Winning the bidding war for Amazon’s AMZN, -0.91% secondary corporate headquarters came with a steep price tag — $3.4 billion.
That’s the total amount in tax incentives and grants that state and local officials in New York and Virginia offered the e-commerce giant as part of their bids to house “HQ2” in Long Island City, N.Y., and Arlington County, Va., respectively.
Before the HQ2 announcement, Amazon had received roughly $1.61 billion in subsidies from state and local governments over roughly the past two decades, according to data collected by Good Jobs First, an advocacy group that tracks corporate accountability.
Our romance was a whirlwind
With tax incentives too good to be true
But our heart’s no longer in it
No #HQ2 for you.#TaxValentines
— David Stewart (@TaxStew) February 14, 2019
But New York was going to pay far more than Virginia for its share of the HQ2 headquarters in tax breaks and credits. Amazon said Thursday that it’s no longer pursuing its plans to build the HQ2 campus in Long Island City but is still moving forward with the Northern Virginia location as well as a large operations center in Nashville, Tenn.
The Seattle-based company had announced back in November that it had selected New York and Northern Virginia from its short list of 20 cities across the U.S. and Canada, ending a bidding process that took more than a year.
“What we’ve seen play is one of the most public site-selection processes in recent years,” said Jared Walczak, a senior policy analyst with the Center for State Tax Policy at the Tax Foundation. “Taxpayers are getting a look under the hood at the sorts of negotiations that happen every day.”
Here’s how the HQ2 incentives were going to break down
For the Long Island City location, Amazon was going to receive $1.2 billion in refundable tax credits through New York State’s Excelsior Jobs Program if the company created 25,000 net new jobs in New York State by the end of June 2028. New York State had also promised a $505 million capital grant to reimburse Amazon for the costs associated with building its office space.
Amazon also planned to take advantage of incentives through New York City’s Industrial and Commercial Abatement Program and New York City’s Relocation and Employment Assistance Program (REAP). Unlike the incentive offered by state officials, these city programs are available to any businesses that meet their specific requirements. Tax breaks through REAP, for instance, could have added up to $900 million.
Saying no to Amazon’s HQ2 isn’t creating or protecting affordable housing in queens.
— Eddie Amador (@eddieamador) February 14, 2019
Comparatively, Virginia’s commonwealth government only offered $750 million in grants, split across two phases, for the Arlington County HQ2 location. The first $550 million is set to be paid out from 2024 through 2030 based on Amazon hiring the promised 25,000 new jobs. An additional $220 million will be given to Amazon if it adds another 12,850 new jobs. Arlington County also agreed to chip in $23 million through a grant to cover taxes associated with hotel stays.
State and local lawmakers in both New York and Virginia had also offered to invest money in infrastructure and other improvements.
How Amazon’s HQ2 incentives stack up
While $3.4 billion is nothing to sniff at, Amazon had reportedly received better offers. Maryland was offering $8.5 billion in tax and infrastructure incentives to Amazon as part of the bid for Montgomery County, while New Jersey was offered $7 billion in incentives as part of its Newark proposal.
“These regions were not chosen by Amazon for tax breaks,” said Heather Redman, managing partner at venture capital firm Flying Fish Partners and the former chair of the Seattle Metropolitan Chamber of Commerce. “These regions were chosen because this is where the talent currently lives or wants to live.”
Still, Amazon’s HQ2 incentives were set to rank as one of the largest in the country’s history, Walczak said. Here’s how it compared to other recent large incentives packages corporations have received for building large manufacturing facilities or corporate headquarters:
1. Boeing BA, +1.99% (Washington, 2013): $8.7 billion
2. Alcoa AA, +0.25% (New York, 2007): $5.6 billion
3. Foxconn (Wisconsin, 2017): $4.8 billion
4. Boeing (Washington, 2003): $3.2 billion
5. Amazon (New York, 2018): $2.6 billion
6. General Motors GM, +0.51% (Michigan, 2009): $2.3 billion
7. Ford F, +1.43% (Michigan, 2010): $2.3 billion
8. Sempra Energy SRE, +1.06% (Louisiana, 2013): $2.2 billion
9. Nike NKE, +0.83% (Oregon, 2012): $2 billion
Indeed, mega deals, or incentive packages that cost more than $75 million, have become increasingly common in recent years. Between 1976 and June 2018, there have been nearly 400 deals of this size, according to Good Jobs First.
