Competition among the states for mobile firms and the jobs and infrastructure they can bring is a well-known phenomenon. However, in recent years, a handful of states have added a mysterious new tool to their kit of incentives used in this competition. Unlike more traditional incentives, these new incentives—which this Article brands “customer-based incentives”—offer tax relief to a firm’s customers rather than directly to the firm. The puzzle underlying customer-based incentives is that tax relief provided to the firm’s customers would seem more difficult for the firm to capture than relief provided directly to the firm—strange, as a state’s primary goal is to subsidize the firm’s investment in the state.

After examining the emergence of this new form of incentive, this Article offers a novel explanation for its use and potential for success. Specifically, the Article argues that the effects of predictable consumer biases, particularly with respect to the salience of the tax relief provided by the incentives to consumers, cause customer-based incentives to differ substantively from traditional incentives in ways that are beneficial to both firms and states. Customer-based incentives thus present an example of how taxpayer behavior can influence the substantive effects of tax provisions, even causing two provisions with the same goal to differ on the ground. Taking these behavioral effects into account provides opportunities to increase the effectiveness of tax provisions.


In 2012, Amazon agreed to invest $130 million in building two fulfillment centers and to create 1,500 jobs in New Jersey in exchange for the state relieving Amazon of its sales-tax-collection obligations.1 That New Jersey took action to lure Amazon into the state is unexceptional; states have long competed with each other over mobile firms by providing specific firms with targeted economic development incentives to encourage those firms to invest in the states.2 Until very recently, however, few, if any, states had provided such incentives in the form that New Jersey provided to Amazon,3 a form that this Article labels “customer-based” incentives. Instead, targeted economic development incentives have traditionally taken the form of such things as income tax credits and property tax abatements.4 For example, in 2013, New Jersey’s close neighbor Maryland provided Amazon with $43 million worth of tax credits in exchange for Amazon’s opening a one-million-square-foot distribution center and employing one thousand people in the state.5 Though “traditional incentives” like those provided by Maryland are unremarkable, customer-based incentives are anything but.

This Article introduces customer-based incentives to the academic literature by arguing for their remarkability and their place in states’ efforts to lure mobile firms and the jobs and infrastructure they bring. After providing an overview of how customer-based incentives function and the apparent oddity of their use, I argue that predictable consumer biases cause individuals to react to customer-based incentives in ways that make those incentives more effective at luring firms to the offering state and more beneficial to society as a whole than traditional incentives. This conclusion explains why the emergence of customer-based incentives is not so odd after all and, at a higher level, demonstrates that the form of a tax provision can affect its substantive consequences; policymakers can improve the efficiency and equity of tax provisions, particularly tax relief provisions, by incorporating the lessons of behavioral research into the design of those provisions.6

Customer-based incentives and traditional incentives represent two ways a state can achieve the substantive policy of encouraging a particular firm to invest in the state. Through traditional incentives, the state provides the firm with direct tax relief;7 through customer-based incentives, the state provides tax relief to the firm’s customers when they transact with the firm.8 The difference between customer-based incentives and traditional incentives may appear irrelevant when actors are economically rational; a firm can adjust its prices to capture as much of the tax relief provided through either form of incentive as it prefers.9 Further, when one relaxes the assumption of rational actors, there also seems to be a real danger to Amazon or any similarly situated firm that it would not be able to capture the tax relief from customer-based incentives; its customers might not tolerate the firm raising pretax prices to capture the relief. Research into consumers’ perceptions of fairness in pricing confirms the likelihood of this result; thus, the tax relief from customer-based incentives should be expected to stick with customers, at least to some degree.10 Thus, the emergence of customer-based incentives is somewhat mysterious; why break from the status quo of traditional incentives in favor of what appears to be a less firm-friendly form of incentive?

The effects of tax salience on consumer behavior provide an answer to this mystery. Tax salience refers to the level of awareness taxpayers have of a tax provision.11 Thus, when a consumer wants to spend $1,000 on a new laptop from Amazon but the additional $60 of sales tax stops her from doing so, that sales tax is salient to her. Research into tax salience demonstrates that many tax provisions—particularly sales taxes—may be “undersalient” to consumers; consumers ignore these taxes to some degree.12 Returning to that same consumer, when the sales tax is undersalient to her, she might completely ignore that $60 of sales tax and purchase the laptop anyway, even though she ultimately spends $1,060 and exceeds her preferred budget. Other tax provisions can be “hypersalient” to consumers, meaning that consumers overreact economically to the provisions.13 The laptop purchaser might perceive a hypersalient sales tax as the economic equivalent of $120 instead of $60, making her even less likely to purchase the laptop. However, if tax relief can be made hypersalient to consumers, then they will overreact to its economic value; $60 of sales tax relief might feel like $120 to the laptop purchaser, causing her great satisfaction when purchasing from a firm receiving customer-based incentives, such as Amazon.

