The Downside of Winning the Amazon Race

Perhaps reflecting some dry humor (sorry), Tucson accompanied its bid for Amazon’s HQ2 with a 21-foot saguaro cactus.

Amazon’s reply:

Sadly, it didn’t work. Tucson was not among the 20 finalists. (Austin reputedly included the best BBQ in its pitch and it made it.)

This is the list. Amazon had received 238 bids:

So now the contest intensifies. New Jersey’s $7 billion tax incentive package might not be enough. The Columbus, Ohio bid included no property taxes for 15 years. Dallas’s mayor just promised to outbid everyone else.

At stake for Newark, NJ and others like it is the opportunity (described here) to jumpstart a struggling city. Yes?

Maybe not.

The Downside

Incentive packages to attract business investment sound exciting. They create more jobs, more spending, more demand at local businesses. Wisconsin got a Foxconn 20 million square foot factory.  Law and Order decided to film in NYC. BMW is building cars in South Carolina. Usually involving tax benefits and other inducements, each municipality presented an offer the business could not refuse.

Meanwhile, Amazon says it will build eight million square feet of office space and up to (a whopping) 50,000 full time jobs. The pay? Exceeding $100,000 a job. The jobs? Primarily in management, software development, and finance.

The problem though is that some of those 50,000 full time jobs might be filled by employees from Amazon’s headquarters–not the locals. And, more residents mean additional support services. You need more teachers and extra police, fire, garbage removal.

As for the tax incentives, that means less money to spend on education and infrastructure. Consequently, taxes could even rise for the locals or services diminish. Please think also about the local businesses that compete with Amazon. They would not be so happy having their tax dollars support it.

Our Bottom Line: TINSTAAFL

As economists, we always know that there is no such thing as a free lunch. We can ask whether the diminished money available for infrastructure and education would have been better for the economy than HQ2. Defined as the sacrificed alternative from a decision, the opportunity cost of winning the Amazon contest could be higher than we realize.

So maybe Tucson should be happy that the cactus did not win it for them.

My sources and more: This NY Times article is the perfect gateway to the negative side of attracting Amazon. Balancing the negative though, we have the finalists here and Newsweek had the “bizarre” bid examples.