Dissecting Virginia’s Amazon Deal

Source: PROJECT COOPER: BRIEFING FOR THE
HOUSE APPROPRIATIONS COMMITTEE

Virginia has committed to investing a sum unprecedented for an economic development deal in the Commonwealth — roughly $2.5 billion in state and local dollars to bring Amazon, Inc. to Northern Virginia. In a presentation to the House Appropriations Committee yesterday, Stephen Moret, CEO of the Virginia Economic Development Partnership (VEDP) provided a detailed account of the incentives. Now that the numbers are out, the public has an opportunity to review the deal. At Bacon’s Rebellion, we love critiquing things, so here goes…

Cash flow positive for the state. The first point to note is that, while Virginia is making a massive public investment to the project, it will be cash-flow positive for the Commonwealth from Year One. If Amazon pays its projected 2,500 employees an average of $150,000 a year — the target number to qualify for state subsidies — the company’s Virginia workforce will generate a lot of new income taxes and sales tax revenue. By Year Ten, added state revenue from direct, indirect and induced employment will amount to $209 million. The sum could grow to $364 million within 30 years. That compares to a General Fund revenue forecast of about $20 billion in Fiscal Year 2019.

As Steve Haner explained in the previous post, the deal will have a minimal impact on the current budget cycle, and future expenditures on higher education, transportation and direct subsidies to Amazon will be phased in over time. The project is designed to ensure that new General Fund revenues will exceed project-related outlays. In other words, according to Moret’s numbers, the state will make a “profit” on the deal from which the entire state benefits.

Investing in competitiveness. A second key point is that 60% of the incentives will be invested in infrastructure and educational programs that don’t go into Amazon’s pocket. I have a huge philosophical problem with the state giving $550 million in Phase One (and another $200 million in a potential Phase Two) to one of the world’s richest companies. Talk about welfare capitalism! But Amazon could have located in Dallas, Texas, or a handful of other cities, so it has the power to play off one location against another. I don’t like it, but that’s the way the world works. The question for Virginians is whether or not the state comes out ahead.

Critical to the deal, Virginia will invest heavily in building its tech talent pipeline. According to Moret’s presentation, the state envisions producing approximately 25,000-35,000 new degrees (over and above baseline levels) in computer science and related programs over the next 20 years. That’s more than Amazon will require. So, labor-starved tech companies other than Amazon will benefit from the investment.

In an earlier post, I had expressed concern that the state would be subsidizing Amazon’s employee recruitment efforts to the tune of $22,000 per employee, giving the company an immense advantage over other Northern Virginia companies competing for talent. In his presentation, Moret acknowledged that there would be “short-term pressure” on Northern Virginia job markets, but that NoVa executives were mostly positive about the deal. His presentation includes a sampling of reactions back in February:

“The economic lift that we get in Virginia, the branding part of it, would be a strong positive for our recruiting efforts. Clearly we will be competing for talent, but that’s fine,” said a Fortune 500 CEO. “I think it’s important for regions to have a diversity of employment options. The economic lift and intellectual lift for the region is a strong, strong positive. I would like to see us get selected.”

“It would be a double-edged sword. Great for the economy. Great for the brand,” said the CEO of a successful tech company. “Long-term it would be good, but it’s another competitor to deal with for talent. … It would give cachet to our area.”

Said the C-level exec of a Fortune 500 company: “In the short run, it will entail some competition for talent. But it’s very powerful for the region for the long term. We’ve made Virginia our hub. The fastest growing part of our ecosystem
is tech – we hire thousands of associates [every year]. We want to have an ecosystem where new tech grads stay here and where there is a desire of folks from around the country to move here.”

The workforce worries are real. But the Virginia’s higher-ed investments will expand the local talent pipeline, Moret argues, while the presence of Amazon will help give the Northern Virginia tech sector a more positive brand nationally, aiding recruitment from other labor markets.

Meanwhile, the state, Arlington County, and the City of Alexandria will spend hundreds of millions of dollars building out transportation infrastructure serving the Crystal City/Potomac Yard area. The transportation initiatives, designed to complement walkable urbanism in the region’s urban core, will accommodate business and residential growth for more than just Amazon. The Metro bus and rail system is operating at significantly below capacity, notes Moret. This deal could boost ridership and revenues for the troubled mass transit system.

Projected share of Amazon commuters by transportation mode.

