Caution Flag on Amazon Inducements

The Virginia response to the Amazon’s 1/2 HQ2 (half of the originally proposed second headquarters) announcement is not uniformly delirious. Here are a couple of responses landing in my in-box — one from the center-left Commonwealth Institute (CI) and the other from the center-right Mercatus Center that urge caution in approving $1.7 billion in subsidies and inducements.

Writes CI on its Half-Sheet blog:

It’s critical that elected leadership, media, and the rest of us take a careful look at the realistic benefits and drawbacks of the deal, including related public subsidies and the tradeoffs that come with adding thousands – or tens of thousands – of jobs. And regular folks deserve to know what’s in the deal when their public land or public tax dollars are on offer to private corporations. …

With the megadeal promising to add thousands, and eventually tens of thousands, of high wage jobs, it is likely to further exacerbate the housing shortages in the region. … Early details do not appear to show any required direct support by Amazon in the provision of affordable housing, instead relying on local governments to make some investments, although the projected additional housing units fall far short of the projected shortfall for the region. …

The new development will bring new long-term costs – more need for fire protection, more children needing a high-quality education, and more need for public roads and transportation. Avoiding deals that cost more than they will raise over the long term is critically important to make sure ordinary residents aren’t paying the price for subsidies to megacorporations.

Meanwhile, Mercatus questions whether Amazon really needed the inducements to reach its decision to locate in the Washington metropolitan area. A NoVa location, I might elaborate, provides access to one of the nation’s largest high-tech labor pools and to the federal government, which is an increasingly important customer for its cloud services enterprise. Writes Mercatus:

We find it implausible that Amazon’s corporate leaders didn’t already have a good idea of where they would locate HQ2 even before launching the competition between cities.  The research on corporate location decisions finds that subsidies rarely affect the final decision, lending weight to our skepticism. It also suggests that any relocation subsidies would simply be extra icing on the cake that Amazon had already picked.

The general conclusion of academic research suggests that targeted economic development subsidies don’t lead to broad-based economic growth or improvements in community welfare when measured against comparison cities. Why? First, when government officials grant targeted tax cuts, they distort the market-determined prices that lead to the most efficient use of resources. Second, nearly every kind of tax causes additional price distortions and corresponding “deadweight loss”—a pure loss of economic value. This means that keeping taxes high for some businesses to give a subsidy to favored corporation causes further harm to economic efficiency—a better approach for economic growth would be a broad-based tax cut.

I have raised many of these points on this blog — good to hear that other people share the concerns. Amazon is a once-in-a-generation economic opportunity for Virginia. There are many reasons to welcome the deal. But CI and Mercatus both raise legitimate issues. When more than $1.7 billion in public subsidies are at stake, Virginia needs to give the deal a thorough airing. I would agree with CI’s admonition:

Community members, press, and elected officials should be provided time to absorb these details – and receive more details if some needed information is not available – before Virginia or its localities commit public dollars to a deal.

Meanwhile, up in New York… From CNBC:

Democrats from New York’s Queens borough slammed Amazon’s plan for offices in the area, setting up a potential political fight with one of the world’s most powerful companies. The criticism came even as Virginia lawmakers largely welcomed the e-commerce company’s decision to open up another facility outside Washington, D.C.

Amazon couldn’t see that coming?

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28 responses to “Caution Flag on Amazon Inducements

  1. Interesting – so far we’re hearing a fair amount of buyer’s remorse who would not have agreed to the terms had they been negotiating!

    • That’s the most intelligent thing the Commonwealth of Virginia has done for the last ten years. How many times have I said that Virginia needed to have its flagship universities in its centers of commerce or develop the universities in the centers of commerce into flagship universities?

      What next?

      1. Re-elevate the Secretary of Technology to a cabinet level position?
      2. Pay to fix Metro?
      3. Work out arrangements with VCs to fund the inevitable spin-offs?

      The General Assembly is plunging head-first into the mid 90s … which is about a 20 year advance from where they were before this announcement.

  2. AWS claiming that Virginia agreed to pay $22,000 per job which works out to less that 1/3 of the $1.7B total (assuming 25,000 jobs) cited in this blog post. So, I guess it’s $550m of direct payola and about $1.2B of indirect investment. No wonder Virginia won. If there’s one thing our politicians understand it’s direct payola.

  3. From the get-go there was strong reason to believe Amazon wanted a presence in or near DC, so the only real competition was Maryland. But a deal like this gives great leverage to the incoming employer. Can’t really blame Amazon for asking.

    The following quote from Mercatus is going to be very useful….
    “This means that keeping taxes high for some businesses to give a subsidy to favored corporation causes further harm to economic efficiency—a better approach for economic growth would be a broad-based tax cut.” Yep. That’s a keeper.

  4. Green Energy commitment?
    Also we’ve heard it said that 100% renewable electricity is a demand by all new companies, and they will avoid locating in Virginia like the plague unless we commit to that.

