While Amazon’s relationship with the U.S. Postal Service generated most of the headlines this week, another significant development flew relatively under the radar. This week Maryland’s House passed an incentive package totaling $8.5 billion, following passage in the Senate last month it will now head to Governor Larry Hogan's desk. The package is the largest in the state’s history and the most recent development in the competition to land the company’s second headquarters.
Amazon has become one of the largest, most dynamic companies in the world, and it is understandable that different states are interested in its second headquarters. However, incentive packages of this size would reduce much of the related benefits of the move. State and local governments would be better served by reining in these incentive packages and focusing on creating a broader framework more in line with the other criteria outlined by Amazon, including quality of life, an educated labor pool, and a supportive regulatory environment.
An environment with these characteristics would be attractive to all businesses from startups to mom-and-pop restaurants and dry-cleaners to large companies such as Amazon.
Maryland’s newly approved law, going by the cringe-worthy name Promoting ext-Raordinary Innovation in Maryland’s Economy (PRIME Act), while not explicitly exclusive to Amazon, is tailored to the company as only its HQ2 could meet the criteria. The incentives match any Fortune 100 company that seeks to hire 40,000 qualified workers with average compensation of at least $100,000 and includes $4.5 billion in related project expenditures. It is difficult to envision any other company that would be able to meet all of the different eligibility requirements. Large employers such as Walmart would be unable to meet the average compensation requirements, while most tech companies would not place sufficient associated investments in one location.
The Department of Legislative Services for Maryland’s General Assembly estimates that the incentive package will amount to about $5.6 billion at the state level and another $924 million at the local level, for a total of $6.5 billion. State lawmakers seemed unfazed that the price tag is substantially larger than the initial $3.3 billion estimate touted by Governor Larry Hogan’s administration.
Another $2 billion in related transportation expenses brings the total associated costs of the incentive package to $8.5 billion. To put the magnitude of the related incentives into some context, in FY 2017 the state’s total elementary and secondary education expenditure was just over $7.8 billion, although obviously the tax incentives would be staggered over multiple years.
Maryland is far from alone in offering a generous package of credits and subsidies for Amazon’s HQ2. New Jersey offered a set of credits and subsidies worth $7 billion, dwarfing the next-largest package on record, the highest of which was worth up to $390 million from the state to Ameream and Meadow Amusements to develop a retail and entertainment complex in 2013. Other locations have not been forthcoming in the details or amounts of the incentive packages offered. A heavily redacted version of D.C.’s pitch was only made available after a Freedom of Information Request from the local radio station WAMU.
Amazon’s competition for HQ2, with a broad request for bids and a culling down to narrower lists in successive rounds, and the explicit mention of tax incentives as one of the major factors being considered, was designed in part to stimulate an escalation of tax incentives among the potential sites. As the recent package from Maryland shows, in many ways these efforts have been largely successful.
It does not have to be this way. While Amazon indicated that the incentive package being offered was one of the factors the company would be considering, it was far from the only one. The company also said in its Request for Proposal that a stable and attractive business environment and tax structure would be “high-priority considerations.” So would considerations about the permitting environment that would accommodate expedited construction and project delivery, good quality of life, and access to a skilled labor force.
These are generally characteristics that cities and states should be striving to create because they are attractive to all businesses, including Amazon. Some cities that made the final cut, such as Austin, eschewed offering any Amazon-specific tax incentive packages. Austin officials instead chose to highlight the ways its broader economic, cultural, and business environment would make it a good fit.
The rush to land Amazon’s HQ2 has led to record-breaking incentive offerings across the country, most recently seen with Maryland’s $8.5 billion package. While landing HQ2 would generate some benefits, the scale of these incentives being offered would diminish those benefits, and the price is getting higher as different finalists inflate their offerings. Depending on the ultimate choice and the size of the final package, the “winner” could end up regretting its victory.
The same week that Amazon made headlines regarding its tax payments and its arrangements with the U.S. Post Office, states and cities scrambled to offer ever-more lavish subsidy packages. These places should instead try to meet the other criteria outlined by Amazon by creating an environment with stable taxes, reasonable regulations, low cost of living, and good governance. Anywhere with these characteristics will have few problems convincing businesses and workers to come, and helping them thrive once they do.
Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on Twitter @CharlesHHughes.
Editor’s Note: This piece was originally published by Economics21 at the Manhattan Institute.