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Sorry, Not Sorry: Chicago Dodges Another Bullet with Amazon HQ2

Professor Anthony Krautmann  /  11/16/2018  /   / Twitter / Facebook /  

Professor Anthony Krautmann

Amazon recently announced the “winning” cities in the HQ2 lottery.  Amazon decided to locate two headquarters — one in New York City and another in Northern Virginia (as well as a distribution center in Nashville).  Chicago made it to the finalist pool, but eventually lost out to those Eastern cities.  This is the second time in the past decade that Chicago has been passed over in its bid for a major economic event.  In 2009, then-Mayor Richard M. Daley led a group of businessmen and civic leaders in a bid to host the 2016 Summer Games.  The International Olympic Committee (IOC) ended up choosing Rio de Janeiro.

What is common is both of these failed bids? It appears that Chicago dodged a bullet in both cases. Take Chicago’s failed Olympic bid. The average cost for hosting the past six Olympics is more than $21 billion (dominated by Beijing at $40 billion and Sochi at $51 billion). Chicago’s bid was estimated to cost more than $5 billion. The 2016 Games, ultimately held in Rio de Janeiro, cost that city $13 billion, along with promises of infrastructure improvements, like cleaning up the Guanabara Bay (where the sailing and windsurfing competitions were held).  Raw sewage continues to be dumped into the Bay to this day.

Not surprisingly, the number of bids for future Olympic Games is falling quickly. There were 12 bids for the 2004 games, while only two bids for the 2022 Winter Games and two bids for the 2024 Summer Games. Why the sudden lack of interest in hosting the games? First, the games are expensive and cost much more than originally estimated.  While the Chicago bid was estimated to cost more than$5 billion, no Olympic Games since 1960 has come in under budget. Aside from cost overruns, the facilities are typically useless after the games, and very expensive to retrofit afterward to make them useful. The Chicago plan was to build a temporary 80,000-seat Olympic Stadium costing $366 million in Washington Park, which would then be torn down after the games and transformed into a 5,000-seat amphitheater (at a cost of an additional $50 million). The new Olympic stadium for the 2018 Games in Pyeonchang, South Korea will cost the city $109 million – yet it will be demolished shortly after the games as there is no need for a 35,000-seat stadium.

The more recent Chicago dodge is the Amazon HQ2 fiasco. Chicago was reported to have offered Amazon more than $2 billion in incentives. Amazon will receive $2.4 billion in tax incentives from Virginia, New York and Tennessee. New York paid the greatest amount — $1.5 billion, or $48,000 per new job promised; Virginia paid an additional $800 million, or $22,000 per new job. Stephen Moret, director of Virginia Economic Development Partnership, argued that the Virginia subsidy is more than worthwhile because the state will net $3.2 billion during the next 20 years. New York Governor Andrew Cuomo is even more optimistic — he argued that the state would net $27 billion during the next two decades. While tax incentives are an important factor in the Amazon decision, other factors clearly played a role in Amazon’s decision. For instance, Maryland reportedly offered Amazon $8.5 billion, while New Jersey offered more than $7 billion.  Amazon pointed to the quality of the labor force, the transportation system, and the cultural appeal of the chosen cities as equally important.

If Chicago had won the lottery, Amazon promised Chicago would gain 50,000 high-paying jobs. But what price would Illinois taxpayers pay for this promise?  If history is any guide, one can expect that the benefits will not come in as high as promised/estimated. Most economic studies of the costs-benefits of large economic events promise a huge net benefit ex ante, but show a huge taxpayer burden ex post. Jared Walczak, senior policy analyst at the Tax Foundation, argues that “residents and local businesses would benefit more from tax reform (cuts) than huge tax breaks for individual companies.” For example, Boeing received $8.7 billion in tax incentives from the state of Washington in 2013, but still lost 22,000 jobs when Boeing moved its headquarters to Chicago. North Carolina paid $240 million in 2004 for Dell Computer to open a plant in their state; less than five years later, Dell closed the facility. According to Good Jobs First, a national policy resource center in Washington, D.C., there have been more than 400 domestic mega deals (i.e., incentive packages greater than $50 million to entice business location decisions). Good Jobs First goes on to document that  during the past decade, Amazon has procured more than $1.5 billion from state and local economic subsidies for its warehouses, data centers and film productions. 

State and local politicians are more than happy to dote on companies like Amazon because then they can claim credit for creating jobs. Yet a study by the Upjohn Institute for Employment Research found that “incentive deals did not correlate with current or past unemployment or income levels, or with future economic growth.” These deals rarely live up to their hype, and typically come at a very large cost per job created. Finally, the tax-incentive game is inherently unfair to existing businesses in the subsidizing state. For example, Michigan spends about the same amount in tax incentives as it receives in corporate taxes — meaning that the existing businesses are ultimately underwriting the subsidized firms.

So, did Chicago taxpayers miss out on a once-in-a-lifetime economic jackpot? Or did taxpayers dodge an economic bullet? Sorry, not sorry!