New York City’s Amazon debacle

Politicians and commentators opposed to Amazon’s HQ2 project in New York City changed their rhetoric after the company abandoned the effort.

Rep. Alexandria Ocasio-Cortez, an early project opponent, re-framed her stance saying, “We do not have to settle for scraps in the greatest city in the world. We deserve far more and can ask for more, and if they don’t want to negotiate, that’s their problem, not ours.”

But, on Feb. 1 she had argued, “Nothing Amazon has said or done – including selling facial recognition technology to ICE & its intent to fight against worker unionization – would lead us to believe it could be a good or healthy neighbor for NYC.”

A Cuomo administration source to the Albany Times-Union blamed Amazon’s withdrawal on vocal opposition from Sen. Michael Gianaris, whose district included the Long Island City site, and on Senate Majority Leader Andrea Stewart-Cousins. Stewart-Cousins’ decision to appoint Gianaris to the Public Authorities Control Board “indicated to the company that the entire Democratic majority, and not just Gianaris, was opposed to the project.” The PACB would have had the power to kill the deal.

Ocasio-Cortez’s and Stewart-Cousins’ messages to Amazon were hardly welcoming. They demonstrated to the company that New York’s governmental leaders could not be relied upon to work together to make Amazon’s project a reality.

Withdrawing from the New York project, Amazon said: “A number of state and local politicians have made it clear that they oppose our presence and will not work with us to build the type of relationships that are required to go forward with the project.”

In hindsight, it appears that project opponents considered their vocal opposition to be part of a negotiating process. At best, they overplayed their hands. At worst, they showed a serious disregard for the creation of thousands of well-paying jobs for New York’s residents. Perhaps they failed to recognize that Amazon had little patience for time-consuming debates about whether the project would receive the offered incentive package or about their fitness as corporate neighbors.

Location advantages and disadvantages

New York City has advantages as a business location for Amazon, perhaps the most significant of which is the metropolitan area workforce, the largest in the nation, with its high concentration of information technology workers. But New York’s labor market advantages weren’t large enough to rule out other competitors. Metropolitan areas like Washington, D.C., Boston, Atlanta and Dallas had large enough labor pools to meet Amazon’s needs. In the wake of Amazon’s decision, other New York metros have offered themselves as alternatives but simply lack enough potential employees for a large information technology business headquarters.

New York State also has significant disadvantages. Large projects in New York City are often difficult to develop because decision processes give vocal critics opportunities to delay or prevent them. In this case, the “Progressive Democrats,” who just took office in the state Senate and Congress, joined neighborhood critics who feared the impact of the large Amazon project. The split among government leaders contrasted with northern Virginia, where, according to Amy Liu of the Brookings Institution,”the Governor’s office, key state legislators and city and council officials worked together to address anticipated concerns from their constituency].”

Amazon’s proposed HQ2 project is unique, initially offering 50,000 jobs, more than any business expansion project in memory. Economic logic tells us that Amazon had tremendous market power in making its decision. Because of America’s federal system, states can freely compete with each other to attract businesses. Given that, it should not be surprising that there was intense competition between locations seeking to be home to the project.

Incentives as marketing tools

States and localities market themselves by advertising the availability of tax incentives to businesses. New York has been among the most aggressive in promoting them and emphasizing the value of incentives available to companies that promise to create jobs.

State marketing materials claim that “You’ll find all forms of tax incentives, business incentives and tax credits in New York State, all designed to benefit small or expanding businesses as well as film and TV production companies.” and that the state “offers new and expanding businesses the opportunity to operate tax-free for 10 years.”

In another place on the Empire State Development website, the text states, “Firms in the Excelsior Jobs Program may qualify for four fully refundable tax credits.” New York City also has a set of tax credits aimed at encouraging business investment in specific locations .

New York spent billions of dollars to encourage technology development at Global Foundries in Saratoga County and at the Tesla Gigafactory 2 in Buffalo, among others. These technology-related projects carried high risks. Tesla’s Buffalo venture, for example, is far short of the number of jobs that it promised to create and a film hub, developed in Syracuse, never attracted enough users to make it viable. A semiconductor manufacturer (ams AG) dropped plans to build a facility in Oneida County despite a substantial incentive package.

Amazon’s project was different, carrying relatively little risk for New York. Amazon is the market leader in internet commerce. Though the deal was expensive – possibly more expensive than it needed to be – at least the tax credit incentives were performance-based, and the capital grant would have contained recapture provisions if the company failed to meet job requirements.

Does corporate greed make states use incentives?

Amazon received hundreds of proposals from localities hoping to secure the facility. New York’s winning $3 billion offer (about $1.7 billion from the state and $1.3 billion from the city) was not the largest. Offers from New Jersey ($7 billion) and Maryland ($8 billion) for the entire 50,000-job site were larger.