Hypersalience of the tax relief from customer-based incentives may seem outlandish at first; however, consumers’ behavioral biases make it not only feasible but likely. For instance, research has demonstrated that people suffer from a behavior termed “tax-label aversion”—people value not paying something labeled a tax just for the mere fact that it is labeled a tax.14 Because customer-based incentives offer consumers tax relief, those incentives trigger consumers’ tax-label aversion. Therefore, a firm receiving customer-based incentives can promote sales-tax-free shopping and expect a bump in demand because people simply do not like taxes.15 Traditional incentives do not offer this advantage because consumers are unlikely to think they are being relieved of taxes, even if the firm lowers prices to pass along the tax relief from traditional incentives. This suggests that, when it can invoke tax-label aversion in its customers, a firm can get more of a benefit from customer-based incentives than traditional incentives, explaining why Amazon would request customer-based incentives.16

Any hypersalient tax relief provided through customer-based incentives should be expected to benefit not only firms but also states, further explaining the emergence of customer-based incentives. Customer-based incentives are likely to generate more benefits for society than traditional incentives, all else being equal. These societal benefits result primarily from two sources. First, because of tax-label aversion, consumers feel more satisfaction when shopping at a firm receiving customer-based incentives than they would otherwise.17 Second, because a firm receiving customer-based incentives is less likely to capture the tax relief offered than a firm receiving traditional incentives, customer-based incentives are more likely than traditional incentives to undo the harmful effects to society of the original taxes.18 Taxes reduce the amount of beneficial transactions in a society and thereby reduce overall social welfare. When customers retain the tax relief provided by the state, it is as though the original taxes were never imposed; society is restored to a pretax world. If the firm retains the tax relief, as can be expected to happen in the case of traditional incentives, society remains in the after-tax world and the harmful effects of taxation are not eliminated.19

States have additional reasons to potentially prefer customer-based incentives. A common concern regarding traditional incentives is the fear of the tax relief being used to finance activities outside of the state—that the money the state lays out will somehow “escape” the state by the firm’s actions.20 Because the tax relief provided by customer-based incentives is directly tied to in-state consumption, those incentives are not plagued by the escape issue.21 Also, customer-based incentives provide tax relief—even if only nominally—to anyone willing to shop from the recipient firm, which may make customer-based incentives more equitable in public opinion.22 However, certain customer-based incentives involve a form of selective nonenforcement of taxes by the state that may be perceived as particularly unfair and politically undesirable (though the states’ current experiences should soften this concern).23 Customer-based incentives may further increase social welfare if they are perceived as more equitable and less subject to abuse than traditional incentives, but, at a minimum, these additional aspects of customer-based incentives further demonstrate how such incentives can differ from traditional incentives.

In sum, the goals of this Article are twofold: first, to introduce customer-based incentives to the academic literature; and second, to use those incentives to demonstrate that the form of a tax provision can affect its substantive consequences. To these ends, the Article proceeds in four Parts. Part I details the different forms of targeted economic development incentives, providing an in-depth look at how customer-based incentives function and describing their recent emergence and potential for growth. Part II then questions the puzzling emergence of customer-based incentives, the benefits of which appear more difficult for a firm to capture than those arising from traditional incentives. Part III offers a solution to this puzzle: the salience of the tax relief from the two different forms of incentives affects the benefits they produce for firms in ways that make customer-based incentives more appealing than traditional incentives. Part IV then examines the potential benefits of customer-based incentives to states, providing a basis for why a state would prefer customer-based incentives to traditional incentives as a matter of policy.

