In the biggest ever defeat for a subsidized project in history, Amazon announced February 14th that it was canceling its planned half of HQ2 for New York City, which was to receive subsidies worth at least $3.133 billion. After facing months of public opposition, the company provided a Valentine's Day present in the form of capitulation. Amazon showed that, like Electrolux, its efforts to extract maximum subsidies from 238 cities constituted corporate rent-seeking on a grand scale. Not only did Amazon conduct an exploitative public auction for the supposedly single HQ2 facility, it furthered the impression that it was engaging in rent-seeking by its refusal to discuss alternatives with New York officials, by its absolute insistence on opposing a union for its workers, and by its sudden though not unexpected cancellation announcement. Activists scorched the firm, too, for the fact that for the second year running, Amazon will pay 0 in federal income tax despite earning $11.2 billion in profits in 2018 and $5.6 billion in 2017.
This is not to be confused with Foxconn, which is looking more and more like an economic development failure. There, it appears that the company will not be able to provide the investment and benefits it promised in Wisconsin. With Amazon, what we have is a case of the company being unwilling to continue the political battle to obtain its $3+ billion in incentives. While Amazon is by far the largest project ever defeated, such defeats are not unprecedented. I participated in two successful campaigns in the late 1990s and early 2000s against abusive tax increment financing (TIF) projects in the St. Louis suburbs of Olivette and O'Fallon, but these were on the order of $40 or $50 million, not $3 billion. Alas, I was also on the losing side of an exceptionally bitter battle against a TIF-funded mall in Hazelwood, Missouri, which still hurts to think about. The residents lost their homes to eminent domain, the city administration was high-handed and manipulative, and the new mall contributed substantially to the death of at least two nearby malls, part of the $2 billion retail subsidy merry-go-round during 1990-2007 documented by the East-West Gateway Council of Governments.
In addition, as Richard Florida reports at Citylab and Good Job First points out at length, the victory has also energized reformers around the country searching for a solution to the problem of corporate bidding wars. I myself have received inquiries from multiple elected officials' offices about the European Union's systematic control of investment incentives, and I know of other efforts to make the shocking subsidy and perhaps even more shocking victory against it into a national teachable moment. For the first time in the over 20 years I have been fighting wasteful corporate subsidies, which is to say the vast majority of them, this is the first time it feels like it's possible that we could really see reform take place -- though not without a political battle royal. Buckle up!
Showing posts with label New York. Show all posts
Showing posts with label New York. Show all posts
Friday, February 15, 2019
Tuesday, November 20, 2018
Amazon Wins!!!
Well, what did you expect? With 238 entrants and 20 finalists, the Amazon HQ2 location tournament resulted in a resounding victory for Amazon: Billions of dollars in subsidies and binders full of detailed information on the contestants. Plus, we got a surprise twist at the end, when Amazon announced it would choose two "headquarters" instead of one. Of course, I never thought that having two headquarters made economic sense ("Doesn't that defeat the idea of a headquarters as a central coordinating site?" I asked last year), and the same is even truer when you have three "headquarters."
Leaving aside how Amazon plans to coordinate three headquarters' operations, the subsidies boggle the mind and insult our intelligence. Let's lay out what we know about the subsidies so far, remembering that there are other subsidy elements that are likely to be discovered as things play out. That is what happened with Foxconn, for example: Its subsidies in Wisconsin were originally reported as $3 billion in state subsidies plus local tax increment financing (TIF). By June of this year, Good Jobs First was reporting that further subsidies plus a huge TIF award brought the total to $4.8 billion (Megadeals spreadsheet, June 2018 update; download here). Something is likely to up the total incentives Amazon will receive, above what we know today.
So, which cities got half of HQ2? Amazon split the project in half, with 25,000 jobs set to go to Long Island City, Queens, New York, and 25,000 to Crystal City, Arlington County, Virginia. This much leaked out the week before the official announcement, but the November 13th official notification added that Nashville would get a 5,000 job consolation prize (for $138.7 million in incentives) as well as the incentive packages from each of these three jurisdictions -- well, some of the incentives, anyway. As with Foxconn, this announcement was rapidly followed by the discovery of new incentives. I'll skip the various updates and skip straight to what is currently known.
New York city and state both provided large incentives to the company. State benefits comprise mainly $1.525 billion in Excelsior employment tax credits, plus another $325 million based on the size in square feet of the Amazon offices, or a total state package of $1.85 billion. New York City will provide a job creation tax credit of $897 million over 12 years, plus a partial property tax abatement of $386 million over 25 years, according to a Good Jobs First analysis of the city's press release on the project.
