Amazon HQ2: From Tax Incentives to Market Distortions
Crystal City, Virginia, one of two locations chosen for Amazon’s new headquarters. (Jared Soares/New York Times.)
On Nov. 13, following the culmination of a year-long search, Amazon announced its selection of Crystal City, located in Arlington, VA, and Long Island City, located in Queens, for its HQ2 campus. Amazon initiated its search for a new campus on Sept. 7 of last year, citing requirements it be in a metropolitan area of more than one million people, a business-friendly environment, and close proximity to an international airport.
With the promise of 50,000 new jobs paying an average of $150,000 a year and upwards of $5 billion in investment, 238 cities and regions from the U.S., Mexico, and Canada submitted proposals. The numerous bids varied a great deal, from $7 billion in state tax credits offered by Newark, NJ, to the offer by Stonecrest, GA, (population: 53,000) to de-annex 345 acres of land to be named Amazon, GA. After narrowing its options down to 20 finalists (Stonecrest unfortunately did not make the cut), Amazon elected to divide its HQ2 into two separate locations, committing to create at least 25,000 jobs in both Arlington and Long Island City.
Many residents of these cities, along with their elected officials who presented the bids, have displayed their elation, looking forward to the improved employment prospects and increased local investment. Virginia Governor Ralph Northam described it as an “exciting day for the Commonwealth of Virginia” while New York Governor Andrew Cuomo lauded the plan as the “largest economic development initiative that has ever been done by the city or the state or the city and the state, together.” Others, meanwhile, have exhibited far less enthusiasm for the new headquarters.
Targeted tax incentives, such as those provided to Amazon, have received a great deal of criticism for their inefficient and inequitable nature. Amazon would have almost certainly chosen a U.S. city for its HQ2, leaving overall welfare in the U.S. identical regardless of the location it selected. As such, the billions in tax incentives provided to Amazon by New York and Virginia constitute unnecessary market distortions that resulted in the wasteful spending of taxpayer dollars. For these reasons, the European Union has banned such government incentives under Article 107 of the Treaty on the Functioning of the European Union, since, just as in Amazon’s HQ2 bidding process in the U.S., they distort competition between member states. Moreover, providing these incentives creates an unfair playing field in which the government effectively picks winners and losers. Many smaller retailers, who lack Amazon’s political clout and resources, will face a larger tax burden.
Regional concerns have also spurred a backlash against the construction of the new headquarters. Although the splitting of HQ2 into two locations will likely aid in curtailing these effects, many current residents remain apprehensive about the project due to fears that the large influx of highly paid technology-sector workers will drive up both Crystal City and Long Island City’s housing costs. Between 2005-2015, the median rent in Seattle, home to Amazon’s original headquarters, increased by three times the national average as the company expanded. While it is possible that Crystal City and Long Island City will be more effective in absorbing the population inflow, upward pressure on the cost of housing appears likely. This is especially troubling for lower-income residents who may be priced out of their current homes.
These issues have led numerous elected officials to come out against the HQ2 agreements. New York Assemblyman Ron Kim, for example, has promised to introduce legislation that would dedicate development subsidies to purchasing and subsequently forgiving student loan debt while Democratic Congresswoman Alexandria Ocasio-Cortez has stated that “displacement is not community development. Investing in luxury condos is not the same thing as investing in people and families.”
While an increase in jobs and investment presents a substantial boon to the two cities, the construction of Amazon’s HQ2 will certainly pose problems as well. Issues of rising housing costs, though they would likely arise no matter where Amazon chose to locate, will force numerous residents to leave their homes for a more affordable area. The cities’ public transportation systems and highway infrastructure will also face increased gridlock, with the wasteful tax incentives used to lure Amazon leaving diminished levels of funding with which to address these issues.
While Amazon’s arrival may provide a net benefit to the two cities’ residents, the use of generous tax incentives to lure the company appears far more questionable. It remains to be seen whether the cities will receive a positive return on this investment, and a nationwide ban on such tax incentives would likely increase overall welfare.