Here’s an Idea, Let Maryland Have Amazon

Virginia’s friend: Maryland Governor Larry Hogan

Maryland legislators approved Wednesday an $8.5 billion incentive package to lure Amazon’s second headquarters to Montgomery County. Governor Larry Hogan (R), who proposed the plan, is expected to sign the bill.

I love it! This is the best of all worlds for Virginia. Amazon has estimated that the headquarters will invest $5 billion and employ 50,000. If Amazon puts its second headquarters just across the Potomac River in Montgomery County, Md., Northern Virginia will benefit from many of the positive spillover effects without undermining its tax base to bribe the company into locating there.

Nonpartisan analysts with Maryland’s General Assembly said the incentives would cost the state $5.6 billion in tax breaks, $2 billion in transportation spending, and $924 million in local tax credits, for a total of $8.5 billion. While a solid majority of Maryland legislators backed the package, a sizable minority objected to the massive subsidies, reports the Washington Post.

“Amazon is getting the gold mine and we’re getting the shaft,” said Del. Herbert H. McMillan, R-Anne Arundel. He described the package as “corporate welfare.”

(Virginia has offered an incentive package as well, although nothing that has required approval by our General Assembly. The details remain confidential, despite efforts by anti-Amazon groups to obtain them through Freedom of Information Act requests.)

Let’s game this out. Let’s assume that Maryland’s bribery package is so generous that it outweighs anything Virginia can cobble together under existing legislation and appropriations. Let’s assume that Amazon builds an 8-million-square-foot  headquarters campus in Montgomery County, invests $5 billion, and hires 50,000 highly compensated workers, as it says it will. Where does that leave Virginia?

In the cat bird seat.

Maryland and Montgomery County hired the Sage Policy Group, Inc., to study the economic impact of an Amazon relocation to Montgomery County. The study finds that a full build-out would support more than 101,000 jobs in Maryland, generate nearly $7.7 billion in employee compensation, and boost economic activity by more than $17 billion. (Presumably these are annual figures, although the study’s Key Findings does not say so explicitly.) Writes Sage:

Complete development of Amazon’s HQ2 will create approximately $112 million in augmented tax revenue at the County level. The bulk of this will flow to Montgomery County through direct income and property tax effects, though indirect and induced activities will also augment local tax revenues as far north within Maryland as Frederick and Baltimore Counties. This tally includes nearly $64 million in property taxes and nearly $34 million in income taxes.

At the state level, tax receipts will increase by an estimated $190 million over the duration of development, including $84 million in sales tax revenues, $62 million in income tax revenue, and more than $10 million in nontax revenues (e.g., fees, and permits.)

Here’s what the Sage study overlooks: the costs associated with an added workforce of 101,000 in an era of full employment.

Unemployment for the Washington metropolitan area was 3.6% in February. That verges on a labor shortage. Indeed, for IT-related jobs, there is a labor shortage. To fill those jobs, Amazon will either (a) induce skilled employees from other metros to move to the Washington area, or (b) recruit skilled employees from local employers, who in turn will have to induce skilled employees from other metros to move to the Washington area. Those people will have to live somewhere, and they will require state and local government services.

The increased economic activity resulting from the Amazon headquarters will more than offset the drain from $8.5 billion in subsidies. But will it also offset the cost of building new infrastructure and providing state/local government services, including schools, to the tens of thousands of households moving into Maryland?

Let’s assume for purposes of illustration that a third of those 101,000 employees joining the Maryland workforce have children, and let’s assume that they have only one child at home on average, and let’s assume that only 75% of those children are of school age. That means we can expect an enrollment increase of 25,000 students in Maryland schools. The average cost per K-12 student in Maryland is about $15,000. Let’s say a 20% of that is overhead and that the variable cost per child is only $12,000. That pencils out to $300 million in added K-12 school expenditures.

Guess what. The total anticipated increase in state and local tax revenues is…. $300 million. That leaves nothing for public safety, public works, higher education, health care, social services, the environment, or the mandatory bloated bureaucratic overhead. Fiddle with the numbers in my assumptions, if you want, but understand the principle: Sage’s economic impact formula considers only tax benefits, not fiscal costs.

By contrast, Virginia will enjoy economic benefits from Amazon in Maryland without the tax giveaways.