But wait, there's more! Good Jobs First reports that the city will also provide a subsidy known as a payment in lieu of taxes (PILOT) that could itself cost another $100+ million. Last, as far as we know, but not least, the project will be located in a federal Opportunity Zone, which will provide further, though not-yet-estimated, benefits to long-term capital investors like CEO Jeff Bezos.
Total so far: $1.850 billion + 0.897 billion +0.386 billion = $3.133 billion, and likely more. While Amazon wants to emphasize the cost per job of its incentives, it only considers the first of these subsidies in its public calculation. But with just these three programs, we are already at a cost of $125,333 per job. While this doesn't sound horrible compared to some incentive packages we've seen recently, it completely omits that with such large numbers of jobs, there are diminishing returns in the value of each job due to the increasing likelihood of dumping thousands of workers and their families on a locality's infrastructure and educational system. Further, as I predicted in January, it normalizes the use of aid intensities* above 100%: $3.133 billion/$2.5 billion = 125%! Mind you, this is the nominal subsidy, not at present value, but with the 10-year Treasury note at 3.08% on November 16, the proper discount rate will be in that (low) vicinity, as has been the practice of the Organization for Economic Cooperation and Development in estimating the present value of U.S. subsidies for over 20 years.
To add a final insult to injury, the Amazon site will be in a federal Opportunity Zone, but the company's project is destroying one of the things that would be most welcome there, affordable housing. Politico (h/t Daily Kos) reports that the New York outpost of HQ2 will displace a planned 1,500 units of affordable housing from two developers.
In Virginia, a second $2.5 billion investment, 25,000 job facility will be opened by Amazon as well. There, the company will receive $573 million in job creation tax credits. Virginia Tech University also plans to open a new "Innovation Campus" less than two miles from HQ2/Virginia. The $1 billion campus has been considered one of the biggest draws for Amazon in its location decision, and Good Jobs First includes the entire $1 billion as a subsidy for Amazon. I disagree; building new educational infrastructure will provide benefits to the students that they will always possess regardless of who their future employers may be, so I see the company as unable to capture much of the $1 billion as a subsidy. A university is a great economic draw, but this extends far beyond any single employer. If we exclude the new campus as a subsidy, the aid intensity in Virginia is only 22.92%.
Combining the two locations, we now find, even without the new Virginia Tech campus, that Amazon will receive $3.706 billion in subsidies for the HQ2 project proper. For the combined project, that brings us to an aid intensity of 76.1% of the investment.
Long-time readers know it's time for a comparison with how this would be treated in the European Union under its regional aid guidelines. First, no region in the European Union is eligible for a 76.1% aid intensity, not even the poorest part of Bulgaria. Second, HQ2 is not going to the non-existent U.S. equivalent of Bulgaria, but to two of the richest places in the United States. What would Amazon get in state aid (=subsidies) for locating such a facility in London or Paris? Not one penny. Rich regions can't give investment attraction incentives, period. So the entire $3.7 billion and counting subsidy for the company would be disallowed if rational regulation of the bidding wars existed.
Happily, these subsidies have come in for a great deal of criticism around the country. As The New York Times editorialized, "New York's Amazon Deal is a Bad Bargain." And how does it know New York overpaid? The same way I recommended back in 2014, comparing to a similar deal. And there's no more similar deal than the other half of HQ2 that went to Virginia. Seeing that New York paid more than twice as much as Virginia for an equivalent project, the Times rightly concludes that New York paid more than it had to. Whether much political resistance to HQ2/New York develops or not, it's great to see the press analyzing these deals well.
To end on a down note, though, we need to recognize the harm the Amazon auction did to transparency. The company made the finalists sign non-disclosure agreements, although a couple did make it into the public eye (Newark, New Jersey, and Montgomery County, Maryland, two of the largest finalist offers, though it appears Pittsburgh topped them all). Hopefully some of the losers will now come forward. However, that's not the point; we need real-time transparency if there is to be any democratic oversight of the multi-billion giveaways that look to become more common than ever.
* Aid intensity is a metric, first used in the European Union, that allows us to compare the size of subsidies regardless of the size of the project. It is calculated as subsidy divided by investment. An intensity of 100% at present value means that the government is paying the entire cost of the investment. Thanks to reader TM for pointing out that I should have clarified this in the original article.
