Issues to Watch, Uncategorized

Funding Amazon’s HQ2: Benefits and Burdens of Government-Funded Incentive Packages for Corporations


Funding Amazon’s HQ2: Benefits and Burdens of Government-Funded Incentive Packages for Corporations

James Beslity*

Over the course of the last several years, Amazon.com, Inc. (Amazon) has grown its market share to become one of the biggest online retailers in the world.  See Phil Wahba, Amazon Will Make Up 50% of All U.S. E-Commerce by 2021, Fortune (Apr. 10, 2017), http://fortune.com/2017/04/10/amazon-retail/.  Approximately 34% of all U.S. online retail activity is conducted through Amazon, with Wall Street firm Needham & Company estimating that Amazon will control up to 50% of the online retail market by the year 2021 and continue its rapid growth in international markets.  Id.; Greg Hoffman, NEEDHAM: Amazon’s Stock Is Going a Lot Higher from Here, Bus. Insider (Apr. 10, 2017, 3:04 PM), http://markets.businessinsider.com/news/stocks/amazon-stock-price-april-10-amazon-prime-2017-4-1001911558.  The impact of what some have dubbed “the Amazon effect” has had far-reaching impacts not just within the realm of online retailing, but on traditional brick-and-mortar retailers as well.  Steve Dennis, Assessing the Damage of ‘The Amazon Effect, Forbes (June 19, 2017, 11:39 AM), https://www.forbes.com/sites/stevendennis/2017/06/19/should-we-care-whether-amazon-is-systematically-destroying-retail/#646d8206b1f0.

Amazon’s recent acquisition of Whole Foods Market is just one example of its ability to enter a market segment and wreak havoc on long-time players.  James F. Peltz & Ronald D. White, Bye to ‘Whole Paycheck’? New Owner Amazon Slashes Whole Foods Prices, L.A. Times (Aug. 28, 2017, 3:00 PM), http://www.latimes.com/business/la-fi-amazon-whole-foods-20170828-story.html.  The advance news of Amazon’s impending purchase of Whole Foods, including its promise to cut the upscale grocer’s notoriously high prices on a variety of products to make them “affordable for everyone,” sent traditional grocers’ stock prices tumbling.  Id.  Indeed, the permanent price reductions enacted on the day that the sale closed left competitors scrambling to compete in light of already razor-thin margins.  Id.

As part of Amazon’s ongoing efforts to grow its footprint, the company announced on September 7, 2017, that it was searching for a North American city or metropolitan area to construct a second headquarters, or “HQ2.”  Nick Wingfield & Patricia Cohen, Amazon Plans Second Headquarters, Opening a Bidding War Among Cities, N.Y. Times (Sept. 7, 2017), https://www.nytimes.com/2017/09/07/technology/amazon-headquarters-north-america.html.  The company emphasized that HQ2 would be a full equal to its downtown Seattle headquarters, comprised of several buildings and millions of square feet of office space.  Amazon HQ2, Amazon, https://www.amazon.com/b?ie=UTF8&node=17044620011 (last visited Mar. 22, 2018).  According to Amazon, the $5 billion HQ2 site will eventually employ about 50,000 workers and potentially pump billions of dollars into the host jurisdiction’s economy.  Id.  Amazon’s own calculations of its contributions to Seattle’s economy from 2010 (the year that it moved its headquarters to downtown Seattle) to 2016 paint a rosy picture.  See id.  The company claims to have made $3.7 billion in capital investments, paid $25.7 billion in compensation to employees, and indirectly created an additional 53,000 non-Amazon jobs in the Seattle area as a result of its direct investments.  Id.

Mere hours after Amazon’s HQ2 search announcement, cities across the United States and Canada began scrambling to put together proposals for the project.  Wingfield & Cohen, supra.  As the October 19, 2017, deadline for proposals approached, it became clear that politicians and development planners from cities and metropolitan areas were getting creative in their strategies to secure Amazon’s HQ2 and its vast potential for economic enrichment and revitalization.  For example, the city of Camden, New Jersey, offered to demolish its relatively new baseball stadium to make way for HQ2, while a small town in Georgia offered to establish a new city named “Amazon” just for HQ2.  Rebecca Everett & Bill Duhart, Here’s What Amazon’s HQ Would Look Like if Jeff Bezos Bites on Camden Offer, NJ.com (Oct. 20, 2017, 2:02 PM), http://www.nj.com/camden/index.ssf/2017/10/heres_what_amazons_hq_would_look_like_if_jeff_bezo.html#incart_river_index; Mahita Gajanan, This City Has the Weirdest Idea to Attract Amazon’s New Headquarters, Fortune (Oct. 3, 2017), http://fortune.com/2017/10/03/stonecrest-georgia-amazon-hq2/.

However, the main commonality amongst the serious proposals are the monetary incentives, namely tax credits and benefits, being offered by various state, county, and municipal governments in an effort to lure Amazon to their jurisdictions.  Leanna Garfield, Amazon Just Revealed the Top Cities for HQ2 – Here Are the Ones Throwing Hundreds of Millions to Land It, Bus. Insider (Jan. 18, 2018, 12:26 PM), http://www.businessinsider.com/amazon-hq2-cities-developers-economic-tax-incentives-2017-10.  Some jurisdictions, such as the city of Raleigh, North Carolina, put together incentive packages totaling just in the tens of millions of dollars, while the states of Maryland and New Jersey each presented Amazon with many billions of dollars in economic incentives in an effort to reel in the company’s new headquarters.  Id.  Amazon explicitly instructed respondents in its call for HQ2 proposals to outline any incentive programs available for the project, including tax credits or exemptions, grants, and fee reductions.  Amazon HQ2 RFP, Amazon, https://images-na.ssl-images-amazon.com/images/G/01/Anything/test/images/usa/RFP_3._V516043504_.pdf (last visited Mar. 22, 2018).  In fact, two of the nine total categories of general information requested by Amazon deal solely with the value of, and conditions attached to, any financial incentives that could be available to the HQ2 project were it to be sited in the respondent’s jurisdiction.  Id.  With so much taxpayer funding on the line, the question cannot help but loom large: do such exorbitant incentive packages translate into long-term benefits for the populations of host jurisdictions, or do they serve only to subsidize the costs of growth for businesses such as Amazon to the potential detriment of host jurisdictions?

