The Political Calculations Behind the Amazon Package

Governor Ralph Northam touted the Amazon deal at a press conference last week.

Michael Martz has done an excellent job reporting on the political factors that shaped the incentive package that induced Amazon, Inc., to select Crystal City-Potomac Yard in Northern Virginia along with New York City to co-host its massive expansion. The article illuminates the critical role of the little-known Major Employment and Investment Project Approval Commission (MEI), in forging the incentives.

As its name suggests, the legislative commission provides oversight of incentives for economic-development projects, and its input was essential for a project that would require budget approval for an estimated $1.85 billion in state expenditures on direct incentives, transportation projects, and higher-ed funding.

While Stephen Moret, president of the Virginia Economic Development Partnership (VEDP) was the administration’s point man on the deal, it is apparent from Martz’ reporting that state Secretary of Finance Aubrey Layne was a key player in the negotiations. “VEDP’s role was to get the deal done,” Layne told the Times-Dispatch. “My role was to make sure we were partners and kept in communication with MEI and the money committees.

Crafting the Amazon deal required political calculations on how to sell the biggest incentive package in the history of Virginia to the General Assembly. One MEI member, House Finance Chairman Lee Ware, R-Powhatan, resigned from the commission in February in protest of the immense size of the incentives offered the e-commerce giant, the biggest company (by market value) on the planet. At least one other member, Del. Steven Landes, R-Augusta, remained undecided until negotiations coughed up $250 million in state funds toward creation of Virginia Tech’s proposed $1 billion Innovation Campus next to the Amazon campus.

Some of the key political considerations:

Cash flow positive. The $550 million in job-creation incentives for Amazon was structured so that state payments to Amazon will be delayed until after income- and sales-tax revenue from the new jobs roll into the state treasury. That way, the deal will be cash-flow positive for the state from year one.

Sustained Metro funding. Amazon was a significant factor in the General Assembly’s decision in the 2018 session to contribute $154 million a year as Virginia’s share for the recapitalization of the decrepit Washington Metro mass transit system. Access to mass transit was a key consideration for Amazon. Said Jason Miller, executive director of the Greater Washington Partnership: “It was a pretty clear signal that because of the importance of the system to both the economy and Amazon, the region can come together and tackle its most pressing issues.”

More STEM degrees. The General Assembly also committed $28 million this year to boost production of undergraduate degrees in computer science and other technical fields as well as $25 million to the CyberX cyber-security education initiative to strengthen Virginia’s technology talent pipeline. In Layne’s estimation the educational commitments may have been more important to Amazon than the direct incentives for job creation. “Incentives didn’t really drive the decision,” said Layne. “At the end of the day, it was the workforce development and education pieces, which we already had decided were going to happen regardless.”

NoVa transportation money only. The Commission made it clear that funds designated for transportation improvements around the Amazon site would not come from general transportation funds. Instead, the state will tap federal transportation dollars restricted to Northern Virginia and toll-concession revenues from the Interstate 95 express lanes. “It was not taking any money from anyone else in the commonwealth — that was key,” said Layne.

Affordable housing a local responsibility. The commission balked at a proposal to offer $100 million in state subsidies to maintain affordable housing in Northern Virginia. Both legislators and the administration agreed that housing was the proper role of local governments and private developers.

Splitsville. Amazon’s decision to split the HQ2 project — a total of $5 billion in investments and 50,000 jobs — between Northern Virginia and New York City actually made the deal more attractive for Virginia. Said House Appropriations Chairman Chris Jones, R-Suffolk: “We felt that it was a better fit for us because it was more digestible.”

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19 responses to “The Political Calculations Behind the Amazon Package

  1. Is Virginia the only state where regions like NoVA have to pay (1) 100% of their own roads, and (2) 50% of outside NoVA roads in RoVA?