Leaving aside how Amazon plans to coordinate three headquarters' operations, the subsidies boggle the mind and insult our intelligence. Let's lay out what we know about the subsidies so far, remembering that there are other subsidy elements that are likely to be discovered as things play out. That is what happened with Foxconn, for example: Its subsidies in Wisconsin were originally reported as $3 billion in state subsidies plus local tax increment financing (TIF). By June of this year, Good Jobs First was reporting that further subsidies plus a huge TIF award brought the total to $4.8 billion (Megadeals spreadsheet, June 2018 update; download here). Something is likely to up the total incentives Amazon will receive, above what we know today.
So, which cities got half of HQ2? Amazon split the project in half, with 25,000 jobs set to go to Long Island City, Queens, New York, and 25,000 to Crystal City, Arlington County, Virginia. This much leaked out the week before the official announcement, but the November 13th official notification added that Nashville would get a 5,000 job consolation prize (for $138.7 million in incentives) as well as the incentive packages from each of these three jurisdictions -- well, some of the incentives, anyway. As with Foxconn, this announcement was rapidly followed by the discovery of new incentives. I'll skip the various updates and skip straight to what is currently known.
New York city and state both provided large incentives to the company. State benefits comprise mainly $1.525 billion in Excelsior employment tax credits, plus another $325 million based on the size in square feet of the Amazon offices, or a total state package of $1.85 billion. New York City will provide a job creation tax credit of $897 million over 12 years, plus a partial property tax abatement of $386 million over 25 years, according to a Good Jobs First analysis of the city's press release on the project.
But wait, there's more! Good Jobs First reports that the city will also provide a subsidy known as a payment in lieu of taxes (PILOT) that could itself cost another $100+ million. Last, as far as we know, but not least, the project will be located in a federal Opportunity Zone, which will provide further, though not-yet-estimated, benefits to long-term capital investors like CEO Jeff Bezos.
Total so far: $1.850 billion + 0.897 billion +0.386 billion = $3.133 billion, and likely more. While Amazon wants to emphasize the cost per job of its incentives, it only considers the first of these subsidies in its public calculation. But with just these three programs, we are already at a cost of $125,333 per job. While this doesn't sound horrible compared to some incentive packages we've seen recently, it completely omits that with such large numbers of jobs, there are diminishing returns in the value of each job due to the increasing likelihood of dumping thousands of workers and their families on a locality's infrastructure and educational system. Further, as I predicted in January, it normalizes the use of aid intensities* above 100%: $3.133 billion/$2.5 billion = 125%! Mind you, this is the nominal subsidy, not at present value, but with the 10-year Treasury note at 3.08% on November 16, the proper discount rate will be in that (low) vicinity, as has been the practice of the Organization for Economic Cooperation and Development in estimating the present value of U.S. subsidies for over 20 years.
To add a final insult to injury, the Amazon site will be in a federal Opportunity Zone, but the company's project is destroying one of the things that would be most welcome there, affordable housing. Politico (h/t Daily Kos) reports that the New York outpost of HQ2 will displace a planned 1,500 units of affordable housing from two developers.
In Virginia, a second $2.5 billion investment, 25,000 job facility will be opened by Amazon as well. There, the company will receive $573 million in job creation tax credits. Virginia Tech University also plans to open a new "Innovation Campus" less than two miles from HQ2/Virginia. The $1 billion campus has been considered one of the biggest draws for Amazon in its location decision, and Good Jobs First includes the entire $1 billion as a subsidy for Amazon. I disagree; building new educational infrastructure will provide benefits to the students that they will always possess regardless of who their future employers may be, so I see the company as unable to capture much of the $1 billion as a subsidy. A university is a great economic draw, but this extends far beyond any single employer. If we exclude the new campus as a subsidy, the aid intensity in Virginia is only 22.92%.
Combining the two locations, we now find, even without the new Virginia Tech campus, that Amazon will receive $3.706 billion in subsidies for the HQ2 project proper. For the combined project, that brings us to an aid intensity of 76.1% of the investment.
Long-time readers know it's time for a comparison with how this would be treated in the European Union under its regional aid guidelines. First, no region in the European Union is eligible for a 76.1% aid intensity, not even the poorest part of Bulgaria. Second, HQ2 is not going to the non-existent U.S. equivalent of Bulgaria, but to two of the richest places in the United States. What would Amazon get in state aid (=subsidies) for locating such a facility in London or Paris? Not one penny. Rich regions can't give investment attraction incentives, period. So the entire $3.7 billion and counting subsidy for the company would be disallowed if rational regulation of the bidding wars existed.
