Cash Chronicles

Behind the Numbers: Amazon Cancels HQ2 in New York City

There was a lot of buzz last Thursday around the announced pull out of Amazon from the proposed Long Island City campus that Amazon has proposed. The headlines read that it was supposed to add 25,000 jobs and that the company was offered $3 billion in incentives by the state and city government.

There were mixed opinions, those on the far left felt they had won an improbable victory against rigging the system for wealthy corporations. Those on the right lamented another example of jobs being killed by those that only understand how to destroy prosperity and not generate it.

Not one to just trust the numbers and the headlines though, I decided to look a little deeper behind the numbers and behind the headlines and see what was really offered and whether an opportunity was really lost.

The Incentives From the State and the City

The most headline grabbing figures were the $3 billion that the state and city would have given Amazon to set up shop in Long Island City. These are really 4 incentives which were added onto each other for simplicity:

The first one is a state program that already existed and is offered to businesses with as few as 5 employees. It offersa refundable tax credit equal to 6.85 percent of the total wages per new full-time job they create, and a capital investment credit equal to 2 percent of a company’s total qualified investments that result in new jobs.

REAP also previously existed and is a per-job tax credit in which companies from either outside New York City or below 96th Street in Manhattan get a $3,000 per employee credit for 12 years for each employee that moves into the new office outside the REAP area.

ICAP is a city program similar to the 421-a program in which high end developers get a tax abatement a for building affordable housing into their luxury buildings. It’s available to companies who undertake new commercial construction in areas outside of some exempted sections of Manhattan.  

The Empire State Development Capital Grant has a value of up to $505 million which is intended to help defray the cost of building the corporate campus.

The first 2 of these are directly linked to the jobs created and according to CNN total $1.5 billion if 25,000 jobs are created in 10 years or $1.7 billion if 40,000 jobs are created in 15 years. Together with the ICAP they total $2.5 billion in incentives according to the Gotham Gazette. Add the $505 million capital grant to that and you arrive that the $3 billion figure.

The first 3 are already established programs that any company can apply for depending where they want to set up. However with all the incentives linked to areas outside of Manhattan, it now becomes more obvious from a financial standpoint why Queens was chosen as opposed to Midtown.

In addition, the city and the state worked together to provide incentives for building in the area. Much of the campus would have been built on state land leased to the company, with funds then going directly to the city coffers and development for the local community.

What New York Could Have Gained

So we know where the $3 billion figure came from but more importantly half of that was linked to the jobs being created. This doesn’t mean that the 25,000 workers would be paying less taxes, it means the company itself would be able to claim those credits. In addition to that, the company would have been able to reap the savings on development in the area due to choosing that particular location.

However those workers would have paid income tax like everyone else. With an average wage of $150,000 for the 25,000 jobs added, this was not going to be an insignificant figure for the city or the state. Although it would have only represented 0.5% of the 4.3 million jobs within the city currently, they were almost sure to be made up of relatively high paying jobs.

Now people that get paid well don’t always live in New York City or even New York State but let’s assume of those 25,000 a quarter of them decide to reside in the city. If we also assume the average pay of these folks will be $150,000 annually and the city and state taxes will be about 10% of that, we come to a figure of about $94 million annually. Multiply that by 10 and you come to almost $1 billion just in taxes wages over a decade.

This is just one back of the envelope calculation. It’s been reported that Amazon accounted for 330,000 hotel stays in Seattle in 2017. With a 6% hotel occupancy tax and assumed $300 a night price, that’s an additional $6 million a year from this activity generated.

Nor do these examples take into account the real estate brokers fees, construction jobs to build the sites, greater activity benefitting small business around the site and on and on. Not to mention that the company would still be paying that land lease and other property taxes. In the long run it likely would have paid for itself.

Instead of focusing on the $3 billion figure, we should also be taking into account the alternative figure: $0. That’s what the city and state will now get without the new campus and the increase in jobs. They did a terrible job of selling it as a net positive for the city and state. The only figures we have seen quoted time and again are the subsidies, not what could have been gained in terms of the tax revenue or economic activity.

The Bigger Question

The bigger question here is the key though. At the end of the day, these are really subsidies. They don’t go to the workers, even the high paid ones. They go straight to the company. The question is, should governments really be offering these subsidies to large corporations? This fundamental question and the increasingly polarized political environment, are key to understanding why there was so much opposition to this move.

Large, profitable companies do not need subsidies to operate. Especially when they are already benefitting from tax avoidance created by recent federal legislation due to their scale and size. The incentives offered by New York weren’t even the most generous offered. Toronto didn’t even play the game and offered zero incentives. Even though some of the programs existed already, people could sense the insider element and the giveaway to another large corporation. This is probably why Amazon signed a number of Non Disclosure Agreements (NDAs) with cities like Miami, so we may not know for years how generous some of the other subsidies were.

In addition, as I pointed out in one of my previous posts there were already big time loopholes and programs from the federal and state government that would allow already rich developers and well off individuals to further avoid taxes and benefit from this particular project.

For a lot of people it just added up to more of the same, and with political engagement at a high, a vocal yet organized minority has the potential to make a lot of waves and alter big moves like this. For this reason we have been seeing headlines in recent days discussing federal legislation to eliminate incentives offered to big corporations by states and local municipalities.

What Amazon Lost

Clearly Amazon wanted its hub near smart educated workers that it could tap. However, the pullout reveals something more interesting about the culture of Amazon: it isn’t comfortable yet as one of the biggest companies in the world and defending itself.

I think this comes from the many years of getting its way and not having its business scrutinized in the way it was by New York activists and politicians. The claim from Amazon that this was a long term decision is flimsy in itself. The blame was shifted to the details of an obscure state assemblyman and an obscure committee that would be approving the construction.

This was a cop out. The executives didn’t show the bravery that their CEO did when he pushed back on the National Enquirer. Instead the company missed a great training ground for publicly defending its business and its practices.

Rather than let the politicians tell everyone how great they are they are, Amazon missed the opportunity to address the concerns of the public itself and showcase its world class ability to be innovative and drive solutions. This could have provided Amazon with a valuable internal case study of working with local opposition. If Amazon thinks New York is hard, what are they going to do when they want to expand in Europe or Asia?

Conclusion

Both sides in this case should be rightly embarrassed. Time will tell if this will spell the beginning of the end of the “race to the bottom” for state and local tax subsidies for corporations. On a local level, it’s also a great time for the public to start poking around and asking more big questions about the inner workings of Albany. Trust and believe that Amazon wasn’t the only case like this, it just received the most press.

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