How Should Pennsylvania Attract Amazon?

Amazon has been dominating Pennsylvania business news since announcing its interest in creating a second U.S. headquarters (HQ2). Several regions of the state are expected to contend for this new project—and already folks are speculating as to what sort of tax credits or taxpayer funded-incentives it will take to attract the Fortune 500 company.

To be certain, this is a potentially huge opportunity. Amazon estimates that HQ2 will employ 50,000 workers. But the additional jobs would represent just a fraction of the state’s economy. In 2016, Pennsylvania employers added 1,098,783 jobs and saw 1,055,040 individuals leave employment (voluntarily or involuntarily)—for a net growth of 44,000.

Still, Pennsylvania should do everything it can to attract Amazon but not at the expense of the other million Pennsylvania businesses. Yes, adding 50,000 jobs at one location is crucial, but policymakers should consider the impact of special subsidies on the other million jobs created and destroyed every year.

Unfortunately, political incentives drive politicians to subsidize big projects and confer special treatment to big companies. What's the reason for this? Both provide ample opportunities for press releases, ribbon cuttings, and shovel ceremonies.

However, evidence shows that economic development subsidies undermine economic growth. Pennsylvania leads the nation in the total amount of economic incentives from 2007-2016, yet we lag the nation in job growth during that time

Why? The tax credits and subsidies Pennsylvania offers to big, politically connected corporations masks a bad tax climate that affects all businesses.

For starters, Pennsylvania’s corporate income tax is second highest top rate and highest starting rate among the 50 states. The United States has the highest corporate tax rate among OECD countries. In other words, Pennsylvania has the second highest corporate tax rate in the industrialized world.

Is it any wonder why Pennsylvania finds it difficult to attract companies?

At the same time Amazon is looking to Pennsylvania, Gov. Wolf and lawmakers have been batting around several tax ideas. Here are just a few:

A six percent tax on warehousing, proposed by Gov. Wolf, which would indirectly affect Amazon’s business model
Taxing marketplace sellers—small businesses that have no physical presence in Pennsylvania but use Amazon.com or eBay platforms to sell products
A five percent hotel tax on top of the current sales tax—a tax that would impose additional costs on out-of-state visitors, Pennsylvanians traveling within the state, and the Philadelphia and Pittsburgh travel industries

These proposals do not make Pennsylvania more attractive to companies like Amazon.

Rather than raising taxes and using subsidies to offset the added costs of taxes, lawmakers should fix the inhospitable tax climate, along with our regulatory and labor climate, to attract all types of companies and benefit all the other employers calling Pennsylvania home.