What can Philly learn from Amazon’s decision?

Well, Amazon didn't choose Philadelphia, Camden, or hundreds of other cities for one of its two new headquarters. That was hardly a surprise. But interestingly, the decision seems to have been made on the basis of fundamental economic location factors, not the size of the tax incentives. That is a lesson cities and states should understand before they give out massive tax breaks to attract or retain companies.

Philadelphia should be proud that it made it to the final 20 of the Amazon headquarters list. As recently as a decade ago, it is doubtful the region would have been taken seriously as a potential location for one of the largest companies in the world.

It is important, though, to do a postmortem on why the city and the region lost out. Doing that would, or should, guide future decisions on how to spend precious tax incentives.

The choice of Arlington, Va., and Long Island City, N.Y., made total sense, at least when you ask the question "What did Amazon need to succeed?"

When a company says it will be hiring 25,000 or 50,000 workers, the major requirement is a huge pool of current or potential workers with the requisite skills.

Philadelphia currently doesn't have enough workers with the skills that Amazon requires. According to a Brookings report, the area ranks 11th in the nation when it comes to the size of its tech workforce. The Washington, D.C., region has nearly two times as many and New York has over three times the number of tech workers.

Philadelphia does have the potential to provide those workers, given its large number of colleges. But, as Amazon surely noted, the area has problems retaining most of those students. That isn't an issue for New York or D.C.

Amazon also indicated that excellent transit and proximity to airports mattered, and Philadelphia could compete on those factors. It couldn't when it came to labor.

Put simply, Amazon's most critical requirements were a location that had a large number of workers that met its skill needs and could attract additional workers as required. Northern Virginia and New York City were the best matches.

And that brings up another question: What role did tax incentives play in the decision? Amazon claims it didn't make a major difference, and that may have been the case.

Northern Virginia's incentives totaled less than $600 million, while New York's package was just over $1.5 billion. In contrast, it appears that Pennsylvania's offer was in the $5 billion range, while New Jersey was willing to pony up about $7 billion. Other regions reportedly offered more than the two winners as well.

While tax incentives matter, they often are not the critical factor in location decisions, something economists have been saying for decades. A firm will choose a location if it is a good location, so don't overpay.

What are the lessons for the Philadelphia region?

If this area wants to grow by attracting technology-related companies, it must expand its supply of tech-skilled workers. The region's universities produce thousands of potential tech workers. It has to keep them.

Until a critical, sustainable mass is reached, the region may need to employ reasonable tax incentives and strategies to attract and retain small to midsize tech companies. Home runs are great, but small ball makes more sense. That is especially true for Camden, as Amazon would have overwhelmed it.

The use of tax incentives should be limited to firms that will create additional growth. The scaled-down Amazon headquarters would have been a tight fit for Philadelphia. But it could have worked since it would have created a tech sector that rivaled most other cities'. While the tax incentives were excessive, they were offered for the right type of company.

In comparison, New Jersey's use of tax incentives to attract the 76ers to Camden made little economic sense. It created no additional growth. Worse, it gave away an extremely attractive waterfront site that can no longer be used to attract firms that would add to growth.

Tax incentives are a way of life. The next time a major firm relocates without tax incentives might be the first time that happens. But, politicians think all they must do is offer enough tax benefits and a firm will take the bait. Amazon showed that is wrong.

When it comes to location decisions, fundamentals, not incentives, should matter the most. If they don't, the firm will add little to the economic base and should never be offered a tax break to begin with.