Last week’s news that Amazon had chosen Long Island City to build their new headquarters was initially met with excitement, then concern and now outrage, as voices on both sides of the political aisle have condemned the massive tax incentives that the city and state of New York have offered to Amazon to entice them.
It is a rare issue that seems to have even united such polar opposites as Alexandria Ocasio-Cortez and Tucker Carlson. Yet, it seems that all these detractors have completely missed the point.
States and municipalities are in a competition to attract businesses. Businesses create jobs, support other local businesses, and increase tax revenue.
Amazon is expected to create 25,000 jobs, but the reality is that they will support many more because Amazon is not a closed ecosystem. Both the company and the 25,000 new employees will rely on other local businesses for any number of services which will result in their growth as well. For example, those 25,000 new employees will eat lunch most days in local restaurants or delis who will, in turn, hire more employees. In addition to the 25,000 new Amazon jobs, there will be countless additional new jobs created for the supporting industries. Creating all of these new jobs is good for New York City, with a current unemployment rate of 4.0 percent, higher than the national average of 3.6 percent.
One of the reasons why New York City’s employment rate lags behind the national average is because of the high cost of doing business in the city. Virtually every expense is higher in the city than the rest of the country — rent, transportation, parking, construction, food, insurance, and the list goes on and on. For many businesses, these are outweighed by the benefits of being in New York — higher customer volume, higher retail prices, access to certain markets, but for a nationwide online retailer, none of these benefits apply. Internet-based retail companies are better off building their warehouses in places like Savannah or Salt Lake City. So, how could New York ever attract a company like Amazon? Tax benefits.
Only a very small portion of the tax code dictates how much tax must be paid, whereas the vast remainder lists various deductions and other methods of lowering your tax liability.
CPA Tom Wheelright is known for his theory that the government uses these tax breaks as incentives for the taxpayer to do what the government believes will benefit society.
For example, real estate developers get a tax incentive for making a portion of their building projects for low income housing. It’s more cost effective for the government to give this incentive to real estate developers than for the government to use taxpayer dollars to build the low-income housing itself. It is a win-win, as the developer saves money on taxes and the government gets low income housing built without having to spend any taxpayer funds. This same principle applies to almost every tax break in the book. You’re getting the tax break because you decided to do something that either benefits the government or society.
The idea of negotiating tax incentives with the government is nothing new.
When Donald Trump was building his real estate empire, he would identify promising, but condemned buildings, purchase them very inexpensively, while negotiating with the (Democratic) mayor’s office to agree to a property tax break in exchange for renovating these urban blights. The results of the tax incentives that Mayor Koch gave to Trump was a significant positive alteration in the Manhattan landscape, resulting in significantly increased tax revenue to the city.
Applying this theory, the city and state have combined to offer up to $3 billion in tax incentives to Amazon. Though, to be clear, only a small portion of these incentives are actual cash that the government will be investing in building infrastructure. Most of these incentives are reductions in the taxes that Amazon would otherwise pay. It’s a $3 billion discount on the much larger tax revenue that New York expects to collect from Amazon. Obviously, if Amazon had chosen to build elsewhere, New York would get zero tax revenue from this project. Add on top of that the increased revenue that the city and state will receive from the taxes paid by the employees and supporting industries, and the government will make a nice profit.
So, when Ms. Ocasio-Cortez complains that the $3 billion tax incentives would be better spent on crumbling infrastructure, this demonstrates both a flawed understanding of how tax incentives work and, perhaps unwittingly, advocates against a plan that will result in tax revenues that can be used to repair infrastructure.
Tax incentives are a potent tool that governments can use to attract and form partnerships with businesses to improve the local community. It is shortsighted to focus only on the difference between the taxes that Amazon will pay and what they would have paid, if there was no incentive. Instead, we should focus on the jobs, infrastructure, and total tax revenue that will be generated by having Amazon in New York.
Timothy Parlatore is a Navy veteran and prominent trial attorney. He is a graduate of the U.S. Naval Academy, he served as a Surface Warfare Officer and deployed twice in support of Operation Enduring Freedom. He later commanded a Naval Security Forces detachment and worked as an admissions liaison officer for the U.S. Naval Academy. He is the Founder and Managing Partner of the Parlatore Law Group and his legal practice focuses on constitutional issues, white collar investigations and defense, as well as complex civil litigation. He has tried several high-profile cases in New York City and now represents clients in jurisdictions across the country. He brings a unique perspective to issues that is a blend of his experiences as a military officer and a constitutional lawyer, always guided by his oath to support and defend the Constitution. To read more of his reports — Click Here Now.
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