Cities Offer Amazon Dangerous Incentives

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  November 29, 2017

Cities Offer Amazon Dangerous Incentives

Amazon has received 238 bids from North American cities vying to host its new headquarters, and some are offering the company extreme incentives that undermine democracy, says economist Dean Baker
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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being "Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer".


AARON MATÉ: It's The Real News. I'm Aaron Maté. Amazon is taking bids from North American cities, vying to host its second global headquarters, known as HQ2. Amazon says it will invest $5 billion and bring up to 50,000 jobs to the winning bidder. The company has received 238 proposals so far. Now comes the first look at what some of these contenders are preparing to give up. This week, Danny Westneat, of the Seattle Times, reviewed the proposals that have been publicly released so far and he found some great deals for Amazon.

Chicago, for example, says it will give Amazon the income taxes paid by its employees. Boston has offered Amazon a task force of city employees working on the company's behalf. Joining me to discuss all this is Dean Baker, co-director of the Center for Economic and Policy Research. Welcome Dean. I want to start with more from what this reporter for the Seattle Times wrote. He says, "There's rising worry that corporations are taking over America, but after reviewing a slew of the bids by cities and states, wooing Amazon's massive second headquarters, I don't think takeover quite captures what's going on. More like surrender."

Your thoughts, Dean, on what these cities are preparing to g ive up to entice Amazon to move there.

DEAN BAKER: I think this raises huge concerns that you have Chicago promising to refund the income taxes that their workers pay. It said, "One positive is I guess they won't hire contract workers then since then they won't get the money refunded." Boston's proposing to have a task force working alongside Amazon. Some of the other cities were designating city employees to Amazon. This isn't the way our government should be run and I have to say I'm especially outraged that it's Amazon, because Amazon's a company that made itself into the huge Goliath it is by not collecting the same sales taxes that brick and mortar stores, family stores, had to collect. There was no rationale for it, but that was hugely important in Amazon's growth and turning it into the giant it is.

This is not the way to run government. Obviously Amazon's going to be a pace-setter this way, so if they get away with this and get a really good deal, which I'm sure they will, other companies are going to follow the same path.

AARON MATÉ: One of the bidders is offering Amazon to transform how their government is run by basically giving Amazon the reins. Fresno, California promises to funnel 85% of all fees and taxes generated by Amazon into a special fund and then Amazon could have its officials, its employees, sit on a board that then controls how that money is spent. Any project that is funded by Amazon gets to have a stamp on it and a sign on it saying, "Made possible by Amazon."

DEAN BAKER: Yeah, I mean this is the sort of thing as I said, you're going to see a lot more of it. The incentives for politicians are very much in this direction because whoever gets this no doubt it's going to be a big political event, and they'll have Jeff Bezos, the president of Amazon, will be down there and they'll all be celebrating and talk about the jobs. Even if we know the terms, it won't be aware to the public. In other words the public won't fully feel the impact for years, maybe not even decades later, till they realize, oh, wait a second. We told Amazon they get to do what they want with our city or county or whatever the entity is.

It's classic bad government. There actually is an easy regress for it. If Congress were just to pass a law that said that states and cities can't make industry specific deals, so if a city wants to have lower taxes, they could do that. If states want to have lower taxes they could do that. If they build up their infrastructure, they could do that. Improve their education. They could do things like that to try to attract business, but they can't tell Amazon, "Oh we're going to give you a special deal." That wouldn't be hard to legislate, but unfortunately I don't think our current Congress is going in that direction.

AARON MATÉ: Dean, you mentioned how Amazon was able to build its empire through avoiding taxes that other businesses were forced to pay. Can you explain how they did that and other perhaps novel tactics that Amazon has used to become so powerful?

DEAN BAKER: Well, this was a loophole in the tax code that was there from like 1990. It applied to mail-order houses and basically a Supreme Court ruling said that states couldn't make out-of-state retailers pay tax, so they're talking about mail-order outfits that they couldn't make them, I should say, collect the sales tax. When you and I buy a table, a chair, something at a store, in principle we're paying the sales tax. The store is collecting it for the government.

