With Amazon HQ2, the Losers Are the Winners: Why Economic Development Subsidies Hurt More than They Help

Abstract

On September 7, 2017, Amazon, Inc., announced that it would open a second headquarters by building “HQ2,” a new office equal in size to its Seattle campus, that would involve $5 billion in local business investments over 15–17 years and would eventually employ 50,000 workers with an average compensation more than $100,000. Amazon requested that interested cities submit proposals making the case for why their community would be the best fit for this massive new endeavor, including information on the public subsidies the city and state governments would offer to sweeten the deal. Amazon’s six-week deadline created a mad scramble among the 238 North American cities that eventually submitted bids, each attempting to illustrate why it in particular would be the best location to host Amazon’s new headquarters.

Despite arguments from economic development officials justifying such subsidies, both economic theory and experience suggest that cities and states are throwing their money away when they court Amazon’s favor through subsidies. Even subsidies worth billions of dollars are unlikely to sway Amazon’s decision. Worse, these kinds of targeted economic development incentives fail to produce economic growth.

In this paper, we examine the publicly known subsidies offered to Amazon as enticements to locate its second headquarters. We show that these subsidies are unlikely to alter the location decision of the company or lead to economic growth for the communities that offer them. We illustrate the tradeoffs that these subsidies would require in terms of forgone tax cuts and alternative uses of these funds for public services, such as safety and education. Lastly, we offer examples of institutional reforms — constitutional gift clauses, direct democracy, and interstate compacts — that could reduce the number of corporate subsidies in the future.