As a veteran observer of corporate site location behavior, I’m looking askance at the rare public auction that Amazon is staging for its “HQ2,” or second-headquarters project. From meticulous message control to granular preparation of its arguments (who cites obscure federal agencies in press release footnotes?), the online retail behemoth’s bodacious PR stunt will no doubt become a business school case study.
Though the company’s need for an enormous executive talent pool surely means few metro areas can really compete, its stated criteria are so broad that more than 100 places reportedly may apply. That’s no mistake on Amazon’s part; it will use all those hopeless bids as leverage to demand more tax-break concessions from the place or places that it’s really interested in.
But this isn’t just your garden-variety sweepstakes; this is Amazon, a company that first built its empire by avoiding the collection of sales taxes (to gain market share against brick-and-mortar retailers), and then fueled its growth with economic-development tax incentives (as its Prime model evolved so that it needed warehouses everywhere). This is a company with an office dedicated to tax incentives that it created in early 2012.
Hence the tension in this drama: Will politicians, in exchange for a moment of glory onstage with Amazon CEO Jeff Bezos, overspend on huge subsidies that raise everyone else’s taxes? Or will Amazon’s hubris be met with public demands for community benefits instead?
Does Amazon Want a Negative Tax Rate?
It’s no exaggeration to say that the Amazon deal could have profound effects on all taxpayers in the metro area it chooses. As I noted in Fast Company last month, there are two pots of money Amazon could try to grab, each of which could effectively give Amazon a negative tax rate. Of course, any tax discount would be a gift from taxpayers to shareholders, but these two gimmicks can amount to discounts of more than 100%.
The first we call “Paying Taxes to the Boss.” In this scheme, already legal in at least 18 states, Amazon would effectively get to keep some or all of its employees’ state personal income tax payments. The money would not actually end up in the state treasury, supporting public services. This could happen one of three ways: Amazon could simply never remit the money after deducting it from workers’ paychecks; Amazon could remit the deductions and then get the money back as a grant; or Amazon could claim that sum as a dollar-for-dollar credit against its corporate income tax liability.
However, that third option might present a problem, because Amazon is so aggressive at dodging taxes it might not have much of an income tax liability to soak up such credits. Indeed, in most states, it would also get big income tax credits for its capital investment and/or for hiring new employees. Put all three kinds of credits together and Amazon might have total income tax credits that far exceed its tax liability, even carried forward for many years.
Which brings us to the second way Amazon could get a negative tax rate. It could lobby to make these income tax credits “transferrable,” a euphemism for “salable.” That is, Amazon could insist a state allow it to sell unused credits to other companies that actually do have income tax bills. That way, Amazon would be paying no income tax and getting cash for doing what it had to do anyway: build its headquarters and hire its employees. That’s effectively a negative income tax rate.
Regarding other taxes, a project this size in many states will automatically qualify for a 100% sales tax exemption on new building materials, machinery, and equipment. Amazon will likely demand such an exemption, even if its chosen state doesn’t already have it. And on local property taxes, there will be enormous political pressure on local officials to grant the HQ2 project a long-term property tax abatement. For a deal this size, if a mayor or county executive were to hesitate, they’d get strong-armed by the governor.
There’s No Such Thing As Free Growth
Wherever Amazon’s HQ2 arrives, if it grows to anywhere near the 50,000 projected jobs, it will create enormous public expenses (though I’m not aware of any company’s headquarters staff that equals half that figure, much less 50,000 plus the 40,000 Amazon already has in Seattle). Especially now with low unemployment, studies show that most new-job takers won’t be existing residents of a metro area, but rather in-migrants.
More families arriving means more teachers to hire; more classrooms, roads, water mains and sewerage to build; more public safety to provide; and more trash to pick up. All of those things cost money. But if Amazon is paying no sales tax, no property tax, no income tax, and is getting cash gifts from its employees and/or the state treasury by selling tax credits, then Amazon won’t be bearing those new costs.
Instead, there will be a huge burden shift: Either everyone else’s taxes will have to go up, or the quality of public services will have to go down, or some of both. There’s no such thing as free growth.
That’s not to mention the gentrification and displacement likely to occur when so many highly paid employees drive up home prices as they compete for housing. Indeed, as three Chicago community leaders recently wrote: “Seattle’s median home price is now $729,000, more than double that of Chicago. An Amazon HQ2 in Chicago would supercharge gentrification in our neighborhoods, just as in Seattle.”
Hey, Get Your Popcorn! Here Comes the Tax-Break Show!
Who knows what theatrics Amazon’s tax-break masterminds are plotting. Here’s one fantasy scenario for Amazon’s HQ2 public-auction game plan:
October 19: Deadline for metro areas to file their proposals. Mayors and governors continue their groveling antics till the end, trying to outdo stunts such as Kansas City Mayor Sly James buying and reviewing 1,000 Amazon products—all five stars, of course!