The Sage study does not publish an estimate of the economic impact of an Amazon-in-Montgomery-County scenario on Virginia or Washington, D.C. scenario.  I suspect there’s a reason why Sage didn’t disclose those numbers — because an embarrassing proportion of the benefits of an Amazon move to Maryland will accrue to the entire metropolitan area.

“Entrepreneurship related directly or indirectly to e-commerce, cyber-security, big data analysis, and other segments would accelerate,” states the report. As it happens, cyber-security and big data analysis are industry sectors at which Virginia excels. It is inevitable that Amazon will do business with Virginia companies, and it is likely that Amazon or former Amazon employees will seed new enterprises in Virginia.

No doubt some Amazon employees will live in Virginia and drive across the Potomac. We’ll have to provide schools and other public services to them. Here’s the difference: We won’t have to eviscerate our tax base to do so.

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13 responses to “Here’s an Idea, Let Maryland Have Amazon

  1. I’m quite opposed to crony capitalism and huge subsidies to bring business to a location. I believe businesses are attracted to areas where government is operated efficiently and effectively. Keep spending and taxes at reasonable levels.

    But the employment situation in the Metro Area, at least in Fairfax County, is not that rosy. Employment at the high-compensation level has been flat for many years. Most of the job growth is at the lower end of the pay spectrum. Indeed, Fairfax County’s average weekly wage fell again from 2016-2017. The demographics of the area are changing. While we continue to have the mega wealthy, we are losing many middle and upper middle class residents, who are being replaced by many less-educated, lower-skilled individuals.

    And for all the highly educated, highly skilled individuals moving here from other nations, there are many more immigrants coming with minimal skills and education. Their demand for taxpayer-funded services is growing and their ability to pay taxes close to what is necessary to cover the services demanded just isn’t there.

  2. The elephant in the room is the $2 billion spent on transportation spending. What is the $2 billion spent on? Super high speed rail from Baltimore through BWI to DC Union Station? Massive widening of American Legion Bridge (how could that work functionally, other than making matters worse?) A third bridge further west up the Potomac into Va?

    I suggest that only the latter scenario will benefit Virginia financially. Otherwise most of Northern VA. remains largely landlocked land transportation wise from Amazon benefits. And Maryland keeps most all Amazon benefits for itself. I suspect the pressure is enormous for VA. and Md. to cut a deal that unties the VA/MD regional Gordian Transportation knot. American Legion Bridge can’t do that alone. Only another bridge up river can be a win win for all, including interstate drivers passing around Washington Met. Area.

    In short, if Md. gets Amazon without breaking that deadlock, Maryland will have hit a Home Run Four Ways to Sunday.

    • PS – Without upper river bridge solution, a Maryland Amazon deal will leave Northern Virginia largely out in the cold, isolated, as TooManyTaxes rightly says it is already isolated, only now with the Md. Amazon deal it would be more so than today. Who imagined such an outcome back in the 1980s? Only a few.

    • The American Legion Bridge cannot be expanded. The understructure cannot support any additional lanes. Current thought is that a second span will be added next to the existing one. That new bridge, which is being considered for inclusion in the new 2018 Constrained Long Range Plan (CLRP), known as Visualize 2045, allows for toll lanes and express bus service between Bethesda and Tysons. Virginia has also proposed adding its connection to a new ALB for inclusion in the CLRP.

      As I recall, VDOT did a study a couple years ago that showed only 6–8% of drivers crossing from Virginia turned north on to I-270, such that an outer span would not provide any significant benefit to the horrible congestion on and around the American Legion Bridge and the Beltway. Visualize 2045 will also include some aspirational, unfunded projects. An outer crossing was considered, but rejected by the Transportation Planning Board. It had strong support from some members and intense opposition by others.

      Maryland elected officials and many residents strongly oppose an upper crossing as do many residents of Great Falls and Loudoun County who don’t want their neighborhoods destroyed by a limited access road and bridge.

      • Yes, your comment makes sense. Access on both ends of American Legion bridge is for all practical purposes tapped out. Simply no where for additional lanes and traffic to go. Maryland gains far more advantage taking care of its internal traffic mess north of Bridge where flexibility remains.

