Sarah Holder is a staff writer at CityLab covering local policy, housing, labor, and technology.
In a bidding war this contentious, economic incentive packages could get extreme.
Details have emerged about some of the more wacky stunts cities are pursuing to woo Amazon’s second headquarters (give a cactus as a gift; create an Amazon “war room”), but mayors have thus far kept the most consequential details of their bids for HQ2 a closely guarded secret.
To compete, cities are working alongside state and local officials to come up with appealing economic incentive packages. And past mega-deals’ precedent and local laws suggest that the proposals on the table could get extreme.
That hypothetical Extreme Amazon Bidder could surrender their city’s property taxes, sales taxes, state income taxes, and, for a few weeks at least, actually pay the company’s workers for them—effectively draining large portions of the economic investment Amazon is purported to bring.
Just last week, Governor Chris Christie of New Jersey proposed changes to the “Grow NJ” bill, which would allow the state to offer $10,000 in tax breaks for each new employee Amazon hires. That means the state would funnel $5 billion to the company over the course of a decade, if Amazon lives up to its promise of bringing in 50,000 jobs. This is the latest move to change law for the express purpose of offering would-be employers more attractive packages.
There are some incentives for which an investment of this size automatically qualifies. “If you hire X number of people or invest X amount you automatically go to heaven,” says Greg Leroy, executive director and founder of Good Jobs First. Heaven, in this case, is where job-creating companies go to get out of paying taxes on things like building equipment. Amazon, however, has made it clear that the regular old incentives won’t cut it—“a project of this magnitude may require special incentive legislation,”the company wrote in its request for bids.
Tens of millions of dollars have already been offered for much smaller Amazon projects than HQ2. Since 2000, Amazon has received more than a billion dollars in public subsidies, often bringing in several million for each building fulfillment, sortation, data, and distribution center they build. Good Jobs First has compiled the statistics: There’s the whopping $75 million Amazon received from Hebron, Kentucky this year; the $43 million from Baltimore, Maryland in 2015; and the $61 million from Cayce, South Carolina in 2011; along with a few smaller, six-figure deals. Other deals are sealed under non-disclosure agreements or kept behind the locked doors of government officials: Those are listed as “secret,” or in some cases include only the state-level subsidy, not the local one.
“With Amazon as a rule of thumb what I’ve heard some communities or consultants say is there should be willingness to put up to 30 percent of capital investment,” says Andy Levine, founder of Development Counsellors International. “So if it’s a $5 billion investment, that might be something like $1.5 billion.” Or more, as evidenced by New Jersey.
That major investment comes from cities and states in the form of tax credits, abatements, deferrals, and waivers.
Levine attended a conference with more than a thousand economic developers earlier in September, and said that potential Amazon strategies were all anyone there would talk about. “The way Amazon is creating this new game,” he says, “the bidding could go very high.”
Here’s what it could look like, starting with the most ominous:
Diverting personal income taxes back to Amazon
Personal income tax (PIT) diversions are snarkily (but accurately) nicknamed “paying taxes to the boss.” The states that adopt them rebate a designated percentage of the income taxes a company’s employees pay back to the company for a certain period of time. “People’s state income taxes show up on paychecks normally, but at the end of the day, some of the money ends up in the company’s pocket,” says Leroy.
PIT-based programs exist in 17 states, including Connecticut, Ohio, Missouri, and most recently Michigan, which passed a “good jobs” law to woo the Taiwan-based Apple factory, Foxconn, this summer. The incentive is only activated if the company in question meets certain criteria regarding the number and quality of jobs created. In Michigan, post-Foxconn-bid, companies that bring in hundreds or thousands of jobs can retain a percentage of their income tax withholdings for five or 10 years.
“[A PIT diversion] has the potential on any project but especially this project, with this number of jobs at this level of pay—this has the option of rebating anywhere between 3 to 4 to 5 percent of payroll costs,” says Mark Sweeney, a site selection consultant with McCallum Sweeney consulting.
The incentive doesn’t have a direct impact on employees—they’re paying the normal state income tax rate. But instead of contributing to roads and schools in the city, they feed money back to their employer.
Subsidized construction costs
Amazon will also want to reduce costs on the proposed 8 million square foot, $5 billion headquarters itself.
In past site bids, cities have offered to slash taxes upfront on construction materials, convert a government building free of charge, or provide property worth millions of dollars for $1 a year.
Sales taxes, too, on building materials or supplies, could be reduced or eliminated. When Boeing came to Seattle in 2013, the company saved $71 million after Washington State waived sales taxes on the construction of their new building—a loss in revenue that rang up five times higher than the $13 million the state had predicted.
