After Amazon pulls plug on NYC HQ, some call for end to interstate tax competition; that would be a mistake.

After Amazon chose to abandon its proposed headquarters expansion in New York City, there has been a predictable rush to learn lessons and identify opportunities from the experience. The Seattle Times editorial board writes,

Washington should benefit because the Puget Sound region, Amazon’s primary headquarters, is well positioned to absorb a share of growth that won’t happen in New York.

Many thousands of new jobs and potentially billions of tax dollars to fund more schools, parks and transportation are at stake.

Once again, this opportunity is Washington’s to lose.

…Basically the competition for Amazon’s future job growth is back to where it was in 2016, before the HQ2 search kicked off a bidding war between locales desperate for the type of economic growth Seattle saw over the last five years.

In this competition, the Puget Sound region should fare well, as long as politicians don’t further poison the well.

The editorial points out the importance of “Improving the business climate, and reducing hostility to job creators.” In other words, recognizing the reality of competition and making the adjustments required to compete successfully.

That’s the right lesson. Taxation is part of the business climate reality. Governing magazine reports that some political figures are drawing a different lesson.

…the End Corporate Welfare Act is circulating in several states, including New York. The bill would essentially call a cease-fire on awarding tax incentives to certain companies by creating an interstate compact of states that agree to end the practice…

Connecticut state Rep. Josh Elliott, who is behind an effort to put forward a committee bill in Hartford, acknowledges that gaining national traction among states for banning company-specific tax credits is something that will take a decade or more. Of particular concern for a small state like Connecticut is whether such a pact would really work for the state unless all states in the Northeast are members.

“I think something like this has a 10- to 15-year window to become reality, and that might have to happen federally,” Elliott says.

This isn’t new, though the Amazon HQ search has provided new impetus to the efforts. CityLab last year reviewed the “legal case against bidding wars.” In late 2017, as the HQ hunt was beginning, Geek Wire reported on the “race to the bottom” concerns associated with such competition. A very wonky article by Federal Reserve Bank of San Francisco economists effectively challenges the concern.

U.S. states provide an ideal laboratory for investigating the determination of capital tax rates and the role of tax competition because, while states have much latitude for setting their own capital tax policies and do, in fact, set widely varying tax policies, they share many important institutional and environmental factors in common…

Viewed from a variety of perspectives, state capital taxation has changed greatly in recent years and has become more “business friendly.” These aggregate movements, buttressed with anecdotal observations and past empirical studies, suggest to many observers that states are engaged in a “race to the bottom.”

The empirical results in this paper challenge that conclusion.

It’s a complicated analysis; we won’t try to distill it. But we will share a conclusion from the report.

An important implication of this result is that calls for legislative, judicial, or regulatory actions aimed at restricting tax competition as a means of stemming the fall in state capital tax revenue or the mobility of capital are likely misguided.

Tax policy plays a role in legitimate interstate competition for economic growth and development, in attracting jobs and investment, and in demonstrating what works. As the Washington Research Council as written, our state’s tax policies have been important to stimulating economic vitality here. The Association of Washington Business recently wrote,

Despite claims to the contrary from some legislators and interest groups, the truth is that Washington state’s tax system has contributed to the state’s run of economic growth.

In our original foundation report, we said,

In a connected world, capital flows to where it can most economically be deployed. Other states and nations are aggressively recruiting Washington employers, seeking to entice them with incentive packages, lower operating costs, a lighter regulatory burden, and the promise of a more business-friendly culture.

To expand opportunities for those living and working in Washington, state policymakers must create an investment climate that encourages and rewards innovation and risk-taking.

Examples of successful tax policies to promote industry growth include incentives for data centers, R&D, and aerospace. Washington, with a relatively high overall business tax burden, has good procedures in place for assuring accountability and transparency in tax policy. 

As the ST editorial pointed out, the lesson to be learned is to “improve the business climate.” There’s no race to the bottom in tax policy. Rather, we’re seeing fifty states and countless cities race to secure investment and employment, a competition that keeps all players at their best.