Incentives for Amazon's HQ2 stir anger, but they're more common than you may think

In this Wednesday, Nov. 7, 2018, photo, people walk past a mural in Long Island City in the Queens borough of New York. Across the East River from midtown Manhattan, Long Island City is a longtime industrial and transportation hub. (AP Photo/Mark Lennihan)

Amazon’s announcement Tuesday of its final decision in the 14-month national food fight it has lorded over to determine the location of its second headquarters was met with a mix of anticipation and dread as residents of the company’s future homes contemplated the ramifications of its arrival.

After more than a year of rumors, leaks, and speculation, Amazon confirmed it will split the $5 billion HQ2 investment equally between Long Island City in New York and the Crystal City area in Northern Virginia, promising 25,000 new jobs for each. The company also revealed it will open an Operations Center of Excellence in Nashville, creating 5,000 jobs there.

Hiring at all three locations is scheduled to begin in 2019.

Many local and state officials welcomed the announcement. New York Gov. Andrew Cuomo called it “one of the largest, most competitive economic development investments in U.S. history.”

“This is a giant step on our path to building an economy in New York City that leaves no one behind. We are thrilled that Amazon has selected New York City for its new headquarters,” said New York City Mayor Bill de Blasio in a statement.

The planned Northern Virginia location is being branded as “National Landing,” which is apparently a new umbrella term encompassing Crystal City, Pentagon City, and Potomac Yard.

“The strength of our workforce coupled with our proximity to the nation’s capital makes us an attractive business location. But Arlington’s real strength is the decades of planning that have produced one of the most vibrant, civically engaged communities in the world,” Arlington County Board Chair Katie Cristol said.

According to Amazon, the ability to attract highly-trained workers was the top priority in selecting the new locations. When it solicited proposals from cities last year, it had also sought proximity to an airport, a robust mass transit system, and a community with more than 1 million people.

Given the criteria Amazon laid out, experts said the final decision made sense for the company.

“There’s no surprise they ended up choosing the financial capital of the country and the political capital of the country,” said Greg LeRoy, executive director and founder of Good Jobs First.

Ron Starner, executive vice president of Conway Inc. and Site Selection magazine, said it seems clear in retrospect that Amazon wanted to establish a presence on the east coast with this project, and the New York and D.C. areas were the logical places to gravitate toward.

“If you just look at these two cities, the first thing that jumps out at you is the talent that both bring to the table,” he said.

Although the bidding process had been highly secretive, Amazon revealed Tuesday what it is getting in exchange for spurring economic and real estate development in each community. The terms of the agreements include a mix of performance-based tax credits, state grants, and commitments to invest in infrastructure.

New York, Virginia, and Tennessee offered Amazon a combined $2.8 billion in incentives, significantly less than other candidates on the short list had ponied up but more than some believe one of the world’s richest companies should be given for opening an office.

“Amazon is a billion-dollar company,” said Alexandria Ocasio-Cortez, a newly-elected congressional representative who will represent part of Queens, on Twitter. “The idea that it will receive hundreds of millions of dollars in tax breaks at a time when our subway is crumbling and our communities need MORE investment, not less, is extremely concerning to residents here.”

As unnecessary as giving Amazon hundreds of millions of dollars in taxpayer funds may seem, LeRoy said such incentives have been standard practice since the 1930s, and cities that do not offer them would face a disadvantage in high-stakes site selection negotiations.

“Amazon inherited a system that ties public officials’ hands behind their backs,” he said.

Starner agreed economic incentives are a fact of life for states competing over economic development projects, but considering Amazon turned down an $8.5 billion bid from Maryland, the handouts are smaller than they could have been. He also noted that Virginia’s promised investments in workforce training, transportation, and infrastructure will have beneficiaries beyond Amazon.

“Most of the money is being spent on assets the state of Virginia will retain,” he said.

The local economy is also likely to get a boost from Amazon’s presence over time, providing further justification for states to open their wallets.

“The upside is pretty obvious,” said Joe Parilla, a fellow at the Brookings Institution’s Metropolitan Policy Program. “I think you also may get ancillary benefits. Those jobs will pay pretty well, so the people that work in them tend to spend more locally.”

New York has promised up to $1.2 billion in tax credits, calculated as a percentage of salaries payed over the next ten years, which the company says would amount to $48,000 per job for 25,000 jobs with an average wage of $150,000. In Virginia, Amazon will receive up to $550 million if it creates 25,000 jobs with a $150,000 average wage over the next 12 years, which would be about $22,000 per job. The company will also receive a grant in Virginia based on the incremental growth of the local hotel tax.

In return, Amazon estimates its investments and job creation will produce $10 billion in tax revenue in New York and $3.2 billion in Virginia over the next 20 years. Amazon also committed to donating space on its New York campus for a tech start-up incubator and a school and spending $5 million on training and internship programs.

