What Lessons Can We Learn from Amazon’s HQ2 Drama?

Now that Amazon has finally chosen Long Island City, NY and Arlington, Virginia as co-winners in its second headquarters sweepstakes, it’s a good time to think about who the real winners and losers are. And, at the same time, to see what lessons we’ve learned from the year-long saga.  

The most important may be that Amazon may have chosen its locations largely based on the supply of skilled workers and the overall tech environment. Thus, the billions of dollars in cash and tax subsidies may end up being a financial windfall for the firm and a poor use of funds by the bidding communities.

The second may be that the real winners may not be Long Island City and Arlington but their regions. After all, the entire region may benefit from any new economic development without having to give up precious tax dollars.

Opportunities and challenges

Third, while the HQ2s undoubtedly will generate some new opportunities for local economic development, they’ll also create big housing and transportation challenges for the “winning” communities.   

New York’s offer, up to  $1.7 billion in state and local funds, was much more generous than Virginia’s. If Amazon delivers only 25,000 jobs (the minimum requirement), it gets $61,400 per job, or $4,100 per job per year.  But, if Amazon creates 40,000 new jobs and makes $2.3 billion in new capital investment over 15 years in New York City, it would get $43,000 per promised job – or $2,900 per job per year.  

Virginia’s package is more modest. If Amazon delivers the minimum required 25,000 jobs, it would receive $35,800 per job, or $1,800 per job per year.   However, the current incentives package of $1.1 billion is based on 37,850 jobs. This comes out to roughly $29,000 per job, or $1,400 per job per year. The agreement also includes Amazon’s agreement to develop six million square feet of office space in Virginia.

The deals also offer some direct benefits for current as well as future residents of the two states.  Virginia promised to boost transit infrastructure while New York committed funds for workforce training. In addition, Amazon agreed to fund local workforce recruitment, and reserve space for a range of projects aimed to enhancing the local community. Both agreements also include provisions to ensure Amazon meets its jobs and capital investment targets to receive funding.

Was the price too high?

But the key question remains: Did the communities pay too high a price?  

Some analyses show that New York’s subsidy package well exceeds the national average for state and local incentive deals, though Virginia’s is closer to--or may even be less than-- the national average. However, given that Amazon promised the two sites roughly the same number of jobs, perhaps their accepting of New York’s subsidy package reflects their estimation of the higher cost of doing business in New York.

But in a sense, both may have paid too much. In its HQ2 announcement, Amazon acknowledged that talent trumped taxes (as evidenced by Virginia’s pledge to invest $1.1 billion in tech education which seemed to be an important factor in Amazon’s decision). Amazon passed up more lucrative tax incentive packages from neighboring communities in the DC and NY metro regions. Besides, New York won out over locales with much lower property taxes. The more important factors were: Regional collaboration, the supply of skilled labor, and the overall tech ecosystems of each area.

Who benefits?                    

The regional effects of Amazon-like decisions are complex. Both the cost and benefits of those community investments are notoriously hard to pin down. Given how state and local tax systems are structured, it’s quite possible that the state governments may realize a better outcome than local communities. Moreover, it’s possible that the host cities and counties will bear most of the negative impacts while neighboring communities realize a large portion of the benefits. Because labor markets are regional, the two HQ2 locations will see commuters make a daily migration from their homes in neighboring communities to their Amazon jobs, and then return home-- with their paychecks.

Secondly, the implications for housing may not be evenly felt. There will undoubtedly be greater residential growth pressures near the Amazon facilities than in surrounding areas. This will place additional and significant pressures on public infrastructure, schools, and other services that are largely unaccounted for in the incentive packages.

In Seattle, where Amazon is headquartered today, some officials say housing the firm’s highly-paid workforce has resulted in soaring property taxes and created a housing crunch that reduced the supply of  affordable housing and caused a spike in homelessness. To combat these pressures, Seattle toyed with the idea of a corporate head tax earlier this year.

What should politicians do?

Given these lesson, what do local politicians do when confronted with an opportunity to bid for firms that promise big gains in employment? 

The political reality dictates that cities and states feel they must play the game – even when the research shows it’s not in their best interest to do so. In worst-case scenarios, governments will try to lure existing firms from one locality to another, even though business migration constitutes a negligible share of employment gains or losses in many regions. Which suggests that the best bet for job growth continues to be focusing on growth and expansion of existing firms in their communities.

Moreover, leaders should adopt more balanced approaches to economic development that include workforce development, quality of life initiatives, and business ecosystem vitality. And one that uses tax incentives as a complimentary, but not necessarily primary, component of their recruitment packages.