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The Wrong Kind of Jurisdictional Competition

Flickr / Scott Lewis

Amazon, like Apple, or Microsoft is not so much a brand as it is an American institution. It is at once America’s bookstore, retailer, grocer, and postman of choice. To date, it is only the second American company to be valued at over $1 trillion. It makes sense then, that Amazon’s announcement in September 2017 of its plans to build a second headquarters in North America instantly ignited a media firestorm.

What Amazon was offering was unprecedented. The new headquarters would eventually employ 50,000 workers, a “full equal” to their original headquarters in Seattle, bringing with it a windfall of $5 billion in construction costs alone for whichever city was fortunate enough to secure HQ2. The ideal city would be a metro area of at least one million with access to public transit as well as airports and major universities. Incentives, they added, would be “critical decision drivers.”

The public nature of Amazon’s announcement set the stage for a fierce competition of an almost religious nature between cities and states across Canada, the U.S., and Mexico to offer Amazon the most acceptable tributes, er, incentives — undoubtedly the precise outcome Amazon’s executives were hoping for. More savvy executives might have capitalized on the ensuing chaos, an Amazon Amazing Race of sorts for politicians eager to boost their re-election prospects by securing HQ2. But while bureaucrats at every level of government were working overtime to woo Amazon, economists almost in unison noted the “competition” for HQ2 was a sham, a transparent play by Amazon to seek free giveaways from the highest bidders, and a perversion of true jurisdictional competition.

Jurisdictional competition, plainly understood, is arbitrage applied to legal systems. Differing laws and regulations between cities and states allow individuals and firms a mechanism for exit, to vote with their feet or more often, their dollars. It’s why a disproportionate number of Fortune 500 companies are incorporated in Delaware and why former California residents are fleeing to Texas in droves. More expansive views of jurisdictional competition also account for city and state-level differences in the prevailing culture. Austin, TX, and Portland tout their weirdness, while Ave Maria, FL, and Lancaster, PA bill themselves as Benedict options of sorts for devout Catholics and Amish who wish to live and practice their faith alongside their co-religionists.

The link between political fragmentation and the competition it produces, and ensuing increases in both material standards of living and personal choice for citizens has been established by economists for centuries. Before Eric Jones argued that political fragmentation in Europe caused the continent’s economies to grow much more rapidly than Asia’s, Adam Smith noted that differing tax rates between regions would likely cause workers to abandon areas with burdensome taxes, moving instead to more favorable territories. Jurisdictional competition then, serves not only as an exit mechanism, but as a check on ambitious bureaucrats inclined to pass laws and regulations without fully considering their impact on the marginal citizen.

What the announcement of HQ2 produced among North American cities and states, large and small, can’t rightfully be labeled jurisdictional competition. While legal and economic reforms like adjusting sales or property tax rates impact most citizens of a particular jurisdiction, the benefits of tax breaks, subsidies, and other forms of favoritism are primarily enjoyed by the firms that seek them, while the costs are borne by taxpayers.

But while it would be incorrect to excuse Amazon’s role in igniting a race the bottom by cities and states to offer the company extravagant incentive packages, politicians bear the larger share of blame. The proposals from the 238 contenders ranged from mildly amusing to comically absurd. Sun Corridor, Tucson’s main economic development agency, sent Amazon a cactus, a fairly innocuous bribe. Birmingham set up truck-sized Amazon boxes downtown in the hopes that residents would share pictures of themselves with the boxes on social media. During a hockey match between the Vancouver Canucks and Ottawa Senators, Ottawa fans were implored to “Make Noise for Amazon,” ostensibly in the hopes that news of the cheering would get back to Amazon CEO Jeff Bezos.

Less amusing were the millions — billions even — offered to Amazon by city and state governments. Compared with Montgomery County, MD’s offer of $8.5 billion in tax incentives and infrastructure improvements, Raleigh, NC’s bid of $50 million seems downright modest. But both bids represent the abdication by governments of their responsibility to ensure a level playing field for all businesses. Amazon, of course, isn’t the first company to take advantage of politician’s preference for chasing shiny new objects over crafting boring, equally-applied laws and regulations for all citizens. Sports franchises and film studios have long enjoyed the benefits of politicians’ generosity with their constituents’ money. But in setting up HQ2 as a contest, Amazon encouraged the worst impulses of politicians to too easily part with taxpayers’ money in exchange for a set of promises which may or may not be fulfilled, a lesson that Wisconsin is currently learning in the wake of its much-maligned Foxconn deal.

