Amazon’s New York Headquarters: Were Incentives Even Necessary?
Last September, Amazon announced its intent to build a second headquarters, “HQ2,” that would be the “full equal” of its current headquarters in Seattle. Over 200 cities bid in the process, inspired by the promise of 50,000 jobs and $5 billion in investment from the company. In November, Amazon declared New York City and Arlington, VA the winners. Each site would receive half the promised jobs and investment because the company could not find sufficient talent to satisfy its needs in just one city. Although many observers were dismayed at the bait-and-switch of the process, politicians in both areas nevertheless rushed to promote the imminent flood of jobs and investment. By February of this year however, mounting resistance from local leaders in Long Island City, where Amazon planned to build its New York site, led the company to pull out of the deal.
Much of the local resistance in Long Island towards Amazon stemmed from the tax benefits the state and city offered as incentive for the company, along with concerns of gentrification and rising home prices. In addition to $1.2 billion in refundable tax credits from the New York State’s Excelsior Jobs Program if the company added 25,000 net new jobs by 2028, Amazon was promised $500 million in capital grants as reimbursement for its building costs. The company would have been able to take advantage of NYC’s Relocation and Employment Assistance Program (REAP), an as-of-right incentive worth potentially $900 million over 10 years.
Proponents of the project argued Amazon’s entrance would result in much more than just the 25,000 jobs and $2.5 billion investment the company promised. As time went on, additional businesses would crop up to service the needs of the employees, who would be newly enriched from an Amazon salary. As these secondary effects realized, the total amount of jobs created and taxed would surpass what Amazon promised by itself. Proponents argued the taxes paid by these businesses and their employees, combined with income taxes from the Amazon employees themselves, estimated by the state to be $27.5 billion over 25 years, would more than make up for the incentives that were offered.
Critics of the project, perhaps unfairly, expressed anger at the amount of money the city and state offered to one of the largest companies in the world by market capitalization. Due to the performance-based structure of REAP and the Excelsior Jobs Program, much of the tax incentives promised would only have come to fruition if Amazon had created and maintained the 25,000 jobs. Other concerns, such as gentrification and the increased pressure on public resources, are legitimate, though non-unique to Amazon’s entrance.
Taxpayers should not sit easy however, because tax incentives, especially unconditional ones like the capitals grants, are of questionable efficacy. A recent study by Tim Bartik of the W.E. Upjohn Institute for Employment Research found tax incentives were not particularly effective in terms of influencing location decisions or realizing company promises. More importantly, the study found many companies that received incentives would have come anyways. Essentially, location decisions are decided beforehand and companies then attempt to maximize economic gain by initiating a bidding process among cities.
Although we may never know whether Amazon would have been able to carry out its promises in New York, one thing is clear: tax incentives were never the deciding factor. Looking at the request for proposal (RFP) Amazon issued shows the company made its decision based on eight main criteria. Although tax incentives and minimal capital and operating costs were both criteria, it would seem they were not very important in reality. Why? Because New York gave only about $2.6 billion in incentives and Virginia offered around $700 million. Montgomery County in Maryland offered $8.5 billion in tax and infrastructure incentives while New Jersey offered $7 billion for its Newark bid. If tax incentives were the primary driver of the decision, surely Amazon would have chosen either one instead of Virginia’s comparatively measly $700 million. But Amazon didn’t.
Amazon had more pressing criteria on its RFP: labor supply, logistics, culture fit, and quality of life. Even if tax incentives were significant at the margin, very few other cities would have satisfied the above requirements. According to Datausa.io, the New York region is one of the nation’s biggest producers of computer science and computer information systems graduates. For a tech company like Amazon, this continuous source of talent is critical to staffing all the high paying jobs it promised the winning city. Although new hires will likely come from around the country and possibly the world, this source of local labor will give Amazon a significant head start.
Logistics, culture, and quality of life were also important criteria for Amazon, which makes sense. In order to attract talent and convince employees to relocate, the new headquarters had to be in an attractive place to live. New York, one of the largest cities in the world, fits the bill with its young, trendy population, robust nightlife, and accessibility to all manner of goods and services. For many young tech workers, relocating to New York City makes more sense than Montgomery County or even Newark. If Amazon doesn’t work out, there are plenty of other employers in the area.
Location was also likely a significant factor in Amazon’s decision. Although New York’s location and amenities speak for themselves, Arlington’s proximity to Washington D.C. could have differentiated it from competitors. Amazon holds many government contracts, and the location of its Arlington site will likely endear itself to the politicians on Capitol Hill. Finally, a headquarters in Virginia will enable Amazon to more easily influence policy, increasing the chances of favorable regulation and policies.
Amazon’s splitting of its second headquarters made it clear there was no city in America that could supply the sheer amount of skilled-workers the company needed. If Amazon wanted any chance of achieving its targets, it would have to find the sites that gave it the biggest advantage possible and then convince talent to migrate to its headquarters. New York’s qualities made it attractive not just to Amazon but also to the demographic of its potential employees.
Amazon didn’t pull out of New York because there weren’t enough incentives; it pulled out because the local population didn’t want them there. In fact, Amazon would have come even if New York hadn’t given them a cent. Amazon is a prime example of Bartik’s findings. Incentives didn’t bring Amazon to Long Island City. New York’s 24-hour metro system, large population, trendy neighborhoods, and top universities did. Combined with an established tech community buoyed by branch offices from Facebook, Google, and Amazon itself, New York was the natural choice for a new headquarters. It’s too bad incentives that don’t work left a bad taste in both Amazon and the locals’ mouths. If New York hadn’t offered tax incentives, the resistance would probably have been considerably less and Amazon might have stayed in town.
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