Amazon announced last week that it has narrowed its search for a new headquarters, dubbed HQ2, to 20 cities, down from 238. That sent economic development efforts into overdrive. In Maryland, Gov. Larry Hogan is proposing a $5 billion incentive package in an attempt to lure the headquarters, with its estimated 50,000 jobs, to Montgomery County. Chicago is offering $2 billion, but says it could go higher.
In Texas, Dallas and Austin made the cut. Neither city is offering incentives — yet. Instead, both cities are touting their business climates and their high-quality workforces.
And that’s the right approach. Luring companies with tax breaks, loan guarantees, and even grants is bad public policy. What Austin can do, and should do, is ask itself whether high property taxes and excessive regulation make the city less welcoming to new firms and new residents. By committing to the "Texas Model" — lower taxes, less regulation, and more freedom — Austin can fully compete with the other cities on Amazon’s list.
Local officials love property tax abatements as a tool for economic development. Abatements allow officials to offer a temporary tax exemption on all or part of a property owner’s increased value. That benefits the property owner — usually a new business or an existing business that’s expanding — but it comes at the expense of everyone else.
While the recipient of the tax abatement agreement gets a lower tax bill, for a short while at least, everyone else is carrying the cost of additional city services. And when that includes infrastructure — water, wastewater, roads, and sidewalks, for example — that can easily mean higher property taxes for the rest of us.
But on a broader scale, city officials should be leery of government incentives, because those policies encourage unfair competition. Remember, government doesn’t have any money of its own. All of the public tax dollars that officials use to incentivize economic growth must be collected from those already paying taxes.
And often, that means taxing existing businesses to pay for a tax break for a new business — one that might compete for customers, for workers, and for market share.
That’s not a level playing field, especially for the small businesses and entrepreneurs that might already be struggling.
Put simply, government is no good at picking winners and losers. And trying to do so just distorts the market. Often, money and resources are shifted from productive hands into those that are less productive, but more politically connected. This isn’t healthy.
And don’t forget that those tax abatements are temporary. Amazon’s accountants are not just looking at the incentive packages. They’re also looking at the tax rates and the business atmosphere that will be in place once the abatements go away.
And here’s where the Texas Model comes in.
Amazon says that one of its key preferences for any new location is “a stable and business-friendly environment.” That means a commitment from local officials not to a package of tax breaks and handouts, but an adherence to free-market principles that ensure low taxes and predictable regulations.
Elements of this could include limiting yearly property tax increases; easing land-use restrictions to increase housing stock; eliminating unfriendly regulations; relaxing building-code requirements; and generally reducing the cost of city government.
This works. For more than a decade, the state of Texas has enacted just this sort of framework. As a result, it’s been transformed into America’s economic engine.
Of course cities want Amazon’s new HQ2, but it’s important that they go about luring it in the right way. They must avoid getting tangled in costly economic development deals and instead put forth a compelling citywide agenda that helps foster a competitive business climate.
Then, even if Amazon declines a city’s invitation, that city will have started to create the kind of stable and business-friendly environment that others will find irresistible.
James Quintero leads the Think Local Liberty project at the Texas Public Policy Foundation.
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