While some of these packages were offered to large corporations to spur them to relocate a corporate office or factory, in other cases lawmakers have struck these deals in order to persuade the companies to stay where they already were.
As for the discrepancy in size between Virginia and New York’s offers — despite the fact that both locations are expected to receive the same number of jobs — a number of factors are at play. New York has historically been inclined to provide tax breaks and other deals to lure corporations. With 33 so-called megadeals, it has more on the books than any other state except Michigan, which has 35.
“New York does have a history of giving out more in the aggregate and per-person,” said Dave Friedfel, director of state studies at the Citizens Budget Commission, a nonpartisan, nonprofit civic organization that lobbies for changes to the government finances in New York.
Moreover, factors such as the higher cost of living and higher taxes in New York relative to other places (including Virginia) also contribute, Walczak said.
Will taxpayers benefit from HQ2?
When it announced its selections for HQ2, Amazon played up the benefits residents of Long Island City and Northern Virginia would receive as part of the deals. In New York, Amazon said it would create space on its campus for a tech start-up incubator and for artists and industrial businesses, donate space for a public school and invest in infrastructure and green spaces.
Proponents of the plan argued that the expected boost in tax revenue courtesy of the 50,000 Amazon workers earning an average wage of $150,000 annually — plus the countless other workers lured to these cities thanks to the additional companies and jobs that could follow Amazon.
However, the negative effects it was expected to have on affordable housing in New York City stoked criticism from local residents, union leaders and politicians against the deal.
But critics of the HQ2 plan argued that these benefits would be hard to come by thanks to the large size of the tax breaks and grants Amazon itself is receiving. “Taxpayers should be very skeptical that incentives like these will ever pay for themselves,” Walczak said.
‘If you focused on creating a more competitive business tax environment rather than targeting one white whale, you would have a much better system overall and, frankly, it would probably create more than 25,000 jobs.’ Jared Walczak, Center for State Tax Policy at the Tax Foundation
Instead, Walczak argued that residents and local businesses would benefit more from overall tax reform rather than huge tax breaks for individual companies. “When states pick a particular company and throw money at them, someone has to pay for that and you’re foregoing other opportunities,” he said. “If you focused on creating a more competitive business tax environment rather than targeting one white whale, you would have a much better system overall and, frankly, it would probably create more than 25,000 jobs.”
However, the majority of the tax breaks and grants Amazon would have received were contingent on the company fulfilling its promises regarding hiring and occupying commercial real estate.
To that end, the offers Amazon accepted from New York and Virginia were “set up in the least harmful way,” Friedfel said. These requirements would have prevented Amazon from reaping the benefits of the incentives and then simply abandoning ship.
Some have argued that the online retailer was always primed to pick New York City and the Washington, D.C., area since Amazon founder Jeff Bezos owns homes in those locations. As Politico had previously reported, Google GOOG, -0.72% and Facebook FB, -0.88% both opened large corporate offices in New York City without getting state tax breaks. (Facebook confirmed to MarketWatch that it received no incentives. Google said it has not applied for tax incentives or subsidies for any of its current office locations.)
In the long run, the battle over HQ2 could have serious ramifications for taxpayers, if other companies choose to replicate Amazon’s process. However, Walczak said the unusually open process Amazon promoted for HQ2 also meant that Americans were given the chance to scrutinize the terms of the offers lawmakers made.
Already, the deals in Northern Virginia and New York have garnered some backlash from two Democratic lawmakers, New York City Council Speaker Corey Johnson and incoming Representative Alexandria Ocasio-Cortez. “That might cause elected officials to consider deals like this more carefully,” Walczak said.
Amazon is up around 6% year to date. The Dow Jones Industrial Index DJIA, +1.74% is up 9.2% year to date and the S&P 500 SPX, +1.09% is up 9.6% over the same period.
