The Amazon search for a second (and as it turned out, a third) corporate headquarters was an extravaganza the likes of which we may not see again. As an attorney who advises companies in the corporate relocation process, I followed this sweepstakes with special interest. Being the economic behemoth that it is, Amazon can rewrite the rules in ways that other companies cannot. Even before the extraordinary opposition to Amazon in New York City that led the company to reconsider its selection, this was a phenomenon that offered lessons we will ponder for years to come.
Tax abatements are important, but the prize will not necessarily go to the highest bidder.
Incentives will get a community into the game, but that is just the start. Amazon had its pick of tax incentives but did not take the highest bidder. Some of the offers were mindboggling. Maryland offered $6.5 billion in tax incentives and Montgomery County — adjacent to Washington, D.C., and not far from Arlington — offered $2 billion in infrastructure improvements.
Newark and the state of New Jersey offered $7 billion in tax breaks over a decade. Columbus, Ohio, and Philadelphia both offered more than $2 billion in state and local incentives, and Chicago promised a combined incentive and infrastructure package of more than $1.7 billion, including a separate train for Amazon employees. Atlanta, with backing by the state, offered $1 billion.
In the end, the bid went to New York City and Arlington. New York offered a package of subsidies, contingent on the creation of 25,000 jobs, worth $1.5 billion. Virginia and Arlington County offered direct subsidies of almost $600 million, assuming 25,000 jobs, and promised an additional $200 million-plus investment in transportation improvements.
Arlington’s incentives were modest by the standards of this contest. Having participated on many location-deal teams, the big incentive numbers can be misleading because it is the net impact on the bottom line that matters. Virginia’s corporate tax rate is a modest 6 percent (Connecticut is 9 percent), and Arlington’s effective property tax is reportedly just 1 percent. With those numbers, Arlington’s $600 million looks considerably better without considering other tax effects.
Talent was the primary driver of Amazon’s decision.
From beginning to end, Amazon’s decision to create another headquarters was driven by its need for access to additional talent. About half of the promised 50,000 jobs will be tech jobs, many with the word “engineer” included in the title. Other high-paying jobs will be in accounting, marketing, HR, finance, legal, and all the specialties that corporations typically need. With New York out of the picture, many of those jobs will now be spread out among other Amazon offices.
From beginning to end, Amazon’s decision to create another headquarters was driven by its need for access to additional talent.
Even before entering our current tight labor market, few cities could satisfy such a voracious appetite for talent. While some of the cities that offered big incentives may very well be wonderful places to live, they suffer from perception problems and need to rehabilitate their images to be attractive to the educated millennial workforce Amazon attracts.
Talent is generated two ways, both essential. One way utilizes a great education system, from K-12 to universities. For some companies, state-sponsored workforce training is a big plus, and manufacturing companies are practically begging states to emulate Germany’s high school apprentice programs. The second way leverages an urban environment where people with sought-after, portable professional skills want to live. Cities wishing to pursue future transformational projects must continue to assess whether or not they are benefitting from an in-migration of young, educated people. If not, they must assess what steps can be taken to increase in-migration.
Pushback usually dies down.
Both sides of the political spectrum have criticized incentives as corporate welfare, but that usually passes. New York Gov. Andrew Cuomo famously joked he would change his name to “Amazon Cuomo” if that is what it would take to win Amazon. Cuomo penned a long response to charges that he “gave” Amazon $1 billion, saying in a nutshell, “A longstanding, essentially vacant site in Long Island City will see a $3.6 billion construction project and 25,000 to 40,000 permanent jobs at an average salary of over $150,000.” You will not lose an election when you bring in 25,000 jobs, no matter how you did it.
As this article was being written, Amazon responded to a growing local protest over the impact of the project on the culture of the local community and the size of the incentive amounts by terminating its pursuit of a location in New York City. To the extent companies running larger projects are concerned about the potential for longer-term local resistance initiatives, an effective community communications plan coupled with focused political due diligence can help avoid miscommunication between companies and communities. Both the New York City mayor and the state’s governor remained enthusiastic about Amazon, but a perfect storm of neighborhood opposition, philosophical objections to incentives, and required support from other state officials prompted Amazon to reconsider and not invest in a city where it believed it was not broadly welcomed.
Build it and they will come.
Infrastructure received a lot of attention in the Amazon bid, with just about every city promising to build more. In this context, the highest infrastructure hurdle is transit, both in terms of time and cost. Amazon is regarded as having a workforce that wants to walk to work, or at least hop on a train and avoid a grueling freeway ride. That may be especially true with a millennial workforce that is displacing boomers, but every business that wants to locate in a central business district is thinking about this. There are a handful of cities — you know the names — that have a lot going for them, but the first thing that comes to mind is their hour-long commutes and feeble transit systems. New York City, of course, has the best transit system in the U.S., and the D.C. area has transit that is better than most.
Transit weaknesses are not easily addressed, and cities need to stop kicking that can down the road if they do not want to be regarded as a smog-choking last choice for corporate relocation in the years ahead. That will require a détente between urban and rural interests in many state legislatures.
Infrastructure received a lot of attention in the Amazon bid, with just about every city promising to build more.
Are dual headquarters a trend?
Amazon is not the first company to establish multiple headquarters, however in the near term it will remain an option for only a handful of companies. Keep in mind that this is not being done to manage Amazon more efficiently but was driven by the need for more talent. Other companies may do it for marketing purposes, yet that will continue to be unusual.
Amazon is a unique beast, but there are those who question whether these new locations will truly be co-equals to Seattle. Even if it is a marketing ploy, the jobs are real, so I do not think Arlington will worry too much about that. For other companies, selling a new location as a co-headquarters probably is a good way to win additional incentives because of the prestige it brings to a city.
There are no losers in the Amazon sweepstakes.
The 236 cities that bid and did not get Amazon should value the thousands of hours they invested in their proposals as a graduate-level course in economic development and a visioning plan for their communities. Amazon put together a clear and detailed picture of what it needed, and the company’s wish list was not much different than what other service companies would seek in a headquarters location. Most of the unsuccessful bidders should regard this as an opportunity for a sober assessment of their strengths and shortcomings compared to other cities. And make no mistake, it is a competition that will only get tougher.