Recently, Walmart selected Hancock County as the future location of the nation’s newest and largest fulfillment center. Walmart’s investment of $600 million in the facility is expected to create up to 1,000 jobs for Hoosiers by 2025. This news is welcome in a time of such high unemployment, but it’s not an unqualified blessing.
Over the years, Walmart’s many innovations in inventory and supply-chain management have generated enormous cost reductions. In turn, Walmart’s low prices benefit consumers. Estimates suggest Walmart reduces the cost of living for the typical American household by around $3,000 per year.
Walmart Fulfilment Service continues this trend of greater productivity by extending cost reductions to online operations through Walmart Marketplace. Other sellers can partner with Walmart and grow their e-commerce by paying to use Walmart’s unrivaled capabilities to warehouse, pack, ship and handle returns for their own online business. Beyond creating new jobs in Indiana, Walmart’s new fulfillment center will create economic growth by expanding and reducing the cost of online commerce.
So, what’s not to like? The concern is that our state and local governments offered millions of dollars in conditional tax credits to lure Walmart’s investment. Counterintuitively, academic research finds that selective tax incentives do not increase overall employment or business investment. It turns out incentives play a weak role in businesses’ location choices, and that attraction of mobile firms provides a minuscule amount of overall employment growth.
Even in cases where incentives attract firms, they generate perverse consequences. The additional public services needed to accommodate the new businesses and their accompanying migrant workers might not be covered by the additional tax revenue generated by firms with tax reductions. The resulting higher tax bill crowds out government services, such as spending on public education, or increases the tax burden for other businesses. In the long run, this destroys as many jobs as were initially created.
Tax incentives also encourage crony capitalism. Corporations engage in rent-seeking behavior, lobbying for tax breaks and other subsidies and playing governments off one another. From the overall perspective of the economy, the resources wasted in this zero-sum game are a net loss.
E-commerce is the wave of the future, and we are glad to see its expansion in Indiana. But rather than playing favorites, the best way to ensure continued progress is with an across-the-board system of competitive taxes, property rights protection, and efficient investments in public goods.•
Bohanon and Curott are professors of economics at Ball State University. Send comments to firstname.lastname@example.org.