and the cost of hiring and training new employees.

I think a point that gets often missed is that businesses also receive a great deal from the public. 
They benefit from a functioning infrastructure system in terms of easy transportation and movement of goods, they benefit from the school system in the form of good and productive employees, etc. 
All this is paid for with taxes. 

And where do these taxes come from? They are paid by the hundreds of thousands of employees some of which work at big businesses. No businesses = no employees. No one is doing anyone a favor - the exchange of taxes for infrastructure is symbiotic. To claim that publicly provided infrastructure/capital is more virtuous than private business employment/taxes/capital, and visa versa, is wrong on so many levels.

I don’t know exactly what “fair” is, but I can tell you that a system in which a gigantic and thriving business gets tax breaks and Tony’s Pizza in Queens doesn’t certainly isn’t my definition of “fair”. 

.

Tony’s pizza doesn’t employ 25,000 employees but Amazon would have. There are pizzerias everywhere in NYC but how many pizzerias are there that generate 1 billion in yearly state tax revenue?

Amazon wants a tax break? All major metro areas should think about their collective benefit and tell them to fuck off and go set up shop in the Nevada desert, or pay taxes like everybody else. 
I’m far from being “anti corporations” but I want them to be treated like everybody else.

The metro areas are thinking about their collective benefit which is why they fall over each other trying to entice big businesses to their states. Nothing moves the tax revenue needle (and political donations and political prestige ) like a new corporation setting up shop.

HQ2 staff is being recruited from around the world, not many will be current Queens residents. Many of the new staff will look to live near the HQ2.

Amazon was planning to donate money to local real estate development to help defray the cost and lack of housing in NYC.

Since the average local Queensylvanian doesn’t have tech worker skill set and doesn’t make $120k pa on average as the HQ2 Amazonians do, some 40% (not the majority!) are/were concerned about an even faster gentrification, property and rent becoming more unaffordable, public services getting more stretched, the subway getting clogged, restaurants getting too pricey/fancy for them, etc.

Everyone wants nice things but are surprised when the bill comes due. Having nicer stuff costs money which requires tax revenue - the higher the revenues, the nicer the stuff. Once all the nice stuff is built, people want to live there. The increased density, even if all living costs stay the same, increases the strain on infrastructure which then requires more maintenance; roads, plumbing, water, electrical, etc., have to be upgraded to meet the new demand. This costs money. There is a price to be paid for living in popular neighborhood with nice stuff. By the way, the average resident salary for those living in the vicinity of the proposed Amazon site is 70k - not exactly poverty wages.

In short they were worried about the change the HQ2 would bring to their neighborhood and if this change would still leave space for them to live their old lives. 

While it may make sense economically to have HQ2 in Queens, the opportunity cost as perceived by 40% of local residents is quite high. Better no change than a potential negative change. Also 80% of Queens residents didn’t really feel they were consulted/heard during the tender process, so here’s the (populist) political backlash. Maybe Amazon isn’t tough enough for NY, eh?

Progress forces you to adapt or fall behind. Who exactly is living life the same way as the decades go by unless you’re living in a backwater US location, i.e., the Appalachian backcountry? The citizens of Queens certainly have every right to not want change but the price of that decision will impact them - the bill always comes due. Is Amazon tough enough for NY? In light of all the complaints and resistance to change by the locals, I think the better question is “Is NY tough enough for Amazon?

[Jason]

The proverbial mouse flexed at the proverbial elephant and instead of wasting its energy and stomping it, the proverbial elephant turned around, leaving the empowered mouse to spend the rest of its days worrying where it will get its next piece of cheese.

Queens is a subway ride from Manhattan. An international city. Similar to Brooklyn, you could actually have Manhattanites saying "Hey, I heard there is a new area in Queens to spend a Saturday afternoon. They have a theatre, some galleries and some restaurants. Let's look at that crazy new Amazon headquarters" the same say way they go to Brooklyn to catch a Nets game or tourists like to walk over the Brooklyn Bridge.

[Seppia]

@Campitor
Taxes come from people and corporations who pay them. Giving anybody a tax break is making sure they enjoy the benefits of the taxes paid by others (infrastructure in the wide sense) without chipping in.
Where did I claim public infrastructure is more virtuous?
All I’m trying to say is that I don’t want anybody to free ride the system.
It’s funny how often the same people that are against subsidizing the poor with anything are somehow in favor of subsidizing multi billion dollar corporations that don’t need any effing help.