Happily, these subsidies have come in for a great deal of criticism around the country. As The New York Times editorialized, "New York's Amazon Deal is a Bad Bargain." And how does it know New York overpaid? The same way I recommended back in 2014, comparing to a similar deal. And there's no more similar deal than the other half of HQ2 that went to Virginia. Seeing that New York paid more than twice as much as Virginia for an equivalent project, the Times rightly concludes that New York paid more than it had to. Whether much political resistance to HQ2/New York develops or not, it's great to see the press analyzing these deals well.
To end on a down note, though, we need to recognize the harm the Amazon auction did to transparency. The company made the finalists sign non-disclosure agreements, although a couple did make it into the public eye (Newark, New Jersey, and Montgomery County, Maryland, two of the largest finalist offers, though it appears Pittsburgh topped them all). Hopefully some of the losers will now come forward. However, that's not the point; we need real-time transparency if there is to be any democratic oversight of the multi-billion giveaways that look to become more common than ever.
* Aid intensity is a metric, first used in the European Union, that allows us to compare the size of subsidies regardless of the size of the project. It is calculated as subsidy divided by investment. An intensity of 100% at present value means that the government is paying the entire cost of the investment. Thanks to reader TM for pointing out that I should have clarified this in the original article.
Saturday, June 1, 2013
Andrew Cuomo Reinvents the Enterprise Zone. Why?
Via @WNYPlanner, we learn that New York Governor Andrew Cuomo has proposed "Tax-Free New York," a plan that would let any business opening on State University of New York (SUNY) campuses outside New York City, some private colleges upstate, some areas adjacent to SUNY campuses, and an additional 20 "strategically located state properties" be entirely tax-free. According to the proposal:
Another strike against this program is that it explicitly allows companies to use it if they relocate from other states. Of course, relocation from within the state is prohibited:
Finally, as Citizens for Tax Justice points out, this program would exacerbate the state's fiscal problems: "With the state budget office projecting (PDF) shortfalls ranging up to $3 billion per year in the coming years, removing entire companies from the tax rolls is hardly fiscally responsible."
Hopefully the state legislature will reject this poorly thought-out proposal.
Tax-Free NY will entice companies to bring their ventures to Upstate New York by offering new businesses the opportunity to operate completely tax-free – including no income tax for employees, no sales, property or business tax – while also partnering with the world-class higher education institutions in the SUNY system.In effect, we are looking at a new incarnation of the enterprise zone, though thankfully without regulatory incentives to go with the fiscal incentives. Unfortunately, enterprise zones don't work very well, so the lack of regulatory exemptions is cold comfort.
Another strike against this program is that it explicitly allows companies to use it if they relocate from other states. Of course, relocation from within the state is prohibited:
Protecting Against Fraud: Tax-Free NY will include a series of provisions to protect against fraud. Businesses will have to submit certification to ESD [Empire State Development], and falsifying certifications will be a crime. The initiative will include strict provisions to guard against "shirtchanging," or when a company reincorporates under a new name and claims its existing employees are now new jobs. The initiative will also include measures to prevent self-dealing and conflicts of interest. In cases of fraud, the state will be empowered to claw-back benefits granted to the business.Proving once again, as Good Jobs First reported in "The Job Creation Shell Game," that states already know how to write anti-piracy language. They just don't apply it to themselves.
Finally, as Citizens for Tax Justice points out, this program would exacerbate the state's fiscal problems: "With the state budget office projecting (PDF) shortfalls ranging up to $3 billion per year in the coming years, removing entire companies from the tax rolls is hardly fiscally responsible."
Hopefully the state legislature will reject this poorly thought-out proposal.
Friday, June 1, 2012
How bad can "corporate socialism" get? David Cay Johnston gives us a glimpse
David Cay Johnston has a new column up today showing us some of the worst outcomes from corporate subsidies: incentives for retail development.
Johnston analyzes the case of a proposed redevelopment of the nearly-shuttered Medley Centre Mall in Irondequoit, Monroe County, New York, where developer Scott Congel is seeking a $250 million sales tax TIF. Originally a $260 million project, Congel now says he will invest $750 million to build a hotel and condos as well.