        Of course the location of Amazon HQs will have tremendous significance on all of those internal issues. Here Maryland has much geography to work with, an expansive geography that can serve many purposes extremely well. In contrast, keeping traffic out of Northern Virginia would be doing the residents of northern Virginia a favor. Now, as it stands, Northern Virginia has little to offer besides vacant obsolete buildings, and big problems. And a huge challenge. Perhaps, Bezos has decided he has better things to do with his life than tackling Northern Virginia’s self induced nightmare. But you never know. He likes solving problems, with innovation. What a petri dish Northern Virginia is for such ambition and talent. But throwing pearls at swine?

        What is an “ALB?”

  3. I can’t see the two States building a western highway bridge across the River to share Amazon’s wealth when Virginia, from its own economic self-interest, can’t even finish 234 through the Battlefield as far as Dulles — or, for that matter, can’t muster the political will to authorize an above-ground power line to supply all those tax-paying Gainesville area data centers. And Maryland? Place any infrastructure across the Dickerson and Sugarloaf zone? Is it even worth discussing moving people instead of cars across the River, via a Metro rail connection between Asburn and Gaithersburg?

    • I tend to agree. Maryland has all the cards, and little incentive to cooperate. This is an existential battle of airports (Dulles v. BWI) and their twin cities – Baltimore & Washington road and rail served region including all Maryland wrapping DC in all directions versus Northern Virginia outside the DC beltway.

      Looked at this way, Maryland’s got all the cards – great and flexible access throughout the Md. entire region with important but relatively few tweaks, plus also great amenities like Sugarloaf, Dickenson, Poolesville, Mt Airy and Frederick, plus this inner region enjoys great long range multiple mode access to the northeast, west to Pittsburgh and mid-west, and down south via a great road net, such as I-81 circumventing N. Virginia outside beltway altogether, and Rt. 301 circumventing Northern Viginia’s eastern side to gain tidewater, Richmond and points south on coastal side.

      Plus the Maryland Governor is a master real estate deal maker.

  4. What about Elon Musk’s Boring Company having purchased rights of way along the Baltimore/Washington Parkway? A new kind of “people mover” could disrupt the classic congestion model.

  5. “The biggest single element in Hogan’s plan is legislation that would provide a 10-year package of tax credits and exemptions. Qualifying companies would get a tax credit equal to 5.75 percent of wages for each new qualifying headquarters job; a state and local property tax credit; and a state sales and use tax exemption for construction material or warehousing equipment used in the project.”

    Had to go to an earlier WaPo story to find some details. So the size of the subsidy is 100 percent scalable, tied to the actual capital spending and the amount of jobs “created” (because some at least will be moved from somewhere else.) If the company hires fewer, invests less, then the benefits shrink. What the Post does not mention is cash on the barrel head, the kind of up-front grants that often end up being repaid (or owed, if you can find the entity, like in Appomattox). It does look like the state is protecting itself a bit.

    I’m drawn to the idea of a 5.75 percent credit on wages for the first ten years. In effect the employees will be paying their state income taxes directly to Amazon! But of course in order to take advantage of a tax credit, you have to owe taxes in the first place…..I assume Maryland uses the three factor formula for state income tax apportionment, and is hoping that it gets a big slice of the total Amazon domestic tax pie. But if Amazon has other ways to keep its tax liability down, does that mean no credits for the wages paid? Or is that a refundable credit? That would be dangerous.

    Also the tax break on the construction activity costs the state zero, because absent the project there would no taxes anyway. It appears there are no breaks on the local taxes, but the state will turn the usual deductions for those expenses into credits instead. (I’d sure like to see the details on this, need to dig a big.)

    This is a damn generous package but as somebody who has thought about how to wrangle state incentives, the structure doesn’t bother me at all. Plenty of states offer a percentage of wages, returned through the tax system, as an incentive. And the transportation investment is very likely to be something of benefit to the entire region, not just that company.

    Should VA match this? Hell, no. If Maryland is going this far, it means it needs to.

  6. how much in wages will be generated in a year? 8 billion? That seems like not a small number… and as far as “counting” kids, that aspect would be true for any new jobs…a certain number of them will have kids.

    And I’m on the same page as Acbar – transportation-wise….I just don’t see Maryland having any interest what-so-ever , in part because we all know such a bridge would just explode more growth to that area and whatever “relief” for I-95 would be quickly erased by the new growth – UNLESS they toll it- like they are doing with the other major interstates in NoVa…

    At any rate – isn’t it the long term jobs and wages that also need to be part of pro-con calculations?

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