Because nobody has yet explained to me why amazon could not have built the same exact HQ they are going to build without the tax break.

They were going to choose NY or WDC anyway, again smart people have been calling this since the beginning.
Nobody caves = amazon still builds the same HQ and hires the same amount of people, only they pay more taxes.
How is that a loss for the USA?
Same job creation, more tax revenue.

Instead, amazon does a beauty contest, all cities fall for the trick, they all bet against themselves and amazon gets to pick between the same two obvious choices, only with better conditions.
If anything, WDC should also send them packing.

[Jason]

From a US Constitutional angle, if you compel individual states to offer similar benefits, you have lost the interplay of Federal and States rights and have essentially turned the Federalist Papers into something which we should now wipe our asses. From a business angle, that's collusion. So forget about that.

This is business. It's called leverage. Individual municipalities have the right to say no, which Queens exercised. The worse case scenario is where eminent domain would be extended to such a virulently private enterprise. That would have been a shitstorm.

[Gilberto de Piento]

The worse case scenario is where eminent domain would be extended to such a virulently private enterprise. That would have been a shitstorm.

Read up on the Foxconn deal. A number of homes were seized, though homeowners were compensated.

[Jason]

The founders viewed the use of land as best determined within the private sector. That's why the only permissible use of eminent domain at the time was limited to the creation of army bases, as national security was an issue. Eventually it extended to rail roads, highways etc. A flip occurred in the late 19th century when the original business titans were feared as expanding too rapidly, and government was viewed as the appropriate steward of the land in defense of a few wealthy individuals controlling the majority of it. Plot out the national park system in the US, the vast majority are in the West when expansion occurred during this shift in viewpoint. Thank you Teddy Roosevelt, for better or worse.

So the point is complex. The founders would have never anticipated government involvement of land use to this extent. It would be an issue decided by private citizens with very limited government involvement. I think you can make an argument that Jeff Bezos is exacting revenge on behalf of the original titan crew. Government control of land has limited vast areas from commercial expansion so someone like Bezos is leveraging that which is available to him. I don't know whether selling him thousands of acre in Utah and letting him build Amazon city is the answer either. But this is the game that was created before he arrived on the scene and he's just playing it to his advantage. I don't claim to know all the angles, but these are a few of what I see.

[Campitor]

@Seppia

Giving someone a tax break to incentivize relocation to a local site, with high corporate taxes and construction costs, is good business when the numbers make sense. Otherwise businesses would relocate somewhere else thereby increasing the tax coffers of another state. The cost of opening a new business, hiring employees, and constructing a new facility is extremely high and a large outlay of initial capital. Amazon was going to hire 25,000 employees with future plans to add an additional 25,000, and also build a 4 million Sq Ft facility with future plans to increase it to 8 million Sq Ft. The cost of construction in NYC is $354 per Sq Ft. which means Amazon would eventually spend $2.8 billion in total construction cost alone.

Amazon was expected to generate at least $1Billion in tax revenue per year for New York on top of the philanthropy Amazon was going to outlay; they had plans to fund affordable housing and new housing construction, donate to the public school system, etc. NY would have recouped the cost of its investment in 3 years and gained another 7 billion dollars in tax revenue in 10 years with the Amazon also providing public philanthropy that would help the local residents. For every $1.00 handed over by NY they were going to get $10.00 at minimum. How is this bad?

And where did you claim that infrastructure is more virtuous? It was implied by the "All major metro areas should think about their collective benefit and tell them to fuck off and go set up shop in the Nevada desert, or pay taxes like everybody else" comment. It implies that corporations seeking tax breaks to relocate to the most expensive metro areas, is somehow wrong and not a net benefit to the local economy and residents. This implies that publicly supplied infrastructure (funded by private tax revenues) is a privilege divorced from the reality of the monies generated by corporations via employment, sales revenue, and corporate real estate taxes. If you thought otherwise wouldn't the "fuck off" have been a "no thank you?"

[Tyler9000]

I found this take on Zerohedge interesting.

https://www.zerohedge.com/news/2019-02- ... game-loses

Long story short, an experiment called the "Ultimatum Game" shows that "human nature is hardwired to go against its own economic interests in the name of punishing what it perceives as greed or unfairness".