  5. In related news, a frightening shortage of baristas, dog walkers and yoga instructors is predicted for Northern Virginia.

    Joke stolen from somebody on BlueVirginia posting as Jeff Bezos.

  6. Commentary from Jennifer Wexton …

    “However, I share the concerns of my constituents regarding whether we have the necessary infrastructure, including roads, transit, schools and affordable housing, to properly welcome Amazon to our region. I look forward to working with Amazon now and in the future, and call upon them to be a responsible corporate citizen, to ensure that the quality of life of their future employees and current northern Virginia residents is not adversely impacted by this move.”

    Uhhhhh …. facepalm ….

    No, Jennifer – we don’t have adequate roads, transit, schools or affordable housing. Remember all those years you were in the General Assembly doing nothing? Maybe you should have spent less time prattling on about “sensible gun control” given your district is one of the safest in America and actually done something useful.

  7. re: ” …. a better approach for economic growth would be a broad-based tax cut”

    so would that have been the incentive that brought Amazon to NoVa or is that more a theory with no real way to measure results? And if you cut taxes – how do services get paid for? Oh wait.. by the increased revenues from those businesses?

    In other words – can Richmond or Hampton or Roanoke cut taxes and it will spur Amazon-type interest?

    😉

    I hear that a lot – it’s like reciting multiple Hail Marys and Our Fathers for the true believers… but my bet is that companies like Amazon are pure Pagans…

  8. 25,000 employees @ $100,000 per employee per year = $2.5B per year in direct salaries.

    $2.5B in salaries * 5% state income tax = $125m per year in income taxes.

    $1.7b total investment / $125m in state income taxes = 13.6 year payback from state income taxes.

    Now, add sales taxes, real estate taxes, the velocity of money as the Amazon employee influx fuels other jobs …

    This might not be such a bad deal after all.

    • …. but what about across the board tax cuts?

      wouldn’t that had brought the same results?

      😉

      I’m not at all surprised that we’re hearing the “tax-cuts instead” mantra…

      good thing the Conservatives are not in charge of economic development, eh?

      • No. Broad based tax cuts would not have brought these technology jobs or any other technology jobs. Tiny reductions in the overall cost base of technology companies mean next to nothing. Google just announced an additional 14,000 jobs in Manhattan. Silicon Valley and SanFrancisco are booming. Are these low tax locations? Technology companies need access to talent. NoVa has one of the most educated populations in the country. Talent. Technology companies also need reasonably attractive communities into which they can recruit. While Silicon Valley is dystopian from a human settlement patter perspective, the weather is great and the liberal environment works well for hipsters. Walkable, mixed use, high density communities in diverse and liberal minded areas attract hipster developers. And hipster developers are the cannon fodder of the modern technology company.

        • so … all you say here…. doesn’t that argue that the standard Conservative “free market”, “low-tax” mindset is not how urban prosperity occurs and it’s no big surprise that the Conservative-run parts of Va are such economic basket cases?

          😉

          tongue-in-cheek lite… it just seems that most urban areas that are prosperous do not operate by standard Conservative liturgy.. and in
          this case – had Conservatives configured the incentives according to their tenets, Amazon would likely have gone elsewhere?

          Are Conservatives in tune with 21st-century economics?

          • Technology is different than almost any other type of business. It’s more like movie making or publishing than manufacturing. It costs a fortune to build a complex piece of software but then almost nothing to replicate and ship the product. Broad based tax cuts might lure lots of businesses to an area … just not technology companies.

    • “25,000 employees @ $100,000 per employee per year = $2.5B per year in direct salaries.”

      Final commitment for 25,000 jobs is a minimum of $150,000 per employee per year, plus benefits, escalated at 1.5% annually

  9. Looking across the country – most urban areas have two things in common:

    1. – they are NOT low tax
    2. – they are far, far more prosperous than low tax places

    I just don’t see were broad-based low taxes actually are a key element
    of most of our prosperous urban areas..

    Urban areas are huge spenders (investors) for infrastructure and services and it does not come cheap but it provides the business ecosystem that attracts business…. including a deep and educated workforce.

    I just don’t think the appeal of low taxes beats the tax-built ecosystem. Business do make decisions. Some actually do go to low-tax places but far
    more go to higher tax urban areas.

    • Larry, do you think a high-tax approach for Southwest Virginia would have won the Amazon bid (or other projects)? Localities that have some sort of economic advantage can and do have higher taxes. They are playing a different game. Those localities that do not have those advantages have to play the cost card because if they don’t have much else.

