Are Incentives to Lure New Businesses Fair?

(Image credit: 2017 Getty Images)

Q. I read that communities in 54 states and territories (including a few in Canada and Mexico) are vying to be the site of Amazon.com’s second headquarters, offering lavish tax breaks, up-front grants and free land to entice the Seattle-based retailer. I own a small but growing business in one of these cities, and although it’s no Amazon, I’d love—but am not likely to get—the same deal. Am I being reasonable in feeling a little resentful?

A. Yes, you are, and local officials should listen carefully to this frequent complaint from established businesses that see financial incentives showered only on newcomers.

Amazon or any other firm considering a new location should base its decision not on the freebies it can demand for itself alone, but on the general business climate of a state—a climate in which all businesses, existing and newly arrived, can thrive.

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That means a climate of low-to-moderate corporate taxes (on earnings, inventory, property and so on) and workers’ compensation costs, flexible labor laws, plus easy and speedy permitting. Thinking of its employees, a business should consider the total tax burden on their personal income and estates, too.

As for the local officials trying to lure a new business, they shouldn’t offer anything to the new arrival that they aren’t willing to offer their current businesses. Job growth and spending at an existing firm should be worth just as much in incentives as new jobs and capital investment brought in from outside. Shown proof of those new hires and capital spending, the local taxing authority can simply rebate to the growing business some of the taxes it paid the year before. Is the city offering free public land to a relocater? If so, why shouldn’t it offer the same deal to a local business that needs to expand its site, perhaps at a municipal office park or incubator?

And every incentive deal, whether to an established business or a newcomer, should include enforceable methods for recapturing public funds in the event that the promised job creation doesn’t pan out.

Have a money-and-ethics question you'd like answered in this column? Write to editor in chief Knight Kiplinger at ethics@kiplinger.com.

Knight came to Kiplinger in 1983, after 13 years in daily newspaper journalism, the last six as Washington bureau chief of the Ottaway Newspapers division of Dow Jones. A frequent speaker before business audiences, he has appeared on NPR, CNN, Fox and CNBC, among other networks. Knight contributes to the weekly Kiplinger Letter.