As Arlington and Alexandria re-develop the region as a walkable mixed-use community, Arlington projects that 77% of Amazon’s workers will walk, bike, car-share or take mass transit to work. That number, if accurate, is phenomenal. By creating a new template for Crystal City/Potomac Yard, Amazon could catalyze the development of even more transportation-efficient walkable urbanism that can soak up a lot of future transportation demand.

The devil is in the details. Many important questions remain unanswered. One is whether Virginia can deliver on its end of the deal. Can Virginia K-12 schools deliver enough graduates prepared for rigorous computer-science programs — even with the injection of $50 million dollars over 20 years for tech education and internships? Is there a sufficient number of graduates even interested in such programs? Given the high tuition they charge out-of-state students, will Virginia institutions be able to make up any shortfall in Virginia applicants by recruiting from outside the state?

Another issue is traffic congestion. While Amazon will have a small traffic footprint for the size of its project, the giant new corporate campus plus spin-off growth still will add thousands of drivers to Northern Virginia’s overloaded highway network. Northern Virginia citizens most affected by the project will want to see a detailed traffic impact analysis.

One more issue: Affordable housing. Moret characterizes Amazon’s impact on rental markets in metropolitan Washington as “small.” Quoting Zillow, CoStar and Apartment List as data sources, he suggests that the average rent in 2026 will be between $2,216 and $2,233 per month. “HQ2 [is] expected to add <$110 to that monthly bill.”

Marginally higher rents won’t be a problem for Amazon employees making $150,000 a year. But Moret’s analysis does not address how the project will impact affordability for lower-income residents of Northern Virginia. But he does note that Arlington, Alexandria and the Virginia Housing Development Authority have committed to building 2,500 affordable housing units in the area over the next 10 years.

While I have raised several concerns about the project, I have to credit Moret and his team with anticipating major potential objections and structuring the deal in order to address them.

And there is one huge benefit that Moret’s presentation alludes to only in passing — the contribution of Amazon to Northern Virginia’s innovation ecosystem. The presence of Amazon means more than 2,500 jobs. It holds out the potential to rev the region’s entrepreneurial engines. And there is no way to put a monetary valuation on that.

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19 responses to “Dissecting Virginia’s Amazon Deal

  1. So here’s the question for Jim and Steve H.

    if you were in a position of approval or disapproval for this project, would you have agreed to the provisions you know say are a “philosophical” problem for you?

    I’m pretty sure with this much transparency – we’re going to hear from some folks the phrase “lipstick on a pig” but I’m serious in my question about whether or not stuff like this would fly with “conservatives” or not.

    So how does the Virginia Chamber of Commerce and the RPV , Club for Growth folks say about this? If we had a GOP Governor and a GOP majority GA – would they, will the GOP in the current GA agree?

    It’s inexplicable to me that Conservatives supported the Grid Transformation and Security Act and then would have trouble with this.

  2. Larry, you didn’t ask me, but my response would be that the deal should 1) stand on its merits (financial analysis of costs and benefits) and 2) there should be transparency on that analysis. Often, there is limited transparency because many of these deals don’t make sense. Fortunately, that does not appear to be the case here and the state is to be commended so far for transparency.

    I don’t view specific deals as a conservative/liberal thing. Companies like Amazon have specific requirements that narrow the potential sites. From there, the package put together by the states needs to be competitive. You see both Republicans and Democratic administrations pursuing these deals. Scott Walker, the Wisconsin Republican, probably went way overboard in pursuing Foxconn, for instance.

    • Izzo – maybe you have a fair point about liberal/conservative but I hear much more angst from Conservatives in general on philosophical grounds on these projects.

      For instance, Jim has serious philosophical qualms about direct subsidies and most liberal types just see that as part of a potential deal.. it’s not a stopper.

      Similarly Steve H said that tax cuts across the board for all businesses is preferable to “deals” with individual companies , again something most liberal leaders in urban areas are not believers of since taxes pay for services and infrastructure and cutting taxes means starving those things.

      Most urban areas are run by liberals. They very much believe in ED “deals” and are, if anything, guilty of taking bad deals.

      If you divide up Va into Red and Blue – like they vote – and ask leaders about economic development incentives – don’t you think there would be a difference between Conservative and Liberal?

      My premise here is that there must be a reason why most urban areas are “blue” they vote blue – they vote for leaders that really don’t subscribe to the “low tax’ thing but rather leaders that pursue infrastructure and services that serve the public, attract workers and in turn attract business and industry. Red localities tend to be all about low taxes and bare-bone services. My leaders won’t support trails nor sidewalks, dog parks, and other amenities that younger workers value.

