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Corporate tax breaks can backfire – as New York City just found out

NBC News logo NBC News 2/16/2019 Martha C. White
a group of people walking on a city street: A woman pushes a stroller through the Long Island City neighborhood of Queens on  Feb. 14, 2019.© Drew Angerer A woman pushes a stroller through the Long Island City neighborhood of Queens on Feb. 14, 2019.

People complain that everything from coffee to rent is overpriced in New York City. According to tax policy experts, add to that the cost of luring a tech heavyweight to put down roots in town.

Amazon’s surprise announcement that it would no longer bring an expected 25,000 jobs and $27 billion in tax revenue to New York City was fueled by mounting criticism over the generous incentives it was promised from the city as well as the state — tax breaks totaling as much as $3 billion that analysts say probably didn’t sway the company’s decision anyway.

“The price was definitely too high. I think local people were right to complain,” said Jeffrey Dorfman, an economics professor at the University of Georgia. “Companies don’t really need these incentives — they’re not really deciding based on the incentives. They’re deciding where to go and then conning the politicians out of a whole lot of money.”

Tax breaks matter less in an environment with a historically low unemployment rate and trade tensions that threaten to spill over into the consumer economy, said Kim Rueben, director of the State and Local Finance Initiative at the Urban-Brookings Tax Policy Center. “What generates economic activity and what’s attractive to companies isn’t just their tax bottom line, but also what the services and the labor force look like,” she said.

Amazon’s bifurcation of HQ2, splitting it between New York City and the Virginia suburbs of Washington, D.C., probably didn’t help. Tax policy experts said New York’s bid to Amazon was essentially overpriced compared with other deals, including the other HQ2 bid Amazon accepted from Virginia.

“The Virginia offer on a current job basis was offering less money than the New York one, which made it very clear… that it isn’t necessarily true they would’ve needed to give away so much or have the deal be quite so generous,” Rueben told NBC News. “They gave away less in terms of tax incentives to get Amazon to agree to them and it became very clear it wasn’t just being driven by that,” she said.

“I think they’ve always created controversy but the way that I think mayors and business leaders have been able to win political support for them is by saying everybody will benefit from this,” said Timothy Weaver, an assistant professor of political science at the State University of New York at Albany, who specializes in urban policy and politics.

Related video: NYC mayor reacts to Amazon ending HQ deal: 'There was no dialogue'

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Shifts in labor and demographics have made it unclear, at best, that the benefits a company gets will be widely distributed, Weaver said. “What the general rise in urban inequality alongside the persistence of high rates of poverty in the city have shown is that the beneficiaries of this kind of approach to attracting business have been pretty consistently upper-middle-class people and wealthy business people,” he said. “The claim that everyone will benefit and that the benefits will trickle down has become harder and harder to maintain with a straight face.”

These incentives — and the publicity that accompanies them — can be a double-edged sword for politicians, especially when once-ballyhooed promises fail to be delivered upon. General Electric announced on Thursday it will return $87 million worth of state incentives and scale back its plans for a new headquarters in Boston. In Wisconsin, there is now uncertainty around a deal brokered last year by then-governor Scott Walker with Foxconn that would give the Chinese manufacturing firm some $4 billion in incentives to build a $10 billion manufacturing complex and employ 13,000 people. Foxconn officials told Reuters last month that the costs of doing business in the U.S., particularly labor, could be prohibitively high. The company later appeared to walk back its statement, reiterating its commitment to Wisconsin, but ultimately left the nature of its planned investment, and the number of jobs it would generate, unspecified.

In New York City, also, the optics of giving money to a huge and successful business — while infrastructure like schools and subways are struggling financially — seems to have become a political third rail, with high-profile progressive politicians like freshman House Congress member Alexandria Ocasio-Cortez railing against the deal.

Nathan Jensen, a professor of government at the University of Texas at Austin who studies government economic development strategies, said the clandestine negotiation process that often is characteristic of these kinds of deals struck an especially sour note in New York.

“A secret deal isn’t a credible deal," he told NBC News. "The governor and mayor crafted an HQ2 deal without the input of the public or even local officials… New York is an exceptional place that has the ability to attract investment without incentives, a strong activist and labor network, and a city very concerned with housing costs."

Some even suggested that the recent high-profile failures of tax incentives to bring in promised investment and jobs could prompt a broader rethinking — and the conversation around Amazon’s feint in New York City could be an inflection point for how the tactic is perceived.

“We’re either in, or entering into, a different kind of moment in American politics,” Weaver said. “One gets the sense we might have reached the end of the road of cutting and cutting taxes for corporations… A lot will rest on the narrative that’s now written on whether this was a good thing or a bad thing for New York.”

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