Stephen Nocera, director of project excellence for Danbury, Connecticut, which is making a bid, says that the city is “willing to look at real estate and personal property tax deferrals.” Danbury’s real estate is taxed at a rate of around 1.6 percent, and Connecticut charges personal property taxes on business equipment like computers and copiers. If the company came to Danbury, Amazon wouldn’t pay a dime, “at least at the outset.”
Subsidized worker training
The new frontier in site proposals, says Levine, are workforce training grants.
Many cities already provide these kinds of incentives to job-creating companies by funding a percentage of the costs of worker training during an initial start-up period, or providing access to outside training programs, for a subsidized or no-cost rate. The idea is to reward businesses for creating new jobs, preferably those that pay well and have a long shelf life—and preferably those that will go to local workers (though that isn’t always an explicit eligibility requirement). What’s also variable is the length of coverage, the amount of salary covered, and the number of employees included—a sliding scale that could be pushed to the limit in a scenario like this.
Illinois offers companies up to 50 percent of the cost of training employees in emerging technologies: between 2012 and 2014, the state awarded Ford Motor Company $1.7 million in “employer training investment” funds, part of the $6.6 million total offered to a cocktail of companies in that two-year period. Kansas provides its own training program, Kansas Industrial Training, that partners with businesses to provide standardized courses for employees, which they’ll fund up to 100 percent. And New Mexico reimburses 50 to 75 percent of employee wages during classroom or on-the-job training for the first six months of an eligible new company’s life. Sweeney suspects some cities will offer Amazon continuous training for new employees, instead of placing a cap.
And even more perks
Some cities might also offer benefits tied to their particular assets.
For those in regions with prestigious state universities (like California’s UC system or Michigan’s University of Michigan), a city could offer to get all company members and their children in-state tuition rates by granting them immediate in-state residence. Other cities with high property costs could provide relocation assistance to the tune of tens of thousands of dollars per employee.
Companies could also be offered competitive low- or no-interest loans from the cities themselves. Unlike the risk-adjusted loans that come from the private market, the burden of risk for these government loans often falls on the taxpayers, not the banks.
Granted, the chances of Amazon defaulting on a loan or folding may seem low. But, says Art Rolnick, an economist at the University of Minnesota, “markets change pretty fast sometimes, and companies come and go—even the great ones.”
The big-picture package
This Extreme Amazon Bidder might soon exit the realm of the hypothetical. “If you’re Amazon and a city says, ‘You need anything, you can come here, and it’ll be low cost or no cost’—that’s not common!” says Sweeney. “But this is the kind of project that will bring uncommon things to the table.” States like New Jersey are already clearing the legislative way to put $5 billion on the table; others may soon follow suit.
What Amazon is doing to cities is tantamount to “blackmail,” Rolnick told the New York Times. If they want the investment, they have to offer the incentives. If they offer the incentives, the investment could get whittled down to nothing. Bargains like these are “a useless waste of taxpayer dollars,” as CityLab’s Richard Florida recently wrote. “It’s corporate welfare,” Rolnick adds.
In past years, reports have called into question how effective incentives really are, asserting that the economic impacts are “always statistically insignificant,” and “don’t do much to convince companies to move.”
But Sweeney, who works with companies on their selection processes, argues this analysis is somewhat short-sighted. “The economic impact of this payroll and this purchasing is going to be incredible, so it will dwarf whatever incentives the community will put on the table,” he says. “In five or 10 years, they’re going to look back and not see what the fuss was about.” Even in extreme cases, like the one outlined above, “governments can expect a strong revenue increase, just not necessarily directly from company.”
That’s assuming the trickle-down effect with take hold—that jobs will be given to city residents, not primarily out-of-towners; that they’ll all start spending private funds on schools and businesses and restaurants; and that more companies, tech or otherwise, will follow Amazon’s lead.
While the Amazon RFP seems to lay out high stakes, cynics like Joe Cortwright in City Observatory have argued that Amazon probably already has its own ranking of wish list locations. The competition was opened simply to increase the company’s own bargaining power. It’s a move taken from General Electric’s playbook—even before the company bestowed their blue ribbon on Boston earlier this year, Cortwright argues, GE’s CFO knew that the city’s talent pool and thriving spirit of entrepreneurship made it the right choice. GE only pretended to weigh their options, he says, using the bidding war to milk the city for $145 million in tax incentives.
Only 2 percent of a company’s cost structure consists of state and local taxes; the rest of the costs are derived from regular business expenses. “That’s why incentives...will be between marginal and immaterial to Amazon’s decision,” says Leroy. “They know that, and they’ve got internal expertise to know that.”
But even if there’s only a slim chance economic incentives will make a difference, many regions seem ready to push their budgets to these precarious limits. “It’s easy to see why a state might end up overbidding,” Rolnick says. “If you’re the governor and you attract that headquarters and 50,000 jobs, that looks great on your resume—even though in the big picture, it’s a mistake.”