  • 1. See John Buhl, New Jersey Governor, Amazon Reach Collection Agreement, 64 State Tax Notes 676, 676 (2012).
  • 2. See Peter D. Enrich, Saving the States from Themselves: Commerce Clause Constraints on State Tax Incentives for Business, 110 Harv L Rev 377, 382–84 (1996) (offering a brief history of state economic development incentives).
  • 3. See generally Billy Hamilton, Amazon’s “Dirty Little Secret”, 72 State Tax Notes 531 (2014); Amy Hamilton, Connecticut Governor Announces Deal with Amazon, State Tax Today 24­4 (Feb 5, 2013); Neil Downing, Massachusetts Governor, Amazon Announce Sales Tax Collection Deal, State Tax Today 239­7 (Dec 12, 2012); Billy Hamilton, What an Amazon Sales Tax Deal Looks Like, 65 State Tax Notes 675 (2012); John Buhl, Texas Announces Tax Collection Deal with Amazon, 64 State Tax Notes 351 (2012); John Buhl, Amazon Reaches Tax Deal with Nevada, Negotiating with Texas, 64 State Tax Notes 273 (2012); John Buhl, Virginia Governor Approves Amazon Sales Tax Deal, 64 State Tax Notes 85 (2012); Tom Humphrey, Tennessee Governor Approves Amazon Collection Exemption, 64 State Tax Notes 9 (2012); John Buhl, Indiana Governor: Amazon Will Collect Sales Tax, 63 State Tax Notes 191 (2012); Simon Brown, South Carolina Sales Tax Collection Exemption for Amazon Becomes Law, State Tax Today 111-40 (June 9, 2011).
  • 4. See Enrich, 110 Harv L Rev at 382–84 (cited in note 2).
  • 5. Luke Broadwater, Amazon’s Baltimore Site to Receive More than $43M in Tax Credits (Baltimore Sun, Oct 23, 2013), archived at
  • 6. Professor Edward J. McCaffery is a pioneer of this line of thinking about taxes and has argued that taxpayer behavior should be expected to affect tax systems. See Edward J. McCaffery, Cognitive Theory and Tax, 41 UCLA L Rev 1861, 1867–68 (1994). This Article builds on his and others’ early works by focusing on how consumer biases affect the substantive impact of tax relief provisions. See generally id.
  • 7. See James K. Smith, Use of Business Tax Incentives: Part 1, 17 J State Taxn 1, 9–15 (1999); Kathryn A. Pischak, State Economic Development Incentives: What’s Available? What Works?, 8 J State Taxn 191, 192 (1989).
  • 8. See Part I.A.
  • 9. See Part II.
  • 10. See Part II.A.
  • 11. See Deborah H. Schenk, Exploiting the Salience Bias in Designing Taxes, 28 Yale J Reg 253, 261–62 (2011); David Gamage and Darien Shanske, Three Essays on Tax Salience: Market Salience and Political Salience, 65 Tax L Rev 19, 23 (2011); Brian Galle, Hidden Taxes, 87 Wash U L Rev 59, 62 (2009).
  • 12. See, for example, Raj Chetty, Adam Looney, and Kory Kroft, Salience and Taxation: Theory and Evidence, 99 Am Econ Rev 1145, 1165 (2009).
  • 13. Lilian V. Faulhaber, The Hidden Limits of the Charitable Deduction: An Introduction to Hypersalience, 92 BU L Rev 1307, 1317 (2012).
  • 14. See Gamage and Shanske, 65 Tax L Rev at 49–50 (cited in note 11).
  • 15. See Abigail B. Sussman and Christopher Y. Olivola, Axe the Tax: Taxes Are Disliked More Than Equivalent Costs, 48 J Mktg Rsrch S91, S100 (2011).
  • 16. Reports indicate that Amazon has been the initial party proposing the customer-based incentives. See John Buhl, Amazon Seeking New Jersey Tax Collection Exemption, 63 State Tax Notes 511, 511 (2012); John Buhl, Amazon Offers Florida Jobs in Exchange for Collection Break, 63 State Tax Notes 360, 360 (2012); John Buhl, Amazon Reportedly Seeking Sales Tax Collection Exemption from South Carolina, State Tax Today 41-20 (Mar 2, 2011); Amy Hamilton, Amazon Proposes Deal in California, State Tax Today 171-4 (Sept 2, 2011).
  • 17. See Part III.B.
  • 18. See Part IV.A.
  • 19. See Part IV.A.
  • 20. See Part IV.B.
  • 21. See Part IV.B.
  • 22. See Part IV.C.
  • 23. See Part IV.C.