And in the end, for all of the fanfare, the ridiculous and desperate pitches by governments and economic development agencies, Amazon appears to have chosen not one, but two locations for HQ2: New York City and Washington D.C., the frontrunners all along. Both are locations in which, coincidentally, Jeff Bezos maintains residences. A cynical person might deduce then, that it was always Amazon’s plan to split the headquarters, and the “competition” was chimerical, a ploy to extract the largest possible package of incentives from its new host cities.

What’s more, as Stacy Mitchell of the Institute for Local Self-Reliance points out, in their search for a new location for HQ2, Amazon secured not only massive tax incentives, but valuable information from cities and states about planned infrastructure expansions and policy proposals — information that is not readily available to the public. It’s likely that Amazon will use the data it collected to expand its market dominance as America’s preferred supplier of well, everything.

HQ2’s losers would be justified in feeling that even from the beginning of Amazon’s search the deck was stacked in favor of New York and D.C. They are the respectively the seats of finance and political power in the U.S., both obvious choices for the company. But city councils and state governments would do well not to dwell on the loss for too long, and instead pursue creative solutions to attract businesses and residents to their regions. As businesses become increasingly concentrated in America’s powerhouse cities, mid-size cities and smaller municipalities will never be able to compete at the level of Los Angeles, Chicago, and Boston if tax incentives are the primarily tool used by governments to lure companies.

Nor should they try to. The empirical literature on the effects of tax breaks and other subsidies to firms is at best, mixed. For a Cincinnati or a Colorado Springs a much better bet is to re-engage in jurisdictional competition. True, neither city is home to Wall Street or the federal government. Their best bet then, is to pursue competition with much larger cities at the margins on which they can actually compete: regulatory burdens, tax rates, and overall cost of living. Given that New Jersey consistently ranks among the worst states in which to do business, it’s no wonder the state government offered Amazon $6 billion in incentives. Austin city officials, by contrast, didn’t offer Amazon any financial incentives, instead touting Texas’ excellent business climate, proximity to the University of Texas, and Austin’s rapidly-expanding tech sector.

States, it is often, said are laboratories of democracy. So are cities, and local governments shouldn’t be afraid to lead by example and enact. meaningful regulatory and tax reforms. And with any luck, they’ll be able to stem the continued exodus of American enterprise to our largest cities.

Some smaller and mid-size cities have already found success with this approach. Access to major research facilities, friendly business environments for new and small businesses, and attractive housing costs catalyzed the rapid growth of cities like Raleigh, Knoxville, TN, Oklahoma City, and Kansas City, MO. And with increasingly reliable, diverse modes of transport, a distinct sense of place that can be difficult to come by in megacities, and growing efforts by local governments to develop, attract, and retain young talent, it’s no wonder that last year Columbia, SC, Minneapolis, MN, and Jacksonville, Florida experienced some of the highest rates of millennial net migration in 2016. There’s no reason why state and local governments are savvy enough, mini Silicon Valleys and Research Triangles couldn’t sprout up across the United States.

Cities and states already possess the tools to encourage long-term growth and sustainability in their regions. The gains from corporate giveaways, assuming they actually materialize, are temporary. Amazon’s new headquarters in New York and D.C. will join the ranks of businesses before them that received massive subsidies — companies that like Amazon, likely would have settled there anyway. Imagine if instead of competing to offer businesses ever-increasing sums of taxpayer dollars, cities competed to reform the greatest number burdensome, unclear regulations, and engaged in meaningful tax competition. That scenario heralds a future in which Salt Lake City, Savannah, and Fort Worth are discussed in the same breath as their larger counterparts.

Tamara Winter is operations lead at the Center for Innovative Governance Research. Follow her on Twitter.