The state government, city government, requires retailers in their jurisdiction to collect that sales tax but it's you or I as the consumer that in principle owes it. Now the Supreme Court said that for mail-order houses they couldn't do that because they were out of state. They couldn't make that requirement. It didn't matter that much. Maybe they should have made mail-order houses do it, but it didn't matter that much because it was a relatively small share of the retail market. Suddenly when you had the Internet that became a huge share of the retail market and Amazon, of course, was the biggest actor.

In effect, it meant that there was an enormous subsidy, because in many states the sales tax is six, seven, even eight percent. If you don't have to collect that sales tax, and your competitors do, they're at an enormous disadvantage. That was a huge factor in Amazon's growth because they were able to offer prices that were in effect five, six, seven percent lower simply because they weren't collecting the sales tax, so naturally they gained enormous market share at the expense of their brick and mortar competitors.

Now to be fair to Jeff Bezos and Amazon, all Internet retailers had that advantage. They were the ones that were able to fully exploit it, which says, obviously they had a better business model than their competitors, but nonetheless, if they were subject to the same sales tax requirement as brick and mortar stores, and I could think of absolutely no policy reason why they shouldn't be, they wouldn't have grown as rapidly as they did.

AARON MATÉ: One analog that comes to mind here Dean, and I'm sure, I think I saw this pointed out somewhere else, is sports stadiums. Basically these teams threatening cities to move unless they're given massive public funding to build sports stadiums where the profits ultimately go to the owners and the businesses that profit from the operations of the stadiums.

DEAN BAKER: There it's the same sort of thing. Perhaps even more so, because obviously sport teams are very visible. Everyone knows who their football team or baseball or basketball team are, so it's very visible when you can say, "Oh we brought a sports team in or we kept them." Invariably they get large subsidies from the cities and usually it's supported with very hokey analysis. I've seen some of these where they say, "Oh look. There'll be all these people that are going to be buying dinners and other businesses that will benefit because you have the sport's stadium." The flaw in those studies is it implicitly assumes that no one ever goes out if they don't go and watch the team.

They're saying, "Oh someone goes to a basketball game and then they get dinner beforehand or afterwards, so look at all that extra business we brought." Well, most of those people, maybe not all of them, but most of them, if they didn't go to the sports game they'd have gone to see a movie and they'd have bought a dinner, so if you did an honest assessment, you look at that and the net effect of having the sports team is almost always very small, which means that basically you're giving this huge subsidy for nothing.

AARON MATÉ: Right. Finally Dean, I want to get your thoughts on what this case of Amazon and the great lengths to which cities are going to entice it to move there says about our current corporatist capitalist system where, it puts everyone in a weird position because on the one hand you don't want to oppose something that's going to bring jobs to places. Everywhere across the country needs jobs. That's obvious in this economy.

At the same time though, you know, it's fair to be concerned about giving up control of civic democracy to a massive corporation like Amazon, as evidenced by the fact that you have Fresno, as I mentioned earlier, basically offering Amazon a seat in city hall.

DEAN BAKER: The ultimate answer, as I said, I think laws and federal legislation where you ban industry specific incentives, but since that's not going to happen anytime soon, states can preempt cities. California, where you actually do have a relatively progressive governor, legislature, they could tell Fresno, "Well that's nice you want to put on this little show for Amazon, but that's not in your legal authority. You can't do that. If you want to offer general tax incentives, go ahead and do it. If you want to do infrastructure for business in general, go ahead and do it. You don't get to do it for Amazon."

AARON MATÉ: We'll leave it there. Dean Baker, co-director of the Center for Economic and Policy Research. Thank you.

DEAN BAKER: Thanks a lot for having me on.

AARON MATÉ: Thank you for joining us on The Real News.


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