      Another example – if you look at school funding – the Blue localities tend to be willing to fund at higher levels to offer
      more comprehensive education than the Red localities.

      • This is a rare occasion in which I agree with Larry. The conservative blogosphere is highly negative toward the special treatment Amazon is receiving.

        Here’s one example: https://dailycaller.com/2018/11/13/amazon-headquarters-taxpayer-money/

        Here is another: https://www.theamericanconservative.com/articles/amazons-great-hq2-swindle/

        And another: https://www.redstate.com/setonmotley/2018/11/14/bezos-amazon-continue-royally-rip-off-taxpayers/

      • Larry, I think your point is fair on conservative commentators and bloggers, but I think there isn’t that much difference between Republican and Democratic state administrations. They are all chasing business, and a lot of these deals have been in the Red South. The Foxconn deal in Wisconsin many are calling a boondoggle was done by a Republican Governor. The bottom line should be if the individual deal makes sense given realistic assumptions (that can be evaluated transparently). What I suspect Steve was commenting on was whether the state should focus on improving the overall business climate (which involves far more than taxes) vs chasing deals. On that, in general, I’d agree.

        Jim’s concern about direct subsidies may be well founded if you look at some of the deals done. In some cases, the cost per job goes into the millions (and they try to hide the costs). So again, I think realistic scrutiny and projections are the key.

        • Izzo – I dunno guy… these days the Blogosphere and Commentators often echo or reflect elected Conservative thinking. It’s not like the oppose each other.

          I’d not be surprised if the links that Jim posts actually do portend wider Conservative opposition including elected GOP.

          It’s very hard to really quantify in hard numbers the potential

          see this article about the impacts Amazon has had on Seattle:

          https://www.seattletimes.com/business/amazon/thanks-to-amazon-seattle-is-now-americas-biggest-company-town/

          Bezos, by the way, said some time ago – he expects competitors to catch up with Amazon and some day some new thing will replace Amazon.

          This is more like a govt version of venture capitalism… in some respects – you’re just never going to get solid guarantees of outcomes.

          It’s a gamble – a calculated risk … so the numbers are not necessarily going to provide the kind of numbers that some want. Basically it gives govt a good excuse to “invest” but it’s near impossible to calculate payback.

          • Larry, rather than look at the blogosphere, I think it is more instructive to look at the actual deals subsidized. I suspect you’ll find many with support from Republicans. There is a huge database in the link provided by Mr. Moret. https://www.goodjobsfirst.org/subsidy-tracker

            Any analysis of a deal like this involves estimates and risks. (Just like any evaluation of a business plan, a stock value, etc.) That doesn’t mean it shouldn’t be done as realistically and transparently as possible. Some of the most egregious deal subsidies have cost per job estimates in the multiple millions (and those costs may be hidden). Those are difficult to justify realistically without resorting to questionable ripple effects (like we see when trying to justify funding stadiums for professional sports teams).

  3. I am curious about how the new Virginia Tech campus moved forward. Why Virginia Tech and not UVA or UVA and Virginia Tech. Why not GMU? Was this just Virginia Tech showing initiative and taking risk? Is the state really the one that could be said to be taking the risk in funding? Was a decision made at that level on which institution would open the campus?

    • Because it’s Virginia’s top tier university farthest from an economic center? Also a very good engineering school.

      • I think it is a good development as this has been a key missing component in NOVA. Just wondering how it came about.

      • Virginia Tech came forward during the first round of the process with an ambitious proposal they had been working on for some time, as well as a commitment to match state funds provided on a one-to-one basis. We had shared with higher education leaders statewide that we were contemplating including something in our proposal like the Cornell / Technion campus in New York City, asking for feedback and suggestions on that concept.

  4. There was a story on NPR this morning about Seattle’s experience with Amazon. What it highlighted is how unprepared they were for Amazon’s extraordinary growth, which caused huge spikes in housing prices and homelessness. Of course, this probably triggered the decision to spread the growth, but it also highlights how difficult it is to plan when business climates can change rapidly.

  5. I like this deal and I think Stephen Moret deserves great credit for this deal and greatly enhancing Virginia’s economic development efforts overall. However, that analysis is so sugar coated I’d advise that a syringe of insulin be kept handy when reading it.