      Overall, if you compare Calfornia (high tax) and Texas (low tax), you can see Texas has performed better at job growth over time. (California has fared somewhat better recently.)

      https://www.forbes.com/sites/chuckdevore/2018/05/22/texas-laps-california-in-job-and-population-growth/#59946f9173f3

      • Izzo – I’m not going to disagree with you but point out that building a place that invites businesses is a longer game also and often involves the willingness of the locality to “invest” in infrastructure and services – long term and also specific to the wants/needs of a prospective business.

        but also agree… it’s not entirely fair to compare Nova to other places in RoVa that barely have the tax capacity to provide basic services and rely on the Composite Index to help pay for their schools.

        STILL – even a place like NoVa cannot attract outside businesses with a “conservative” low-taxes only mindset. I doubt seriously that Amazon would have come if all they were offered was lower taxes than elsewhere.

        would you agree with that?

        • Larry, I think DJ’s earlier comment covered accurately what Amazon would have been looking for, which is quite different than what another type of company might be looking for.

          The overall model is complex. San Francisco and Silicon Valley are expensive from a cost of living standpoint and a tax standpoint, but are still attractive for certain types of firm because of the talent and resources for developing start-ups. If you’ve read a series of articles in the Economist, though, it shows the area is choking itself off due to cost and its primacy is starting to wane.

    • Larry, it’s totally inappropriate to compare tax rates of urban areas vs. rural areas. Yes, of course urban areas desire a higher level of services and they have higher taxes than rural areas. Because they are wealth generators, they can afford to have higher taxes in exchange for a higher level of services. Also, large metros have tremendous agglomeration effects — the size and depth of the labor market is more powerful than taxes.

      The apt comparison is between different urban areas (or metropolitan areas). Over time, lower-tax metros of roughly equal sizes will bleed off investment capital and human capital — especially human capital — from lower-tax metros.

      • Jim – low taxes alone will not do it even for the larger METRO areas. Beyond that it’s a chicken/egg argument – you don’t, over time, build that “aggregate” agglomeration – one step at a time – it takes decades and the locality has to be open to cutting deals to get the jobs – knowing that the value of jobs far exceeds low taxes alone.

        I still submit this is a fundamental difference between liberal and Conservative mindsets and why – most large urban areas are Blue and most rural areas are Red.

        If Conservatives structured the Amazon deal – they’d be long gone…..
        agree?

        • “the locality has to be open to cutting deals to get the jobs”

          I think a lot of analysis has shown, if the facts are made public, that a lot of these deals don’t make sense (look at Wisconsin and Foxconn). However, I am cautiously optimistic on Amazon so far. The Virginia Tech announcement could be significant in the long term as well.

          • DJ made the observation that it makes no sense to preferentially incentivize a business which has existing competitors in a region who almost sell products and services to folks in that region.

            But if there is no industry or company already in the region like the one that is being wooed AND/OR what they create is sold everywhere else then the jobs are net jobs that do not cannibalize existing ones.

            DJ says this is the case with tech companies although clearly lots of tech companies are competitors also.

            I think in the 21st century – entire companies can be wiped out as technology makes breakthroughs and the industry itself shifts.

            Look at Motorola a few years back in Richmond.

            Bezos himself has predicted that someday – something will replace Amazon.

            But you grab the companies now to get the educated workforce that will be needed for the follow-companies spawned by the changing industry.

            And that’s not something you can bean count the shorter-term ROI.

            I think Pittsburg is an example that saw the steel industry dying and successfully moved on to other industry.

            I think it’s relevant to ask why banking went from Richmond to Charlotte and Railroad operations from Virginia to points south also. Neither banking nor rail – “died”… so something else precipitated it. It may have been something we had no control over or it may well have been something we lacked and did not think appropriate for us to incent.

            Online – anything and everything is changing the world we live in and Virginia need to be a strong participant in the technology that powers it and Amazon fits the bill and clearly Va Tech is totally on the same wavelength.

            I don’t think the dollar numbers will ever make “sense” for most folks because most folks just don’t see the world in such terms and visionary folks who do in the ED world are more like venture capitalists than ordinary “public” and “Conservative” is something different in the Venture Capital world – where failure is an expected part of that game but if you don’t play the game at all for risk of failure then you’re not a player nor a sometimes winner.

            So Bezos is, if nothing else – a world-class entrepreneur of which we really are fortunate that he left the “Left” coast and came to the East cost – IMHO and that is an opportunity worth not squashing.

  10. One of Virginia’s big problems remains its corruption and crony capitalism. Taxpayers and Dulles Toll Road users are paying hundreds of millions to urbanize Tysons. It is supposed to be a world showcase. People are coming here from around the world to see what’s being done.

    Yet, the world showcase was not in contention for HQ2. If we had a media that was interested in finding the truth, this would be a great issue to probe. Or maybe it’s just more evidence that my long-held theory – the Silver Line and mega-density at Tysons – was always about enriching well-placed land speculators who make big campaign contributions.

    But congrats to Arlington and NYC.

    • TMT / others , I’d be curious to hear why Tysons flunked…. I thought it
      was supposed to emulate a city-type business eco-system.

      Was Tysons ever in the running?

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