    That’s what I told my sister one time (she was Bristol resident) complaining. I said “…what, you want NoVA to pay all its own roads, and most of the cost for your roads? ” she said “Yes! you nailed it. That is how exactly we feel (laughs)”.

    • Northern Virginia gets its fair share of statewide tax revenues (retail gasoline tax, wholesale gasoline tax, sales tax, driver’s registration fees, etc.). Over and above that amount, a NoVa transportation commission gets revenues from regional add-on taxes plus toll road concessions. The transportation pieces of the Amazon deal are being funded with regional revenue sources.

    • Is there a prediction on how many Virginia House and Senate seats Nova will gain in 2021 due to population growth and redistricting?

    • No county pays 100% of all the roads in its boundaries -costs.

      Any road that is “US”-signed – like US 1 or US50 is the responsibility of the State with some Federal funding. Ditto for the Interstates and the Va primary roads.

      The “other” roads are the 600 series Byrd era secondary roads and subdivision roads that in all but two county and all city/town jurisdictions in Va are the responsibility of VDOT. The two counties are Arlington and Henrico and all the towns and cities take care of their own roads. All of the others including Fairfax are usually maintained and operated by VDOT. On new roads and improvements – Vdot handles the pursue strings and the localities prioritize what they want done within the constraints of the funding.

      For Hampton and NoVa – they are additional gas and sales taxes collected that add to their available funding which is various pots of money than can be used for various things road and transit.

  2. How do the incentives work if 25% of the Amazon workers live in DC or Maryland and pay no income tax to Virginia?

    • MCS: Pretty sure Virginia gets to tax the income of them all, regardless of where they are reside. Non-residents with Virginia income pay Virginia tax. What Virginia loses is the other stuff (real estate, sales, excise) taxed based on their own personal spending.

      Hm, having said that, I found this and MD residents who work in VA can pay their tax to MD if they are in VA less than 183 days…
      https://tax.virginia.gov/reciprocity

      Politics: If you define “Nova” broadly, to include the burgeoning ring counties, I’d bet at least one new Senate seat and two House seats. Outside the beltway but inside the ring of the Rappahannock, Rapidan and Shenandoah.

    • “How do the incentives work if 25% of the Amazon workers live in DC or Maryland and pay no income tax to Virginia?”

      Good question. The Commonwealth’s forecasted state general fund revenues do not include out-of-state residents who will commute to Virginia. Based on historical commuting patterns and analysis by the Fuller Institute at GMU, we expect approximately 31% of Amazon HQ NoVa employees will live in DC or MD. Those employees are not included in the revenue estimates. VEDP accounted for the estimated out-of-state employees when developing the incentive offer last year.

      For more details on the economic and fiscal impacts of the project, check out the Downloads section of the HQ2 pitch website at http://www.hqnova.com.

  3. Okay – so one more ignorant person weighs in……… ” Major Employment and Investment Project Approval Commission (MEI)”

    so do we know who is on this committee and how members get appointed and their website with agendas and meeting minutes, etc?

    This “sounds” like both Dem and GOP members of the GA were on the group that collaborated this deal.

    How come we never heard of this group and it’s role until now?

    • Some of us do, Larry. 🙂 It’s been around several years. All the interesting meetings are closed…..but they are announced.

      • Steve, has this group typically approved prior ED deals like Micron and the bogus Chinese deal and other debacles (and successes)?

        To this point, I was blissfully ignorant thinking that the ED initiatives are handled by the current Administration with little or no involvement from the General Assembly except perhaps near the end if approval was needed.

        Do we know who is on this committee and what actions they have taken, etc?

        • MEI was not involved in the Lindenburg project, as that project was below the threshold that would call for MEI review. MEI did review the Micron proposal. At least for the last couple years (and maybe longer), the process generally starts with a proposal from VEDP. MEI includes several House and Senate leaders as well as the secretary of finance and secretary of commerce and trade. See https://law.lis.virginia.gov/vacode/title30/chapter47/.

