Sarah Holder is a staff writer at CityLab covering local policy, affordable housing, labor, and technology.
It won't get double the tax incentives (probably). But there are other tactical reasons for the move.
Amazon has spent over a year trying to adopt the perfect second headquarters to complement its Seattle home base. Now, the desired HQ twins could look more like triplets: On Monday, the Wall Street Journal reported that, according to unidentified sources, Amazon plans to split HQ2 evenly across two of its 20 shortlisted locations, instead of choosing just one to host it. The winners of the shared trophy will likely be Long Island City, in Queens, NY; and Crystal City in Northern Virginia, two people briefed on the matter told the New York Times. The official announcement will come as early as later this week.
For the two chosen regions, this means the boon—and cost—of becoming an HQ2 could look different than initially projected. The 50,000 jobs Amazon promised to create will turn into 25,000, and the estimated $5 billion in investment might shrink to a neat $2.5 billion each. The strain on transportation and housing might sting less, and the population might stabilize sooner. Amazon will have more tech talent to choose from, and will likely firm up its influence on more than one coast. But, in the midst of a competitive bidding war—one in which regions have promised Amazon billions in tax incentives for the chance to lure it—will it also mean the company makes off with double the public money?
Not necessarily, says Greg LeRoy, the executive director of corporate research non-profit Good Jobs First. “Here’s the skinny,” he told me. “It may end up costing taxpayers somewhat more this way, but not twice as much.”
Many of the regions on Amazon’s 20-city-long shortlist have kept all or part of their proposals a secret—including favorites Northern Virginia and New York City; as well as Dallas, the third region that has been in “advanced talks” with the company, according to reports in the Wall Street Journal.
But from the information publicly available, much of the big money offered by HQ2 contenders has come in the form of “variable costs.” Those are performance-based incentives: They’re tied to head count, wage levels, capital expenditures or some combination of those factors, says Leroy. “Therefore if they hire half as many people, they get half as much of the head count subsidy.”
Take personal income tax diversions, for example—something Leroy likes to call “paying taxes to the boss.” In 18 states that host nine of the contender cities, including Maryland and Illinois, local leaders can legally sign away the income tax revenue generated by Amazon employees back to Amazon. That’s part of what made Montgomery County, Maryland’s, promised $8.5 billion bid so large: The state’s top personal income tax rate is 5.75 percent, meaning Amazon could get back $4.9 billion from a workforce of 50,000 employees. If Amazon instead hires 25,000, that number looks more like $2.45 billion.
Chicago’s bid neared an estimated $2 billion, but $1.32 billion of it would have come from these income tax diversions; Denver, Indianapolis, and Atlanta all have similar measures that could be used to similar effect. By shrinking the workforce, Amazon is shrinking those individual subsidies. But the money they’ll get, especially if collected from multiple jurisdictions, is still far from small change.
Elsewhere, employees aren’t generating the revenue themselves, but tax breaks are still contingent on their existence: At least $1 billion of Newark’s more than $7 billion package comes from a freshly-signed payroll-tax exemption for companies that create 30,000 jobs, and invests $3 billion over the next 20 years. A pint-sized HQ2 might not meet that threshold.
Infrastructure improvements, meanwhile, can’t be divided as easily. “We can’t say we’re going to build you half a road,” said Leroy. If a city promises to build Amazon a bridge or a road or a transit stop, that would be harder to adjust for the given investment.
But, as the clock runs out on Amazon’s decision-making period—one that’s had cities tripping over each other to grovel at the feet of CEO Jeff Bezos, and that’s had ardent betters readjusting their odds every few months—the final two regions’ proposals still have time to morph.
In many of the places rumored to be finalists, local governments will still have to approve any offer to Amazon. Northern Virginia’s proposal was drafted by the Arlington Economic Development Office, without the approval (or knowledge) of the county board, says board president Katie Cristol. Before any funds are put on the table, that county board will have to vote. In Austin and Nashville, the city’s Chambers of Commerce drafted the proposal, without the city council’s oversight, meaning the council there will have to do the same.
These approval processes could be drawn out, especially if conducted under the scrutiny of activists and skeptical community members, shut out of the process from the beginning, who have long been breathing fire down their councils’ backs. But some legal changes could be approved too quickly for public input. If Virginia wanted to create a personal income tax diversion program for Amazon’s benefit—or if Amazon asks them to—it would only take a one-day special session of the state legislature to enact it for them, Leroy says. And, judging by Governor Ralph Northam’s recent comment to WTOP radio—“A lot of [Virginia government] resources are being expended right now, and I think for good reason”—the state might be easy to convince.
After it whittled down its list of HQ2 contenders from 237 to 20, Amazon promised it would make one final call by the end of 2018. Why did Amazon go all Solomon on us in what may be the final week?
News of the divide-and-conquer strategy broke shortly after Mike Grella, Amazon’s director of economic development public policy, lashed out at Crystal City’s leakers on Twitter this weekend: “Memo to the genius leaking info about Crystal City, VA as
#HQ2 selection. You’re not doing Crystal City, VA any favors. And stop treating the NDA you signed like a used napkin.” (Grella did not respond to multiple requests for comment.)
Perhaps pitting regions against each other until the bitter end has been Amazon’s M.O. all along. Amazon has every reason to settle in the Northern Virginia neighborhood of Crystal City, as the Washington Post reported, or somewhere else in the Metro D.C. area: Bezos owns the largest property in Washington; Amazon has heavily invested in the federal lobbying industry, of which Washington’s the heart; and the company’s data farms pepper Loudoun County, in Northern Virginia. Maybe the two regions it’s chosen are simply D.C. and Northern Virginia, or Northern Virginia and Montgomery County, and the WSJ comment was a sleight of hand.
But the publicity blitz it’s galvanized—and the chokehold on city leaders it’s tightened—by continuing the war well into November might nonetheless be worth the wait. As Joe Cortwright at City Observatory wrote in January, there’s a reason to “keep the ‘game’ alive”:
If a single winner is announced, and its competitors are dismissed, then Amazon’s negotiating position becomes much weaker. A city may not be able to deliver everything that’s promised (especially over time), and local political demands for Amazon to provide compensating benefits to the community in exchange for its subsidies are likely to escalate. Having multiple winners will allow Amazon to continue to keep each of them honest.
The company now has the negotiating power of billions in incentives to ply other cities with—and extremely detailed analyses of the housing, transportation, labor, and economic dimensions of more than 200 regions at its disposal. Former presidential candidate Ralph Nader characterized Amazon-style tax incentive-wooers as “a corporate emperor on top of the mountain asking the vassals and the serfs to offer what they can,” when we spoke earlier this year. More generously, people like Scott Galloway, a professor of marketing at New York University's Stern School of Business, have described the whole ploy as “genius.”
In October 2017, one Georgia city offered to rename itself in Amazon’s honor. By Monday, New York governor Andrew Cuomo had offered the same. These were, maybe, jokes, albeit unsettling ones. But after the final destination is chosen later this week, two major U.S. cities could find their and Amazon’s identities—and fates—more seriously linked.