Let’s See a Proper Accounting of the Micron Incentives, Please

Photo credit: Inside NoVa

Let’s get down to the bottom line on Governor Ralph Northam’s big Micron Technology Inc. announcement: What does Virginia get out of the deal, and how much will it cost the public?

The answer: Not enough information has been made available to tell.

Boise, Idaho-based Micron will invest $3 billion to increase memory production at its Manassas operation, creating 1,100 jobs by 2030, according to the press release issued by the governor’s office. In exchange, Virginia is ladling out one of the biggest incentive packages in the modern-day history of economic development.

Here are the economic benefits mentioned by the Northam administration:

  • The expansion will position the Manassas plant as Micron’s “Center of Excellence” for long-lifecycle memory and “cement the company’s position as one of Virginia’s largest exporters.” The project is expected to increase exports from the Commonwealth by more than $1 billion annually.
  • Micron will establish a global R&D center in Manassas for memory storage solutions focused on automotive, industrial and networking markets. The research center and related activities will employ about 100 product engineers.
  • Micron’s philanthropic arm will donate $1 million toward “growing the next generation of scientists, engineers and technicians” at “several” Virginia universities and community colleges.

Micron is a heavy hitter in advanced technology, and it is playing for the long term. The $3 billion investment represents a long-term corporate commitment. Micron will not operate its plant for 10 years until plant and equipment are depreciated and then pick up stakes and move somewhere else. Though not emphasized by the press release, the Micron investment could have ripple effects if suppliers locate nearby or if its research contributes to growth of a Northern Virginia innovation ecosystem for such sectors as, say, unmanned systems or the Internet of Things.

Although Micron has deep roots in Virginia, the company considered other locations around the world — and it played hardball with the state, extracting a massive incentive package. How much will this cost taxpayers and electricity rate payers?

Well, we don’t fully know yet. Micron will be eligible to receive a Major Employment and Investment (MEI) Project Approval Commission grant of $70 million for site preparation and facility costs, subject to approval by the General Assembly. But that’s just for starters. “Additionally,” says the press release, “the City of Manassas and utility partners are providing a broader, comprehensive support package to enable the expansion, including substantial infrastructure upgrades and additional incentives.” The press release provided no numbers for the “support package.”

Most of the state support will be up-front money. The Commonwealth will contribute $50 million in a year and $20 million in two years, contingent upon the company meeting its commitments along the way. Micron will create an escrow account to ensure that the state will be made whole in case the company doesn’t deliver, Stephen Moret, CEO of the Virginia Economic Development Partnership, told the Richmond Times-Dispatch.

The governor has not yet released the details on incentives offered by the City of Manassas or Dominion Energy for up-front infrastructure improvements. At some point that information will be made public — in the 2019 General Assembly session, if not before. We can assume that the Northam administration will present costs and benefits in the most favorable possible light.

Time value of money. One trick to watch out for: failing to account for the time value of money. A core principle of economics and finance is that a dollar in hand today is worth more than a dollar a year from now, and a whole lot more than a dollar 11 years from now. A 2018 dollar generating a return on investment over 11 years could easily double in value by 2030, depending upon the rate of return assumed. (The Virginia Retirement System assumes a 7% annual rate of return on invested capital.) 

Virginia, Manassas and Dominion will pay for up-front infrastructure improvements in 2019 and 2020 dollars. Micron won’t complete its expansion until 2030. Undoubtedly some of the company’s expenditures will come early in the process, but some will come later. The economic value to Virginia could vary significantly, depending upon Micron’s schedule for investing capital and creating jobs. In any honest accounting, legislative numbers crunchers need to take the time value of money into account.

Sales tax giveaways? Will a break on the state sales tax be part of the package? In an interview with Bacon’s Rebellion a day before the Micron news broke, Secretary of Finance Aubrey Layne alluded to the erosion of revenue gains from the state sales tax due to corporate expansion and relocation incentives. Such giveaways have become routine in corporate incentive packages, he said. Although he made no specific allusion to Micron, as Steve Haner notes in the previous post, it seems clear in retrospect that he was thinking about the semiconductor giant.

Net benefit. One other factor to consider in toting up the costs and benefits: Examine net tax benefits. Undoubtedly, we will hear about the millions of dollars in revenues from the corporate income tax, personal income tax, sales tax, personal property tax, BPOL tax, and machine-and-tools taxes generated by Micron, not to mention the “multiplier effect” of Micron-related spending in the local economy. Given the incredibly capital-intensive nature of Micron’s investment, the project could represent a huge tax boon to Manassas and the state — if they don’t give it all back through tax breaks.

The critical point to remember is that the taxes generated by Micron and its expected 1,100 additional employees come with a liability — the commitment to provide road improvements, schools, and other public services. Northern Virginia roads are already insufferably congested. Northern Virginia localities operate the most expensive school systems in the state. How much will Manassas, its neighbors and the state incur in liabilities from the addition of 1,100 workers and their families, many of whom will be migrating to NoVa from outside the region? No accounting of costs and benefits is complete without those numbers.

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3 responses to “Let’s See a Proper Accounting of the Micron Incentives, Please

  1. Every VEDP cost-benefit analysis I’ve seen on previous agreements, including one’s I helped develop, has included net present value calculations on the incentives and state ROI. Usually they use standard inflation factors (not sure its fair to compare it to investment returns.)

    This is a big win, more important than the 1,100 jobs would indicate because it should have major spin off effects on the supply chain and the region’s growing reputation as a competitor in this market. As to the details, I’d just say stay tuned and stay interested. This is another area where the traditional news media has been too complacent or distracted to do the long-term follow up. You may not get good answers for years, and then you will need to dig for them.

  2. I guess I’m not sure if Micron is any more a safe bet than Motorola and others in Richmond and such failures are the norm … you’re lucky if you get a “win” every so often.

    In that light – it’s a bit of a crap shoot to know with any certainty what is the correct level of “incentive”. You’re basically betting that Micron is a well managed, well financed company that is engaged in a business that will not be “disrupted” in the near future.

    Realistically – do we really expect any company like Micron to be around in 20-30-40 years?

    Still..we want a robust economic development effort in Virginia and to cripple it with demands for “transparency” just seems counter-productive.

    We’re gonna get a lot of strike-outs… it’s normal. But if we stay in that game, we’ll get our share of successes…

    This is one of those areas where the bean-counters are death incarnate…

  3. The most interesting part of this deal is the R&D center in my opinion. Software trumps everything else in technology these days.

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