          I think the MEI model is an important, constructive, and relatively unique (compared to many other states) part of Virginia’s economic development structure. In at least some other states, the executive branch often develops economic development incentive packages for big projects with little legislative involvement until the very end, which can result in tension and sometimes misalignment when a project is announced. With MEI, big projects are pre-vetted (before a proposal is delivered to major prospect) with both administration and GA involvement. Notably, full GA approval is still required for any large custom grant program, such as Amazon or Micron.

          • Thank you for the background and yes I do agree – getting folks from both sides of the aisle to help vett the proposal is a good process and it does sound like they were directly involved in the Amazon deal.

  4. As an initial observation, let me suggest this line of argument offered in the above post (article) goes nowhere. It is, by and large, irrelevant to the transaction’s worth and value, and its costs, to the community.

    Why?

    It’s simple. What Michael Martz (or is it Jim) calls some of the key political considerations, should not be called “political” at all.

    Rather, instead, they are all essential business ingredients to making this transaction a highly beneficial commercial transaction that will financially and commercially, civically and socially, benefit all the citizens of this state four ways to Sunday.

    These business ingredients, working together, will jump-start a new era of prosperity in the state at just the time that Virginia very much needs that financial and societal rebirth.

    Hence:

    The deal is quite simply brilliantly and very effectively put together. Not least because it solves so many critical problems confronting Virginia irrespective of Amazon, in the best way imaginable. Another words, the Amazon deal offers highly practical and doable solutions to many problems that confronted Virginia long before Amazon ever appeared on the scene. Problems that were theretofore deemed insoluble. Post Amazon deal, however, now suddenly the landscape and future of Virginia changes radically for the better, given the power of these solutions put into the deal that are not political at all.

    As Mr. Lane said, for example: “Incentives didn’t really drive the decision,” said Layne. “At the end of the day, it was the workforce development and education pieces, which we already had decided were going to happen regardless.”

    In addition these incentives ARE NOT IMMENSE, despite their numbers. Fairly and accurately put, these numbers and their size can only be measured against the benefits and returns they generate, and the source of their payment, which is generated out of thin air. By this I mean these sources of repayment are spun out of the power of deal’s stupendous benefits that, but for the genius of the deal itself, would never have been realized.

  5. re: ” The package was assembled by the Virginia Economic Development Partnership, the governor’s office and a high-level legislative commission that approved it unanimously on Oct. 25. The Major Employer and Investment Project Approval Commission ….”

    so… in terms of “politics” – it sounds like the GOP was involved and part of the process…

    no?

    so it sorta sounds like both the Dems and the GOP knew there was a process and both Dem/GOP were involved with the process… so it should have been a little less “political? ?? that’s a question.

    • Not all political calculations revolve around the two political parties, Larry.

      NoVa and RoVa compete for resources. Medicaid, K-12, higher-ed, roads, public safety, etc., all compete with economic-development inducements for resources. The allocation of scarce resources in the legislative process is inherently political, and that’s why I described it as such.

  6. I haven’t read the Martz analysis, but today’s WaPo Business Section carries an article by Steven Pearlstein (posted online 11/12) estimating about $650 million more in tax revenue for State and local governments around the DC region from the Amazon deal, plus providing the leverage for associated infrastructure borrowing. So he asks, how should we invest it? He breaks his recommendation down into four categories: expand commuter rail service, deal with the obstacles to new housing construction, boost higher education in NoVa (and celebrate the new Va Tech satellite campus), and “keeping it in perspective” (especially, acknowledging the good that demonstrably can come and came in this instance from greater regional collaboration). Hard choices, but I like his priorities.

  7. re: ” deal with the obstacles to new housing construction”

    yes – that’s the part that is said to be caused by restrictive regulation.

    Might be interesting to know – in this case – what specific regulation could be loosened to encourage construction of more housing and more affordable housing…

    I wonder what that list of restrictions that should be changed looks like.

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