Promising Billions to Amazon: Is It a Good Deal for Cities?
A review of the 20 finalists finds that several are already forgoing hundreds of millions of dollars in potential revenue each year and might not be able to afford to give up more.
In the quest to land Amazon's second headquarters with its juicy 50,000 jobs and potential $5 billion investment, cities have made some eye-popping proposals. Maryland's transportation chief, for instance, promised a "blank check" -- an offer that has since been walked back -- and Newark, N.J., pledged a whopping $7 billion in tax breaks.
But according to a Governing analysis of the 20 finalist cities in Amazon's HQ2 search, some are already forgoing hundreds of millions of dollars in potential revenue each year through tax incentives and might not be able to afford to give up more.
Take Chicago. The fiscally strapped city, which has been repeatedly downgraded by credit rating agencies and has raised property taxes to help its budget, reported that it gave up more than a half-billion in tax revenue in 2016 via incentives primarily associated with tax increment financing. TIFs subsidize companies by refunding or diverting a portion of their taxes to help finance development in a specific area. According to the city's financial report, its giveaways in 2016 represented more than 16 percent of what the city collected in total revenue that year.
Meanwhile, both Denver and Indianapolis reported abated revenue equivalent to nearly 9 percent of their general fund revenue last year.
Justin Marlowe, a public finance professor at the University of Washington, says it's not surprising that the jurisdictions offering the more substantial tax incentives also happen to be fiscally strapped. In a recent analysis, Marlow conducted a "10-Point Test" on the 20 finalist governments. The test looks at a government's near-term liquidity, its long-term solvency, and whether it generates enough taxes and fees to cover its main expenses.Chicago and Indianapolis both scored poorly on the test. Denver scored moderately.
"It's part of the same underlying tendency which is for certain cities to look at a lot of these fiscal policy decisions in the near term rather than the long term," says Marlowe, who is also a Governing contributor. "If you do that year over year over year -- it catches up with you."
The data on incentives is available thanks to a new accounting standard that went into effect last year for government financial reports. Governing used data compiled by the subsidy tracker Good Jobs First and referenced financial reports from 18 of the 20 finalist cities. (Toronto and Northern Virginia were not included because the rule doesn't apply to a foreign government and the Northern Virginia region encompasses several governments.)
Of the 18, a total of 11 governments have filed their financial reports with information on their foregone tax revenue due to economic development incentives. Two -- Montgomery County, Md., and Raleigh, N.C. -- didn't disclose any tax abatement data in their reports because they said it wasn't "significant," and the remaining governments haven't yet filed their annual reports.
|Total FY 2016/FY 2017 Tax Abatements||FY Budgeted General Fund Revenue||Percent Total Revenue Abated|
|Atlanta (FY 2017)||$3,284,000||$607,388,585||0.5%|
|Boston (FY 2017)||$17,084,000||$2,857,410,000||0.6%|
|District of Columbia (FY 2017)||$84,421,000||$7,450,000,000||1.1%|
|Los Angeles (FY 2017)||$18,300,000||$5,007,604,000||0.4%|
|New York City (FY 2017)||$3,389,468,000||$83,468,000,000||4.1%|
The available data show that some places already giving away a significant portion of potential revenue could add substantially to that burden. Atlanta and Chicago, for instance, could offer Amazon up to $2 billion in tax breaks.
The concern over what cities may give up for the Amazon prize has caused S&P Global Ratings to caution that while landing the e-commerce giant "would have mostly positive local economic and governmental revenue effects … direct costs or foregone revenues in the incentives that some communities have offered to attract Amazon could offset some of the potential gains."
Not all of the finalists are offering big tax incentives, though. Notably, Boston reported that less than 1 percent of its total revenue was forgone to tax incentives last year. When it comes to its Amazon bid, the city isn't offering any company-specific subsidies, but does outline $93 million in investment in housing and workforce development, as well as an additional $4 million for small business loans. Boston also scored high on the fiscal health 10-Point Test, according to Marlowe.
Boston's bid does include a description of its TIF programs, so substantial property tax breaks for Amazon are not out of the picture. Still, says Greg LeRoy executive director of Good Jobs First, cities might want to rethink how generous they are. History, he says, has often shown that incentives only play a role at the margins. More often, companies' relocation decisions are rooted in tangibles such as the talent pool and existing commerce and industry.
LeRoy pointed to General Electric's decision in 2016 to relocate from suburban Connecticut to Boston. Although the company was offered $145 million in tax incentives (mostly from Massachusetts), GE said its primary reason for moving its headquarters was that the company wanted to be in a place that had a walkable, urban environment with access to transit and a deep talent pool. Amazon's second headquarters search, LeRoy says, is no different. "Real estate isn't the key to this," he says. "It's the brain cells."
*CORRECTION: A previous version of this story wrongly stated that Atlanta's 2017 tax abatements totaled $384 million. The data in the table and text have been updated to reflect the correct amount.