    The biggest flaw in the qualitative analysis is an excessive confidence that the government – infused transportation and construction efforts will keep pace with Amazon’s free enterprise speed. Arlington and Alexandria are Libtopias where projects like widening Rt 66 require 30 years of study and a Noah like search for Snail Darters and Roanoke Pikeperch. Meanwhile, Amazon puts out a virtual “help wanted” sign and candidates come in droves from cities, towns and universities all over America and all over the world.

    Affordable housing will be the first casualty as gentrification occurs while The People’s Republics of Arlington and Alexandria argue over the shape of the conference room tables where the endless re-zoning debates will be held.

    Traffic will snarl. The assumption that 77% of Amazon employees will walk, car share, etc is beyond wishful thinking. NoVa is sweltering in the summer and freezing in the winter.

    If this deal holds together for 5 – 7 years I think it will be great but it’s going to be tough sledding at first.

  6. I use to make and put together big commercial business deals for a living, that is all of did for more than 2o years. I never saw a conservative deal or liberal one, a republican or democratic one. Likely I was working before the golden age of crony capitalist deals. Likely that’s one reason why I got so angry poking around business deals done in Northern Virginia from and after the late 1990s.

    So now I ask here:

    1/ Where is the crony capitalism in this deal, if any? So far, I see no evidence of that, even a hint of it.

    So back to normal old fashioned questions before crony deals.

    2/ Does the deal work for both parties? It has to for both in this sort of deal, or it fails all parties. I think the advantages to both parties are plain on the face of the deal so far as I can now see.

    3/ In the best case, in a deal like this, you want to maximize the benefits in the deal for both parties. If you do that than you got a deal spinning off maximum benefits to everybody in the neighborhood, near and far, which is a lot of people and interests. Everybody who touches or can be touched by the deal. On that count, I see great possibilities for that here. Particularly because here for Virginia, the deal not only very likely spins off a lot of benefits in order to incur costs for Va. that are substantially less than benefits, while at the same time the deal also works strongly to solve a lot of problems for which Virginia has otherwise no found solutions, and/or for which solutions might otherwise never be found.

    4/ Have both parties here protected their downside, while maximizing their upside. I hope so for the sake of the deal, and for the public’s sake. This surely deserves further investigation and debate, but so far it looks clean here too.

    5/ And, in furtherance of the above, look at all the ways the state designed their side of the deal to create collateral benefits for so many of the state’s stakeholders. I am very impressed here as well.

    6. As to whether or not these sorts of deals should be done? Well, for now, folks need to live and succeed in the world they live in, not the one they might prefer. Here, again, this deal strikes me as setting a new standard on the side of excellence.

    But again, these are first impressions.

  7. Interesting tidbit…. They are using I-95 Toll Concession funding from the Stafford County project to pay for a second entrance to the Crystal City Metro…. I would think the VRE station at CC or Long Bridge funding would have been a better project for the I-95 Toll Concession funding. or….fixing the I-95 bottleneck at the Occoquan River.

    • One of the news accounts I read this morning (can’t recall which one) noted that the transportation money would come from Northern Virginia-dedicated funds — presumably to avoid pissing off downstate legislators. I guess this is one of those sources. Somebody’s favored transportation projects will NOT get funded (or will be be delayed), which will surely cause some consternation.

      • Of course those same downstate legislators will be only too happy to spend the increase in NoVa real estate taxes on their schools and the additional income taxes on their latest hopeless scheme to perpetuate coal in a world that doesn’t need or want coal.

  8. There is an expectation that Amazon will affect the Fredericksburg Region, in other words, they do expect increased commuting from the workforce at Amazon.

    ” New Amazon headquarters will impact Fredericksburg region, but experts differ on how much”

    goo.gl/38fFMN

    Folks who switch from a govt/contractor job to Amazon and who already commute won’t be a commuting change.

    Amazon is projecting average salaries of 150K – and a good question perhaps is for new, younger, perhaps single Genx employers – what kind of housing would they be seeking? Will they join the thousands of govt/contractors mired on I-95 and other interstates ever morning/afternoon or will they settle closer to work and/or use METRO/VRE to commute? At 150K average salary, others wonder if they will become avid users of the tolled Express Lanes.

    Assuming the incentive package is approved and Amazon does locate here – it presents an interesting opportunity to actually find out how new Amazon employees find housing and commute and use that info in modeling when determining what transportation improvements to prioritize.

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