Mid-November: Just in time for Black Friday and Cyber Monday, Amazon announces its short list of, say, 20 metro areas. For the rest of the holiday shopping season, Amazon executives stage massively publicized site visits and are treated like royalty. Politicians in each place urge shoppers to show Amazon their love: “Buy everything from Amazon to show how much Charlotte wants to win!” Amazon’s holiday sales volume exceeds Wall Street projections. (Later post-mortems make it clear many of the ~20 metro areas didn’t have a prayer).
Also during this mid-November-to-January period: Tthe media make cartoons of the 20 politicians. Ellen DeGeneres hosts them on her show. (No, Kelly Ripa! No, Anderson Cooper! Remember back in 1985, when 15 governors vying for the General Motors Saturn plant publicly begged on the Phil Donahue Show?) National TV news magazines document cities’ throbbing “Amazon war rooms.” Everyone becomes obsessed with trying to read Jeff Bezos’s mind.
Early January: Amazon narrows the list to perhaps five “finalists,” even though, with its sophisticated internal site location capacity, it probably knew its short list, if not its top preference, before it even launched the public auction. Insane media coverage ensues, as the finalist teams make their pilgrimages to Seattle for their final pitches. News programs treat their comings and goings like episodes of Survivor. The events remain a cynical sport for Amazon executives, as politicians debase themselves trying to outdo each other.
February: Amazon announces its choice, while using the “losers” to artfully send blunt political signals to impertinent governors and legislators. For example, it could credibly short-list Boston, and then choose, say, Dallas, while subtly leaking that Massachusetts was competitive, but the state’s lawsuit (to investigate whether Amazon was failing to collect sales tax on third-party sales that the Bay State could have a right to tax) was such an unfriendly “business climate” signal. Gov. Charlie Baker gets lambasted by both Republicans and Democrats for “losing” the HQ2 deal and withdraws the lawsuit.
With a massive taxpayer gift secured, blockbuster holiday sales in hand, brush-back pitches thrown, and a country full of adoring, smitten politicians saying “coulda, woulda, shoulda” while waiving their checkbooks for the next “buffalo hunt,” Amazon steamrolls on.
Or Not: Cities Opt Out, Coalitions Demand Community Benefits
Amazon has disrupted retailing. Will community demands disrupt its tax-break power grab?
Already, at least three prominent cities have said “no thanks” to Amazon’s subsidy demands. The Greater Toronto Region’s Amazon point man said: “There are clearly places in the United States that will, I use the word, bribe, people to come. [They] say you just tell us what cheque you want us to write, we will write that cheque. We’re not in that business.”
In a remarkable public rebuke, San Antonio Mayor Ron Nirenberg and Bexar County Judge Nelson Wolff published an open letter to Bezos, essentially calling Amazon’s bluff. “[N]o metropolitan area meets all of the criteria in your RFP. That is why so many states and cities are attempting to lure Amazon largely using incentives.” They admit “we have a competitive toolkit of incentives, but blindly giving away the farm isn’t our style.” They then brag at length about all the investments they’ve made in San Antonio’s future: in pre-K education, affordable housing, clean water, the nation’s largest municipal electric utility, climate action planning, bike and running trails, a cybersecurity cluster, and a stable fiscal base that makes it the largest U.S. city with a triple-A credit rating.
San Jose Mayor Sam Liccardo wrote an op-ed in the Wall Street Journal, citing recent “megadeals” like Wisconsin’s subsidies for Foxconn (which now total $3.76 billion). “[M]y city won’t be offering incentives to Amazon. Why? Because they are a bad deal for taxpayers. With many subsidies, the jobs a company brings to an area don’t generate revenues commensurate with public expenditures.”
Indeed, Good Jobs First’s latest tally of megadeals puts their average cost at $658,000 per job. No typical Amazon employee will ever pay that much more in state and local taxes than she and her family consume in public services. The mayor’s calculus is exactly right.
In addition to the Chicago leaders’ op-ed, community groups in New York have publicly criticized Gov. Andrew Cuomo, Mayor Bill de Blasio, and two other mayors for failing to announce conditions upon any Amazon arrival. “To be clear: Amazon should not receive sales tax exemptions, property tax abatements, corporate income tax credits, or any other state or local financial incentives, period,” they argue.
As well, a national coalition fighting for equitable infrastructure called Our Neighborhoods, Our Future has just published an open letter to Bezos. Think of it as “A People’s RFP,” demanding Amazon instead make concessions for arriving. One of the coalition’s members is the Partnership for Working Families, whose member groups pioneered Community Benefits Agreements, in which developers legally agree to quid pro quos such as local hiring, affordable housing, and public space improvements.
“[We] want to see local hiring, living wages and strong benefits, opportunities for disadvantaged groups of workers, respect for the right to form or join a union, and protections for whistleblowers,” they write. They also detail demands for affordable housing supports, transit investments, strengthening small business, and an open public engagement process. Finally, Amazon “must pay all of your property taxes to fund our schools, public safety, infrastructure and other public goods and services.” (Full disclosure: Good Jobs First is a signatory to both coalition statements.)
Will Amazon win a negative tax rate and stick everyone else with the costs of its arrival? Or will it agree to pay its taxes and engage with the community to ensure that benefits are broadly shared? Game on!