IT Industry Subsidies: Ending the Race to the Bottom

In September 2017, Amazon let it be known that they will accept bids to house their second global headquarters, called HQ2. They dangled the sweetest of carrots: the chosen city will get “50,000 jobs and a $5b investment.”

Amazon humblebrags

In a euphemistic turn of phrase, the bid document requested details of the “business-friendly environment and tax structure” bidders would provide. They also made several other exacting demands: proximity to highways, airports and universities, onsite access to mass transit, insulation from extreme weather events etc.

An unseemly spectacle followed.

Three giant replicas of shipping boxes woo Amazon. Source: City of Birmingham, AL.

Cities across America have been falling over themselves to show why they should be chosen. There have been numerous gimmicks to catch Amazon’s eye. Public officials have been acting like court jesters to impress them: Kansas City’s mayor is reviewing 1,000 Amazon products to get on its radar.

Emperor Jeff Bezos, the world’s third richest man, must be laughing his head off.

Jeff Bezos of Amazon. If you held 238 cities to ransom, you’d be laughing too.

Amazon are doing everything to further the hysteria. Yesterday, they humblebragged that an astonishing 238 cities had submitted proposals. They may also keep the cities guessing before the winner of the bidding war is announced. Possibly to remove any lingering doubts about who is boss. Or may be simply because they can.

Winner’s curse

It’s a profoundly unequal fight: there is only one Amazon, but each city competes with 237 others. Amazon can pick the city most plaint to their demands. They’re certainly not lacking in choice:

• Chicago is offering to redirect income taxes incurred by Amazon employees back to Amazon. The result would be more than a billion dollars unavailable for schools, roads etc.
• New Jersey is offering sops of about $7b.
• Fresno, California would let 85% of Amazon’s taxes go towards projects of Amazon’s choosing, advertised with a shiny, “This project brought to you by Amazon” label.
• Stonecrest, Georgia has made a symbolic surrender of land, offering to re-christen a 345-acre neighborhood “Amazon, Georgia”.
• Chula Vista, California has made a more tangible surrender of land. Its bid included a plot worth $100 million, and plans to defer $300 million of property taxes.

Preposterous giveaways aside, it’s not even clear that the winning city will benefit all that much. Seattle, the company’s first headquarters, has long suffered the ‘Amazon effect’: spiralling housing costs, worsening traffic jams and the specter of income inequality. In the words of Seattle city council member Kshama Sawant, “Amazon isn’t a tide that lifts all boats.”

A blank cheque

The “winning” city will have such low bargaining power with Amazon that it simply cannot hold them accountable. That was certainly the case when Taiwanese hardware giant Foxconn chose Wisconsin to host their $10b manufacturing plant. Along with giving financial incentives, Wisconsin rolled back many environmental protections, including letting Foxconn “discharge materials into wetlands, fill lakebeds to create more land and reroute streams without obtaining permits.” In other words, they may do as they please.

By that evidence, Amazon can expect to go completely unchallenged by their new host. They can carry on their merry ways, paying infamously low corporate taxes and brutalising low-wage workers.

IT industry subsidies in India

While Amazon has taken this power game with governments to spectacular levels, they are by no means pioneers. Indian IT firms are the past masters. For decades, they have played states off against each other, and essentially got Governments to fund their expansion plans.

The playbook is similar to Amazon’s. When an Indian IT firm wants to expand operations, they shop around with aggressive intent. Which state is willing to gift them acres of prime land? Which state will build free infrastructure that benefits them? Usually the answer is, every large Indian state – Karnataka, West Bengal, Andhra Pradesh, Punjab and Assam being only a few examples.

IT industry subsidies: powered by demands, driven by sops.

The “winning” state then ends up giving away too much for too little return. The resultant benefits like taxes don’t sufficiently outweigh the costs of rising inequality, steepling real estate prices and traffic nightmares that Big IT inevitably seems to foment.

Even the states that recognise it’s all a race to the bottom are powerless. The choice is diabolical: don’t play the game and miss out on jobs, or try to win by providing more sops than anyone else.

The only way to to stop this socially damaging competition is to pass regulation that outlaws sops to large IT companies.

Ending the welfare state for Big IT

New industries rarely take off without a helping hand from the government. So it was too, with Indian IT. When the industry was in its infancy, the Government offered numerous tax sops and valuable land at throwaway prices. Fair enough; jobs and economic development were badly needed, and it created an industry that’s now 9% of the GDP.

But things are different now. Leading IT firms have more cash in the bank than they know what to do with. Infosys is in the middle of a share buyback program of Rs. 13,000 cr ($1.9b)  – an implicit confession. They’re by no means the only ones. Why should such firms need shops to hire the people they need to further their business goals? Governments should instead be able to spend on farming, education, healthcare etc.

So here’s a simple proposal to stop bad sops. Large IT firms should be outlawed from receiving any financial incentives or land grants from any state Government or the Centre. Three criteria might suffice to define ‘large’:

• Rs. 1,000 cr. in yearly revenue or
• Rs. 100 cr. in yearly profit or
• Rs. 1,000 cr. of assets like cash and land.

Should such a regulation be mooted, there will be howls that the Government is eroding industry competitiveness at a time when automation is killing jobs. There will also be threats to look at the Philippines or Ireland for new office locations. But we have to trust that the quality and quantity of technical talent in India will win out.

Disclaimer: The views expressed here are the author's personal views, and do not necessarily represent the views of Newsclick.