Are relocation incentives bad policy?
After Amazon’s aborted attempt to locate its Headquarters 2 in New York City, public incentives to corporations for relocating or remaining in a jurisdiction seem to be everybody’s whipping boy. In the Amazon case, politicians on one side have been accusing Amazon of taking billions of dollars that could be used for more pressing public needs and on the other side of its board members being 1% elitists with no compassion for the other 99%. The issue is, of course, more complex.
Government entities should consider their taxpayers, both private and corporate, as customers and that it is their duty to provide them with good service if they wish to continue to be appreciated and to retain those customers / citizens. In that context it would seem to be reasonable to offer a particularly large customer or a prospective customer a discount to obtain their business. In most every case that is what incentives are – a rebate of a portion of the tax revenues that would ensue from the project. Low tax jurisdiction in most cases understandably offer much smaller or no incentives. Often incentives that are offered flow to the common good for things like infrastructure improvements and workforce education.
On the corporate side, in my experience as a site selection consultant, the potential for incentives play an insignificant role in the first and second phases of site selection, which are 1) to screen for a long list of potential locations, and 2) perform desktop research to narrow the list to a short list of candidates. In the third phase of fieldwork and discussions with local stakeholders are incentives negotiated – usually in a frank manner. Besides their monetary value, incentives offers are viewed as an indicator of the friendliness of the local business climate, which in itself is an important factor in site selection. In one case I have been told that Toyota in siting a manufacturing plant in San Antonio requested an offer of incentives but, after offered, turned some of them down or handed them over to local school districts. We counsel clients to use incentive offers as a tie breaker between equally matched contenders or as an opportunity for the number two candidate to compete against its rival.
Popular today is the notion that corporations are not only beholden to their shareholders, but also to society in general. Neither group can prosper from the corporation, however, unless the corporation prospers. Amazon, while its web services may have high profit margins, has had its online retail business grow by operating on razor thin margins. In fact, for a long while its rivals claimed its success was due to its avoidance of paying local sales taxes on online sales to locations where it had no physical nexus. In any case, a corporation must balance civic responsibility with profitability. It is not for a corporation to decide if, say, the citizens of New York are more deserving of the economic and charitable benefits of its presence then, say, Tennessee. Locating in a jurisdiction that has a lower tax base to provide for the citizenry and where the corporation has greater profitably could even be seen as levelling the playing field.
All of the above being said, there is at least one scenario to rail against. Occasionally, we as location consultants, are brought into the fray by a corporate officer in the tax department whose compensation is based on the amount of tax dollars savings he can produce. This is short sighted and in doing a relocation analysis and fieldwork a company must look for a win-win situation. A win for them, and a win for the residents from which its workforce will be drawn and for other employers in the area who can either share in a more educated workforce and vibrant economy or who can oppose the newcomer if it is seen to be cannibalizing the resource base of the area.