State and local governments’ autonomy in their use of tax incentives to attract and retain business investment in their jurisdictions is by no means a new concept.  See Norton Francis, Urban Inst., State Tax Incentives for Economic Development 1, 4 (2016), https://www.urban.org/sites/default/files/publication/78206/2000636-state-tax-incentives-for-economic-development.pdf.  Companies such as IBM, Boeing, and Twitter have successfully obtained substantial government incentive packages to create new jobs and keep existing jobs by simply implying that they might move to another jurisdiction.  Emily Badger, Should We Ban States and Cities from Offering Big Tax Breaks for Jobs?, Wash. Post (Sept. 15, 2014), https://www.washingtonpost.com/news/wonk/wp/2014/09/ 15/should-we-ban-states-and-cities-from-offering-big-tax-breaks-for-jobs/?utm_term=.0512cec14f39.  Though the practice of doling out these incentives has come under increased scrutiny in recent years, state and local governments subscribe to the belief that the only way to compete with other jurisdictions for new jobs, and retain the jobs they have, is to offer more generous financial incentive packages than neighboring jurisdictions.  Id.  And yet, if no jurisdiction was able to offer financial incentive packages, companies would no longer be able to coerce governments into granting such incentives, and taxpayers would not be on the hook for disastrous investments.  Id.  For example, the contraction of the American automotive industry following the 2008 financial crisis led General Motors to shutter several facilities that had been the beneficiaries of millions of dollars of incentives over the years, leaving several state and local governments with no jobs or growth to show for their investments.  Louise Story, As Companies Seek Tax Deals, Governments Pay High Price, N.Y. Times (Dec. 1, 2012), http://www.nytimes.com/2012/12/02/us/how-local-taxpayers-bankroll-corporations.html?pagewanted=all.

A 2012 New York Times investigation that examined and compiled thousands of local incentives granted nationwide estimated that states, counties, and municipalities have given in excess of $80 billion annually in financial incentives to various types of companies.  Id.  However, a complete and detailed accounting of these incentives is not possible due to the many thousands of government agencies and officials granting such incentives, many of which keep poor records of the cumulative value of all their awards.  Id.  What may be of even greater concern is that these agencies and officials do not have a way to know for certain if the money was “worth it,” as they rarely keep track how many jobs are created.  Id.  Moreover, determining whether or not the creation of a job was a direct result of a government-sponsored financial incentive is nearly impossible.  Id.

Amidst the rush to attract companies like Amazon that promise new jobs, infrastructure, and overall tax revenue in exchange for assurances of hefty incentives, it is clear that state and local governments have a tendency to become hypercompetitive and perhaps neglect to consider the potential consequences of a less than ideal outcome of such a deal.  See, e.g., Badger, supra; Story, supra.  Their autonomy in offering these lucrative incentive packages begs the question of whether or not they should be subject to stricter regulation.  In the meantime, Amazon has narrowed its list of HQ2 contenders to twenty jurisdictions, including Montgomery County, Maryland, which is offering financial incentives and transportation investments to the tune of $5 billion.  Robert McCartney & Ovetta Wiggins, A $5 Billion Carrot: Larry Hogan’s Historic Offer to Win Amazon HQ2, Wash. Post (Jan. 22, 2018), https://www.washingtonpost.com/local/md-politics/a-5-billion-carrot-larry-hogans-historic-offer-to-win-amazon-hq2/2018/01/21/4d5631d8-fedd-11e7-bb03-722769454f82_story.html?utm_term=.f693a10ac578.  Amazon is expected to announce the winning proposal sometime in 2018, and the victor’s prize will undoubtedly include bragging rights for successfully bringing the promise of jobs and development within their borders after a grueling and very public competition.  Id.; Katy Steinmetz, Winning Amazon’s New Headquarters Could Come with Hidden Costs, Time (Oct. 18, 2017), http://time.com/4987883/amazon-hq2-headquarters-costs/.  However, it may be some time before these benefits outweigh the costs of paying for the incentives required to win this high-stakes contest.  Steinmetz, supra.

 

*James is a second-year student at the University of Baltimore School of Law, where he serves as a staff editor for Law Review.  James is a member of the Royal Graham Shannonhouse III Honor Society and the Honor Board.  James also proudly serves as the president of OUTLaw, as a Teaching Assistant to Professor Nancy Modesitt for Introduction to Lawyering Skills/Torts, and as a Writing Fellow in the University’s Legal Writing Center.  During the spring semester, James worked as a judicial extern for the Hon. Michael W. Reed of the Court of Special Appeals of Maryland.  This summer, James will be working at Stein Sperling Bennett De Jong Driscoll P.C. in Rockville, Maryland, having been selected as a 2018 Montgomery County Bar Foundation Summer Scholar.  James holds a B.A. in Environmental Studies from Hamilton College in Clinton, New York.

 

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