Amazon spokesperson Jay Carney told CNBC Tuesday the financial handouts were not a primary factor in the company’s decision. He also disputed the premise that the $2.8 million being spent on financial incentives for a thriving $800 billion company would be better spent on social services for the existing population.

“We really are confident that these performance-based incentives will absolutely pay for themselves and then some for each community,” he told CNBC.

Seattle has seen some benefits from hosting Amazon’s primary headquarters as the company has grown, but it has faced challenges as well. As home values rose, so did homelessness, and Amazon campaigned aggressively against a corporate tax to fund homeless services. The company and the other cities partnering with it can learn from that experience.

“Especially if they’re getting public subsidies, we should hold them to account for how they participate in their community,” Parilla said. “Being blind to the inequality in their backyard while accepting a lot of incentives I don’t think behooves them either.”

Amazon laid out all the incentives promised by New York, Virginia, and Tennessee in its own press release, an unusual disclosure that left LeRoy suspicious that more details may be coming down the line as the deal progresses.

“It looks to us like Amazon is trying to control the message about the tax breaks they’ve gotten,” he said.

Rep. Don Beyer, D-Va., said the agreement reached with Amazon will make Norther Virginia “an economic engine of the nation,” but he also promised to ensure that the legitimate concerns his constituents have about it are addressed.

“Everything in my career -- in the private sector and as a Virginia public official -- has taught me that communities rise and fall together. The infusion of jobs and investment that Amazon will bring to the region will benefit many people who will never collect an Amazon paycheck,” Beyer said.

While some celebrated the expected influx of high-paying jobs and well-educated upper middle-class residents, others balked at the prospect of 25,000 more people cramming themselves into already-congested communities.

"Arlington and our region already have an affordable housing crisis due to gentrification and rising rents, which so-called HQ2 will surely exacerbate,” said Alex Howe of Metro DC Democratic Socialists of America Northern Virginia Branch, one of the leaders of the Obviously Not DMV campaign. “We shouldn't be giving billions away to one of the biggest companies in the world when our schools are already at capacity and our transit crumbling across the region with no clear solution planned even before the impact of HQ2.”

Amazon’s detractors have questioned whether pouring more money into already-prosperous neighborhoods of two of the nation’s most economically-active metropolitan areas is the most effective use of $5 billion. However, it was predictable that the company put its bottom line above the impact such an investment could have on a city like Pittsburgh or Newark.

“I think it would be hard for Amazon’s decision-makers to argue to their shareholders that we thought business would benefit more from New York and D.C. but we felt a duty to put it somewhere else,” Parilla said.

Amazon needs very educated, very skilled workers and many of the finalists with greater economic need could not guarantee that kind of talent pool.

“You’d have to have the burden of proving there’s a workforce there that Amazon wants and needs The only place on Earth you’re going to find workforce skills you must have to be globally dominant is in the most densely-congested cities on Earth,” Starner said.

Some critics have alleged Amazon misled local governments and used the drawn-out bidding process to collect data on major cities across the country that no other company is privy to.

“There is no HQ2,” New York State Assemblyman Ron Kim and Fordham law professor Zephyr Teachout argued in a New York Times op-ed Friday. “Instead, Amazon is expected to announce a fairly routine expansion, adding new satellites in Queens and in Northern Virginia. The countless hours spent courting Amazon were undoubtedly valuable for Amazon: the company gained free media coverage and untold amounts of economic data from each bidding city.”

The Open Markets Institute is calling for officials to disclose the details of all proposed HQ2 deals and demanding an investigation of what it called Amazon’s “bait-and-switch” campaign.

“Amazon demanded subsidies and terms from cities all over the country, demanded those terms be kept secret, then reneged on its promise to locate thousands of jobs,” said Barry Lynn, the organization’s executive director. “Amazon is now treating even the biggest of American cities with the same disrespect it shows for the suppliers and the merchants who depend on its website to reach customers.”

City and state legislators in New York are talking about efforts to fight the agreement or even cancel the tax breaks Cuomo has promised. It is unclear how much power they have to do that, but the governor is reportedly eyeing a planning procedure that would at least bypass a zoning review by the City Council.

“I guarantee you Amazon has done its homework. I’d be highly confident in saying these deals in all three of these cities, they’re going to get done,” Starner said.

After drawing the nation’s attention to its headquarters search and stretching the process out for over a year, Amazon must now figure out how to integrate with its new communities and ameliorate the inevitable growing pains, while local governments need to prepare for an influx of thousands of workers without dragging down the quality of life for current residents.

“My sense is the eyes of the world are watching this, and I hope what these cities and Amazon have landed on ends up being positive for these local communities,” Parilla said, “and if they can showcase there can be a public-private partnership that works for people, that can be a model.”

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