A number of commentators have blamed Amazon for being greedy for taking advantage of the incentives that states and localities create to lure businesses to operate within their borders. For example, David Leonhardt in the New York Times wrote, “For years, companies have been getting the better of local governments — and taxpayers — by pitting them against one another. If a city or state won’t pony up cash or tax breaks, companies threaten to go elsewhere.”

Leonhardt’s piece argues that states and localities are helpless victims of corporate greed. In fact, governments are eager participants in corporate location competitions. New York’s successful effort to persuade AMD (later Global Foundries) to locate a large semiconductor manufacturing facility in Saratoga County was the result of an intensive campaign to attract semiconductor manufacturers. The billion dollars in incentives was a lure, not the result of a bidding war.

Virtually all states and many localities market themselves to businesses. Because location costs are often a factor in corporate decision-making, governments sell themselves as low-cost locations, and use incentives, including tax incentives and cash grants, as marketing devices.

Incentives waste tax dollars

Critics of these practices correctly point out that the use of business-location incentives has several negative effects. They disadvantage existing businesses that do not receive them. In cases where incentives go to companies that would have created jobs within the state without their benefit, they reduce revenues that would be available for needed government programs.

Advertising the value of tax incentives to businesses increases the cost to state residents of attracting new jobs. New York advertises its Excelsior program as providing “a credit of 6.85 percent of wages per net new job and an investment tax credit valued at 2 percent of qualified investments,” creating expectations by companies that, like Amazon, they would be eligible for credits worth these amounts. In truth, the credits are discretionary and subject to a budgetary cap.

Given that the Excelsior Jobs Tax Credits that Amazon was offered were valued at $1.2 billion and that the company would have received $1.3 billion in tax credits from New York City, it is likely that they increased the size of New York’s offer beyond what it might have been if the credits had not been advertised by the state.

Brookings’ Liu, in the New York Times, wrote that in contrast to New York’s approach, “Virginia offered Amazon $550 million in job-creation grants, which the company will receive only after delivering the proposed 25,000 jobs, with additional subsidies available if the company creates as many as 37,850 jobs. … Virginia threw into the package more than $1 billion in additional taxpayer funds to build a pipeline of technical workers and improve transportation. This portion of the ‘subsidy’ will not go directly into Amazon’s pockets but into Virginia schools, universities, and local agencies. It is nearly twice the amount offered to Amazon, a signal that investing in the local work force is more important than offering sweeteners to Amazon.“

Another New York practice that may have ballooned New York’s offer is the state’s practice of paying out incentives over long periods of time. In Amazon’s case, the Excelsior Jobs Tax Credit would have been paid out over 10 years. The state’s estimate shows that half the $1.2 billion in tax credits would be paid in years eight through 10 of the benefit. The $505 million capital grant would have been paid over 15 years in proportion to the company’s annual investment.

There is evidence that paying incentives later rather than sooner wastes government funds, because companies heavily discount payments received far in the future compared to those to be received in the near term. Timothy Bartik of the Upjohn Institute for Employment Research found that “paying out incentives uniformly over the new facility’s lifetime is extremely inefficient, resulting in very large net costs for local incomes of an incentive policy, whereas paying incentives totally up front significantly increases incentive benefits.”

Conclusion

The practice of providing financial incentives to businesses to locate within states and localities is destructive in a number of ways. It invites states and localities to give away needed revenues in order to attract jobs. It creates inequalities between companies that get benefits from government and those who don’t, creating the potential for crony capitalism. It distracts government from improving infrastructure and investing in human capital.

Unfortunately, because of America’s federal system, states have the power to set tax policy and use it to compete with each other for jobs. Voluntary efforts by states to refrain from incentive competitions have been ineffective in the past because of the high stakes involved in foregoing potential job creation.

Because of its excessive reliance on tax incentives, New York likely pays more to companies for job-creating projects than is necessary. A policy that relied more on negotiated grants with strong claw-back provisions for noncompliance would provide a better return on the state’s investment.

New York City’s loss of 25,000 well-paying jobs (or more) is significant. Not only is this a foregone opportunity for area residents, but it tells companies considering future city projects that New York’s political leadership is divided, split between forces that welcome job creating projects and those who oppose them for a variety of reasons.

Perhaps the governor and mayor could have paved the way to a better reception from local political leaders by engaging them at an earlier stage. Given New York’s fractious political environment, however, it’s not certain that additional consultation would have silenced objections from powerful local officials.

John Bacheller, former head of the policy and research division of Empire State Development, is an author of Policy by Numbers, a blog that focuses on data and policy at the state level, with a focus on Upstate New York.