Johnston points out that retail is practically the worst thing government can subsidize, because it is almost entirely derivative of a region's population and income. If income falls (actually, even if it stays the same), the new mall can only succeed if it takes sales away from other existing outlets. And it's even worse than Johnston says, because retail jobs tend to have relatively poor pay and benefits.
The best study on this subject was conducted by the East-West Gateway Council of Governments, which is the regional planning agency for the St. Louis metropolitan area. This report found that from 1990 to 2007, local governments in the region had spent $2 billion in retail subsidies, repeatedly shifting the location of sales but generating no tax growth beyond the area's income growth. This comes to an astonishing $370,000 per net job if we believe that the incentives created the jobs, which is unlikely since sales growth did not exceed regional income growth. The cost per job is actually infinite.
Johnston points out more outrageous aspects to the Medley Centre proposal. Instead of conducting its own analysis of the economic impact of mall redevelopment, the developer commissioned and paid for a report, which "found" that the subsidized mall would see its sales grow from $30 million a year to $420 million per year. Johnston, by contrast, found that real income had fallen by $2.5 billion (13%) from 2000 to 2008 in Monroe County, and rightly argues that it makes the 14-fold increase in sales predicted "unlikely." Similarly, Johnston found that hotel demand in Monroe County had been flat for two decades.
Johnston also reviewed building costs for condos and hotels, finding that the $750 million price tag was "wildly inflated." As he points out, even if the figure was right, the subsidy has an aid intensity (subsidy divided by investment) of 1/3, whereas if the investment is only $260 million as earlier promised, the aid intensity comes to 96%. This would rival the 98% aid intensity on the Electrolux manufacturing plant being built in Memphis, itself an absurd level of subsidization, but at least for manufacturing rather than retail jobs.
The Medley Centre project has not yet received final approval, but it is an excellent example of all that is wrong with subsidized retail development. It won't create any new net jobs, the jobs at the mall will be low quality, the economic "analysis" was bought and paid for by the beneficiary, and the cost will be outrageously high. Let's hope there is some way it may yet be stopped.
Johnston analyzes the case of a proposed redevelopment of the nearly-shuttered Medley Centre Mall in Irondequoit, Monroe County, New York, where developer Scott Congel is seeking a $250 million sales tax TIF. Originally a $260 million project, Congel now says he will invest $750 million to build a hotel and condos as well.
Johnston points out that retail is practically the worst thing government can subsidize, because it is almost entirely derivative of a region's population and income. If income falls (actually, even if it stays the same), the new mall can only succeed if it takes sales away from other existing outlets. And it's even worse than Johnston says, because retail jobs tend to have relatively poor pay and benefits.
The best study on this subject was conducted by the East-West Gateway Council of Governments, which is the regional planning agency for the St. Louis metropolitan area. This report found that from 1990 to 2007, local governments in the region had spent $2 billion in retail subsidies, repeatedly shifting the location of sales but generating no tax growth beyond the area's income growth. This comes to an astonishing $370,000 per net job if we believe that the incentives created the jobs, which is unlikely since sales growth did not exceed regional income growth. The cost per job is actually infinite.
Johnston points out more outrageous aspects to the Medley Centre proposal. Instead of conducting its own analysis of the economic impact of mall redevelopment, the developer commissioned and paid for a report, which "found" that the subsidized mall would see its sales grow from $30 million a year to $420 million per year. Johnston, by contrast, found that real income had fallen by $2.5 billion (13%) from 2000 to 2008 in Monroe County, and rightly argues that it makes the 14-fold increase in sales predicted "unlikely." Similarly, Johnston found that hotel demand in Monroe County had been flat for two decades.
Johnston also reviewed building costs for condos and hotels, finding that the $750 million price tag was "wildly inflated." As he points out, even if the figure was right, the subsidy has an aid intensity (subsidy divided by investment) of 1/3, whereas if the investment is only $260 million as earlier promised, the aid intensity comes to 96%. This would rival the 98% aid intensity on the Electrolux manufacturing plant being built in Memphis, itself an absurd level of subsidization, but at least for manufacturing rather than retail jobs.
The Medley Centre project has not yet received final approval, but it is an excellent example of all that is wrong with subsidized retail development. It won't create any new net jobs, the jobs at the mall will be low quality, the economic "analysis" was bought and paid for by the beneficiary, and the cost will be outrageously high. Let's hope there is some way it may yet be stopped.
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