Pedestrians walk on a plaza at Amazon's corporate headquarters. Credit: AP Photo/Ted S. Warren

The competition for Amazon’s second headquarters has gotten a lot of attention recently. And that makes sense. After all, cities have offered Amazon billions of dollars in tax incentives, free workforce training, and all sorts of other perks. Bloomington, Minnesota, even suggested building a monorail. But cities and states aren’t just trying to woo Amazon. They’re fighting over all sorts of corporations. And that might be a big mistake. Nathan Jensen, a professor at the University of Texas at Austin and co-author of Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain, explains what’s going on in the incentives arms race.

Three Takeaways

• Even if cities and states do attract corporations with subsidies, it often leads to the “winner’s curse.” Essentially, there might be some new jobs, but by giving massive tax abatements, Jensen says that “you’re cannibalizing your future tax base at a time when you have workers moving into town.” In the long run, it might not be worth it.
• And these subsidies can lead to some pretty outrageous situations. Jensen brings up a phenomenon known as the Kansas City border war, in which Kansas and Missouri have historically offered incentives for companies to move their businesses from Kansas City, MO to just over the state line in Kansas City, KS (or vice versa). This has led to a lot of corporations simply gaming the system, without a lot of profit to either city (same workers, same income, different commute).
• Jensen points out that, for corporations, considerations like human capital and location are much more important than even large subsidies. “We’re sometimes playing this really expensive game, that might not actually shift that much development,” Jensen says.

More reading 

• Here's some more info about one of the most famous corporate subsidies of recent years, the $7 million in grants and tax help that went to Carrier in Indiana. President Trump got involved, but many at Carrier were still laid off.
• Nathan Jensen outlines his objections to large-scale corporate subsidies in a New York Times op-ed.
• The Economist takes a deeper look at the Kansas City Border War.