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My home state of Maryland has agreed to give Amazon as much as $5.6 billion in state tax breaks, nearly $1 billion in local tax subsidies, plus another $2 billion in unspecified transportation and infrastructure upgrades if the firm builds a second headquarters in the already-prosperous Washington (DC) suburb of Montgomery County. The tax subsidies would continue for 35 years.
Could a deal such as this possibly pay off for the state and region? Could it create enough economic development to be cost effective for the state and its local governments? The short answer is: almost certainly not. Before we dig to understand why, here is what we know about Maryland’s offer:
A big deal, but how big?
First, give the state credit for being relatively transparent about its offer to Amazon. Many governments competing for the facility have refused to say publicly what they’ve put on the table
Yet even in Maryland there is already disagreement about the size of the incentive package. Gov. Larry Hogan (R) says the offer is worth about $5 billion—about $3 billion in income, sales, and property tax breaks and $2 billion in new roads. But the state’s nonpartisan Dept. of Legislative Services says the state and local tax breaks are more than twice as generous---roughly $6.5 billion.
In return, Amazon would agree to hire “at least 40,000 qualified” people and spend “or cause to expend” $4.5 billion for land acquisition, construction, equipment, and financing over 17 years. A qualified job is a full-time position that pays between $60,000 and $500,000 annually. Average annual compensation of the facility’s workforce would have to be at least $100,000. Remember that number.
Helping current residents
And here is where the deal gets dicey for the country and the state. Tim Bartik, senior economist at the Upjohn Institute for Employment Research and one of the nation’s most thoughtful observers of economic development policy, says the goal of a successful project should be to increase the incomes of current residents, mostly through higher employment rates and wage hikes.
Bartik argues that new employees who come from elsewhere receive only relatively modest benefits from the new jobs in part since many were already working elsewhere. However, research suggests that eight in 10 new jobs in a metro area will go to these newcomers.
Similarly, government itself receives little additional revenue since it captures only a small amount of new earnings in taxes (the top state and local individual income tax rate for a resident of Montgomery County, MD is 8.95 percent). In addition, while those taxes are not very responsive to growth, an influx of new workers can come with large costs to government—and current taxpayers. Think about the expense of constructing new roads, or building and staffing schools.
A rule of thumb
Those new jobs may drive up property values, which is good news for current residents. But, Bartik argues, they should receive most of the benefit of these subsidies since they are paying for them--through higher taxes and having to compete with newcomers for government services.
If the goal of economic development is to boost demand for existing labor, how can you test to see if a specific project will pay off? Bartik has a rough rule of thumb: If an area’s unemployment rate is 4 percent or lower (roughly a measure of full employment), a new project will create relatively few local jobs and instead boost hiring of those coming from elsewhere.
Montgomery County’s unemployment rate—currently in the mid-3s, falls well short of Bartik’s rule of thumb. The state of Maryland has an overall unemployment rate of 4.5 percent, but the highest jobless rates are in parts of the state that are far from the DC suburbs, where this project would be located.
Will the community benefit?
A community also can benefit from a new business if it raises incomes. But remember, the state wants Amazon to pay an average wage of at least $100,000, which turns out to be exactly equal to the county’s current median household income. Hard to see much of a payoff there.
There is also the matter of how much tax subsidies alone matter to Amazon. In one survey of potential employers, companies ranked the availability of skilled labor, highway access, general tax rates, and the regulatory climate ahead of tax incentives. That’s what Amazon seems to want as well. Montgomery County likely scores well on skilled labor but relatively poorly on the other metrics.
The opportunity cost
Then there is the opportunity cost of such a deal. Eight billion dollars—or even five billion—is an awful lot of money. Imagine how it might be used to create incentives for hundreds of smaller businesses or to invest in assets that improve the quality of life for current residents.
In DC and its suburbs, for example, long commutes are a major impediment to job growth. For years, Maryland employers have been crying for more state assistance for transit, with only limited success. Now, the state is promising Amazon a $2 billion in (unspecified) transportation improvements. This may benefit those living and working in one corner of the county, but what about everyone else?
There is little evidence that single big-dollar, high-profile developments like this one have the advertised impact on communities. Baltimore’s Inner Harbor, Detroit’s Renaissance Center, and most sports facilities have fallen far short of their promises as magnets for job growth.
Highly-educated, middle-class Montgomery County isn’t Baltimore or Detroit—far from it. And it is a truism that politicians would much prefer to cut a ribbon at a single splashy 40,000-worker headquarters of one of the world’s best known companies than to do the hard economic development work it takes to boost jobs 10 or 20 at a time.
But the evidence suggests slow and steady, combined with job training and infrastructure improvements, may be a far better economic development strategy that lavishing billions of dollars on a single project.
Full disclosure: Maryland’s proposed Amazon site is about two miles from my home. This project probably would boost its value. But it also would create a traffic nightmare. I’d probably need one of Amazon’s drones just to get out of my neighborhood.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
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