[Kriegsspiel]

Oddly enough, "autonomous pricing algorithms increasingly used by online vendors may learn to collude. . . Most worrying is that they learn to collude by trial and error, with no prior knowledge of the environment in which they operate, without communicating with one another, and without being specifically designed or instructed to collude. . . Already in 2015, more than a third of the vendors on Amazon.com had automated pricing"

Amazon can't wait until cities let their negotiation AI do the talking for them

[Campitor]

Here's a link that does a good job explaining the pros and cons of the deal:

https://ny.curbed.com/2018/11/16/180985 ... -explained

[Jason]

Charlie Munger chimes in. Maybe its not so bad living into your 90's.

https://www.marketwatch.com/story/charl ... op_stories

[Seppia]

The cost of construction in NYC is $354 per Sq Ft. which means Amazon would eventually spend $2.8 billion in total construction cost alone.

Their revenue is 250 billion per year. They can afford it.
Amazon and apple both expanded in NY, they didn’t ask the public for a handout because they didn’t need to.
That is fair.

For every $1.00 handed over by NY they were going to get $10.00 at minimum. How is this bad?

It is bad because
THEY
DON’T
NEED
THE
GODDAMN
MONEY

if super rich person A paying 5M dollars in taxes per year started shopping around states and said “I’m going to move to the state that offers me the biggest tax break” and as a result ended up with a lower % tax rate than you or other regular people would you consider this normal and acceptable?
I guess the answer to this question shows our innate difference in opinion.
Your answer may be
“It would make sense for states to give him/her the biggest tax break”
And mine would be
“That would not be fair to the rest of the population and basically an extortion/abuse of leverage, hence its wrong”
I’m obviously not disputing your point, as it’s basic math.

But it would also make sense to steal 1M$ if I were sure not to be caught - that doesn’t mean it’s not “wrong”

And where did you claim that infrastructure is more virtuous? It was implied by the "All major metro areas should think about their collective benefit and tell them to fuck off and go set up shop in the Nevada desert, or pay taxes like everybody else" comment. It implies that corporations seeking tax breaks to relocate to the most expensive metro areas, is somehow wrong and not a net benefit to the local economy and residents. This implies that publicly supplied infrastructure (funded by private tax revenues) is a privilege divorced from the reality of the monies generated by corporations via employment, sales revenue, and corporate real estate taxes. If you thought otherwise wouldn't the "fuck off" have been a "no thank you?"

You are implying way too many things.
The only thing that means is that American states should think collectively and that, if considered as a whole, they would maximize their utility NOT giving any tax break.
Because as stated before amazon is not going to move HQ2 to Europe or India or Singapore.
The USA has a unique combination of business friendliness, pool of talent, rule of law, infrastructure, sheer size that makes it by far the best place in the planet to do business in.
No need to give more incentives.

[The Old Man]

if super rich person A paying 5M dollars in taxes per year started shopping around states and said “I’m going to move to the state that offers me the biggest tax break” and as a result ended up with a lower % tax rate than you or other regular people would you consider this normal and acceptable?

I am not a super rich person, but "I moved to the state that offers me the biggest tax break". Florida has zero income tax. California where I was from has one of the highest tax rates in the USA. I have saved mucho dollars. New York City is even worse than California. It is entirely normal and acceptable for people to relocate to states that are better. It is very common.

I consider taxes to be part of the cost of living and I make my decisions accordingly.

Many many people (and corporations) have left both California and New York for better locales. Texas and Florida as well as the south in general have been the big winners.

New York City has strongly demonstrated they are not pro-business. Businesses will look elsewhere.

[Seppia]

But you didn’t get a special treatment correct?
That’s my point

NYC May have many issues, but I think business wise they are doing fairly ok

[Campitor]

It is bad because
THEY
DON’T
NEED
THE
GODDAMN
MONEY

Doesn't matter that Amazon didn't need the money. NY lost out on a 1 to 10 spread. The money that would have been earned in tax revenue would have been a good investment. And Amazon only would have gotten those tax rebates AFTER delivering on the commitments made to NY. So basically this was a provisional loan. Forsaking a 10 to 1 return on your money is silly - and that was on the low end of the estimate. And this doesn't include the other revenue that would be generated by other local businesses that are needed to provide services to Amazon. And Amazon was going to DONATE additional money into local causes such as affordable housing. Please explain to me how this was a good choice regardless of how deep Amazon's resource are. Resources that Amazon was willing to donate into the local community.

[Seppia]

We’ll just agree to disagree