When Should The Incentives Stop?

Most cities use tax incentives and tax breaks as inducements to development of depressed areas, to lure businesses considering relocation, and to promote other activities that are viewed as economically or culturally positive for their communities.

Cities try to be judicious and targeted in providing the incentives, but of course there’s no certainty in predicting how economic and cultural forces will play out.  Sometimes the incentive plans work and produce the hoped-for benefits, and sometimes they don’t.

608d7dbd-7704-4938-b6cb-ef2a77673a8eRichard recently wrote an interesting article about one aspect of tax incentives:  if they are successful and work as intended, when should they end?  The subject of the article is the Pearl Brewery area in San Antonio — which, by any measure, has been a fabulously successful use of tax incentives.  The incentives have helped to turn what was once a blighted area into a kind of tourist attraction with fine restaurants, pubs, office space, hotels and apartments.  When Kish and I have visited San Antonio we’ve gone to the Pearl area, and it’s hard to imagine it once was a depressed area.  Most cities would love to have a place like the Pearl Brewery District.

And the Pearl Brewery development has produced more tax revenue for the city:  property taxes for the area were $144,000 in 2003, when the development started, this year, tax revenues hit $6.7 million, of which $783,000 was refunded by the city under the tax rebate agreement.  It’s a classic example of how tax incentives are supposed to work.

Now, San Antonio is trying to decide whether the Pearl Brewery District is successful enough, and mature enough, to stand on its own without the incentives.  Some people in the city say that, with the Pearl having become a high-end, expensive area, the subsidies should stop and development efforts should start to focus on other parts of San Antonio.  The Pearl area developers, on the other hand, say that the tax incentives remain essential if the area is to reach even greater heights — with more jobs, more construction, and ultimately more tax revenue.

It’s a tough call — but it’s also a problem that a lot of other cities would like to have.

Amazon Primed

Amazon — that massive, gushing river of deliveries that has fundamentally and forever changed the modern retail business — has announced that it is looking to build a second corporate headquarters somewhere in North America.  Cities like Columbus are jockeying for position and hoping that they get picked to host the Amazonians.

amazonLanding Amazon and its “HQ2” has got to be tempting for just about any city.  You can look at what Amazon has done for Seattle, where its corporate headquarters is located, and see what having Amazon might mean.  Amazon employs 40,000 people on its Seattle campus, it uses an enormous chunk of the available Seattle commercial real estate, and it calculates that, since 2010, it has contributed $38 billion to the Seattle economy.  The proposed “HQ2” is being presented as a similarly enticing proposition for job-hungry municipalities.  It is supposed to create as many as 50,000 jobs paying an average of $100,000, and also produce $5 billion in capital investment in the first 15 years.

As Seattle’s experience demonstrates, these don’t appear to be pie in the sky numbers.  Instead, Amazon has a proven track record of doing what every city wants from a leading corporate citizen — it creates good jobs that are filled by people who pay their taxes and it injects money into the area, which in turn creates jobs at the companies that provide the services that Amazon and its employees need.  Sure, there might be some drawbacks — Seattle real estate has become pretty expensive — but most cities would gladly accept that problem in order to tap into the Amazon river of tax revenue.

Amazon has released a list of detailed criteria that will be applied in its search for the right location for HQ2.  It’s looking for a metropolitan area of at least 1 million people, close to an international airport, with good roads, schools, and mass transit.  Oh, and it also needs up to 8 million square feet of office space.  And the modern world being what it is, we can expect Amazon to look for competing cities to produce packages of tax incentives, tax deferrals, and available development funds designed to entice Amazon as it makes its choice.

Columbus, where several Amazon data and distribution centers have located in recent years, is expected to compete for the prize, and Richard has written about San Antonio’s hope that it wins the crown.   We can expect the big boys, like Chicago and Dallas, to put in significant bids, and struggling cities like Detroit would no doubt see the Amazon initiative as a chance to really turn things around.  And don’t forget that Canada is part of North America; Toronto is said to be interested, too.  In all, about 50 metropolitan areas meet the 1 million population cut-off and would be in a position to compete for the prize.  Bids are due by October 19.

Hey, Amazon!  Come to Columbus!  You’d like it here!

Volt Buying

Recent car-buying statistics tell a sobering tale about car sales.  The federal government has purchased 25 percent of the Chevy and Ford hybrids that have been sold since President Obama took office — at least 14,584 hybrids in the last two years.  Auto manufacturers no doubt are happy about the government’s decisions, because consumer demand for the vehicles is falling — for the third year in a row.

In the meantime, the government has committed to buy the first 100 Chevy Volts that roll off the assembly line.  Who else is buying the Volt?  GE, for one.  It can’t resist the chance to get a $7,500 per vehicle rebate, funded by the federal government.  Other big corporations that have corporate fleets are expected to follow suit.

Whatever you think of the merits of a Volt (and the car is viewed by some as too expensive, too small, and too limited in its range, among other issues) it is just wrong for the government to subsidize the sale of particular cars — especially when the cars are built by a manufacturer that is largely owned by the government.  In this instance, the subsidies also are benefiting large corporations like GE that don’t need taxpayer assistance, and will allow them to curry favor with the Obama Administration and its “green initiatives” at a discount.  GE is making billions of dollars in profits.  Why are taxpayers helping GE buy cars?  And shouldn’t the Chevy Volt succeed or fail on its own merits?  Why should the federal government subsidize a car that could turn out to be a lemon?