The Shire has been on sabbatical for awhile – some exciting family opportunities left me with no time to write. I’m glad to be back.
Amazon Wants to Get Paid
Over the past year, the great Amazon auction played itself out. As most of you know, Amazon announced plans to build a second headquarters, and opened an auction to find out which city would pay most for the “privilege.” 238 entities (including, Londonderry, NH, Frisco, TX, and two dozen Massachusetts towns) tried their luck, but (surprise!) Amazon picked New York City and Northern Virginia (Washington, DC).
NYC and DC Oblige
NYC and DC paid dearly for the honor. New York offered $2.8 billion in subsidies, and Amazon agreed to create 25,000 jobs. That’s a cool $116,000 per job. That money could have been used to cut NYC’s corporate tax rate by 5.42% (benefiting all companies), significantly upgrade New York’s roads and bridges, or spent on other needs.
Virginia ponied up over $768 million in direct subsidies and spending for the same 25,000 jobs — a relative bargain at $30,720 per job. Virginia is raising taxes (via a continued hotel tax) to help raise the money.
This is insane.
Incentives Weren’t Necessary
Even if you believe incentives can kickstart a moribund economy or put a small city on the map, neither NYC or DC need that sort of help. NYC is already the world’s most important business and financial hub; Business Insider ranked New York as the world’s number 2 tech center. NYC is home to IBM, Soundcloud, Spotify, E-trade, Bloomberg and dozens of others. It also has the kind of highly educated workforce, sophisticated transportation network, lifestyle and education options that Amazon desires. In other words, the subsidy was unnecessary. Proof? Amazon rejected a $7.5 billion richer offer from Maryland.
Also ranked in Business Insider’s list of the world’s most important tech centers, DC is a large and economically prosperous region, due significantly to the federal government behemoth (which can’t relocate). It also boasts the kind of workforce, lifestyle amenities and buzz that Amazon is looking for. Unsurprisingly, studies show that corporate incentives are not why companies pick a site (sorry Maryland!), and that they do not pay out.
Let’s take Northern Virginia as an example. In the best case scenario, a couple moves to Virginia and earns $300,000 (Amazon promised to pay at least $150,000 per job). The average tax payment at that income level in Northern Virginia is $16,541. That sounds good — Virginia will recoup its investment in a few years. But, that misses a key point – newcomers bring costs too. For example, Amazon’s new home county (Arlington) spends $19,340 to educate each student. So, if our couple has a couple of kids, Virginia may actually lose money. That doesn’t even account for the increase in costs of roads, police, fire, etc.
The Hidden Cost
Harder to quantify, but real nonetheless, is the cultural change that New York and Washington have just created. Culture is hard to define or articulate, but it is the glue that holds society together.
The Queens neighborhood that Amazon will enter is a former industrial zone that has morphed in recent decades into a mixed neighborhood containing housing, arts organizations, museums, small retail shops, and local offices of companies like Uber and Ralph Lauren. 6250 units of housing, some of which were going to be low-income, were planned for the Amazon site.
This self-described weird neighborhood “full of scabby little brick buildings” will be utterly transformed by the Amazon move. Local landowners will benefit. Others will suffer — in particular, poorer, less skilled people will be forced out as the area gentrifies. The 6,250 units of housing are officially gone, and the rest of the community is at risk. If it’s organic and real, gentrification is a good thing — however, a government-sponsored gentrification scheme to benefit one company is wrong.
Amazon has no presence in these areas, no cultural identity, and neither has nor inspires any loyalty from the people of NYC or Washington. Yet, state and local governments gave Amazon an enormous subsidy that will change the physical environment and social culture of those areas.
There’s Got to be a Better Way
NYC and DC will also need to keep taxes high or raise them to fund their Amazon subsidy. And, by transferring dollars and land to a big outsider, they have made it harder for homegrown companies to compete. That’s bad social and economic policy. And, for what? Amazon will always be a Seattle company — these “2nd Headquarters” won’t change that.
DC and NYC are already international cities — adding Amazon won’t burnish their reputations. But, local politicians just can’t help themselves — they want to be seen as “doing something” to grow their economies. The right way to do so — reasonable taxes, sound regulation, good infrastructure, high-performing schools and sensible governance — just doesn’t grab headlines. And, when neighboring cities are offering incentives, there’s overwhelming pressure to compete.
One idea to fix this mess is to have states sign a compact agreeing not to offer incentives to companies. That makes sense, because it would remove some of the pressure to pay these bribes. I hope policy-makers consider this solution or others to end these unnecessary and harmful subsidies.