Facing resistance from some New York residents and politicians, Amazon backed out of its planned second headquarters in Queens, spurning $3 billion in state and local subsidies that were quickly becoming controversial. The unexpected Valentine's Day announcement may have felt heartless, but in reality New York dodged a very expensive bullet.

New Yorkers were rightfully skeptical about wooing corporate giants with subsidies. These schemes don't pay for themselves.

Sure, politicians offer corporate tax breaks and other handouts all the time. Paying businesses to relocate and allegedly create local jobs is good politics, even if the facts tell us it isn't good economics. But the sheer size of the subsidies offered to Amazon made an already shaky policy potentially catastrophic.

Corporate handouts suffer from three fundamental problems.


Second, giving tax privileges to one company imposes costs on other businesses and residents. Locals must pay more for a given level of public services, face higher municipal debt, or accept an eventual reduction in public services.

The academic research on corporate subsidies generally finds that while they benefit the company on the receiving end — obviously — they don't improve community welfare. The social cost outweighs any new tax revenue.

New Yorkers are already speculating about how the money could be put to better use, although it's fair to say that much of the subsidy would have come out of future taxes paid by Amazon and its employees.

Our calculations show that the state's subsidy ($1.7 billion) could instead have funded 11,100 full-tuition scholarships at SUNY for 15 years or covered the entire cost of statewide highway maintenance for a year. New York City's subsidy ($1.3 billion) could instead have funded 240 additional police officers or paid for the cost of educating 1,400 public school students for 25 years.

Alternatively, the state could have reduced the corporate income tax for all businesses by 1.3 percent. That might not sound like much, but reducing taxes for every business is better for economic growth — and more democratic — than giving that entire benefit to a single company.



Economists call this kind of problem a "prisoner's dilemma." Nobel laureate Elinor Ostrom illustrated that mutual cooperation is the solution, but it requires clear lines of communication and credible commitments from all parties involved. New York Assembly member Ron Kim, D-Flushing, has joined others in calling for an interstate compact that forbids the use of public funds to privilege specific businesses. Rewriting the rules to compel politicians to treat every company equally offers one way out of this mess.

Losing HQ2 certainly stings, but it wasn't worth the exorbitant subsidies that politicians offered. New Yorkers deserve economic development that doesn't involve corporate handouts.

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