Bacon's Rebellion

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More Details on the Micron Deal

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by

James A. Bacon
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Yesterday I tallied up the incentives offered Micron Technologies to invest $3 billion in an expansion of its Manassas Semiconductor plant based upon information released by Governor Ralph Northam’s office and the Virginia Economic Development Partnership (VEDP). Today, thanks to reporting by the Washington Business Journal, we have a few details on what the City of Manassas chipped in.

Manassas did its part by agreeing to waive some permit fees and allowing the company to use third-party reviewers and inspectors. That, in turn, will allow Micron to save several million dollars and have greater control over the timing of permit approvals. The city also agreed to adjust its tax rate for semiconductor equipment each year so that Micron will benefit from gradual increases to its current bill in the next decade.

That last sentence looks like Manassas will create a special schedule for its Machine & Tools tax. Without the provision, Micron’s tax bill for manufacturing equipment would take a huge jump when the expansion goes live. The implication here is that Manassas will allow the higher tax bill to phase in over time.

According to the city website, the normal M&T tax rate is $2.10 of assessed value. A special tax rate for semiconductor manufacturing is $0.656 per $100 of assessed value. Let’s say for purposes of illustration that $2 billion of Micron’s $3 billion investment will consist of semiconductor manufacturing equipment taxable under the city’s current code at the rate of $0.656 per $100 of assessed value. That would imply an annual tax bill of $13.1 million.

That’s a lot of money for a city of 43,000 residents. It is understandable that city officials would be willing to give up some of the windfall — how much, we don’t know yet — in order to make the deal happen.

Stephen Moret, CEO of the VEDP, told the WBJ that Virginia is competing in a global economy in which giant incentive packages for projects like Micron’s is the norm.

There are other places around the world that regularly give facilities like this $500 million incentive packages,” Moret said. “Part of our challenge in Virginia is we’re normally not a significant incentives state. And certainly, we didn’t match what New York has done before, what Singapore has done before. But we knew we had to be competitive, so we worked together with the state and local partners to put forward the best package that we could and responsibly support.

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14 responses to “More Details on the Micron Deal”

  1. Reed Fawell 3rd Avatar
    Reed Fawell 3rd

    Jim and Steve, good reporting, guys.

    As the Gold Dust Twins of Bacon’s Rebellion have here so ably noted, we now can see only the vague outlines of what perhaps can spark its own big deal, and a chain reactions of deals large and small and in between, melding and morphing into an epic change along the borderlands of Virginia’s Piedmont, one whose central features and their consequences will take years to emerge and fill in and out into a whole deal and what follows in its train.

    And so, meanwhile:

    As to a general risk profile of MICRON in one of the world’s most competitive industries, it pays to consult the legendary Andrew Grove, a early visionary guru who drove INTEL to the pinnacle of success not once, but twice, as he confronted abyss after abyss on his sail across the treacherous seas of that worldwide market. His book titled ONLY THE PARANOID SURVIVE provides us bystanders with the vivid details of how the workings of Murphy’s Law afflicts and sorts out these fascinating types of highly complex and fluid transactions that must not only stay afloat but find their way through tumultuous seas of a dog eat dog world that spans the globe. Its Homer’s Odyssey where our hero’s home port is Manassas, Va.

    S0 I’d suggest that Virginia and Mananas could not afford to lose this deal, if it wants and deserves to earn its place on the world stage. Those who have captained it so far, deserve much credit for keeping Micron happily in place.

    Now, too, a looming secondary question is how the city, county, region, and state leverage off what Micron becomes in Virginia. That is a very big challenge with potentially great reward as well as headaches and downsides.

    In short:

    All eyes and efforts of those involved now should now refocus on and energize the periphery of Northern Virginia, its Marches where new Marcher Lords are on the move like in centuries past. Lightening now flares again across those historic lands all the way to their sacred blue horizon.

  2. Steve Haner Avatar
    Steve Haner

    If the investment does not happen, the city collects zero new tax from any source. So some consideration of a reduction of that new windfall revenue is a common request in these situations, either a graduated rate, a new assessment category or ratio, or a rebate that comes back to the taxpayer later. I do not like the M&T tax at all, but one argument the localities use to keep it in place is they find it such an effective tax to tinker with as a development magnet. Is it fair to existing M&T payers? Hell, no, but who promised them fair?

    REALLY interesting that they persuaded the turf-mad bureaucrats to waive their inspection and permit process and defer to others chosen by the company. That may speak to a great trust relationship that already exists between company and locality.

    The thing about these deals – each one resets the standards and changes expectations for future deals. Nobody wants to go back to the boss and say they didn’t equal or exceed the bar. Virginia insists it will not “buy the business” but this is sure getting closer.

    1. Acbar Avatar
      Acbar

      What a way to attract new businesses: let them subcontract the permit and inspection process to third parties because that “will allow Micron to save several million dollars and have greater control over the timing of permit approvals.” Wow! what that says about the regular permit and inspection process in Manassas!

      1. Reed Fawell 3rd Avatar
        Reed Fawell 3rd

        To ask the question is to answer it. Surely you know that if you have tried to get a permit to build on property adjoining the Chesapeake Bay. Unfortunately today, government permitting processes are by and large incompetent and riven with politics and ideology that make a joke of the process as has been amply demonstrated for decades now, including on this blog now week after week. What serious businessman would turn the future of his company over to the whim and will of irresponsible and incompetent government permitting processes if he had the muscle to avoid it. Only of fool would do otherwise.

        The backlog of permits illegally withheld by Maryland’s Martin O’Malley administration is perfect example of problem.

      2. djrippert Avatar
        djrippert

        Good point. I’m not sure what Micron is making at that plant but many types of computer equipment (especially chip making) can use extremely toxic chemicals. I’d rather see Manassas chip in more money and make sure the right inspectors do the inspecting.

  3. LarrytheG Avatar
    LarrytheG

    We talk about “markets”. Well.. there is a “market’ in companies with jobs also. You can say that you’re not going to compete in that market – you’ll just take whatever happens to come your way and let other bid against each other to get those companies. Once you do make that choice – critics can argue about the price that had to be paid and whether it was worth it or not…. but in the end – if you decide to become a competitor – how “much” the incentives should be or not is a conundrum…with no shortage of critics and naysayers and especially so if the deal goes south.

    In the end – I want our leaders to pursue economic development – whether they are GOP or Dem… and I’m not going to criticize over the CONCEPT of incentives.. and not even the incentives themselves as long as there is no corruption.

  4. Reed Fawell 3rd Avatar
    Reed Fawell 3rd

    You raise good and valid points, Steve, in your above comment.

    In reading the public statements here on this deal I read the word “partnership” several times, as between private business and local government. This can be a very good thing, the Ballston to Courthouse Corridor in Arlington, for example.

    But these “partnerships” can all to easily be treacherous shoals to navigate. They require public servants of great ability and strong integrity. I have seen in other countries how very high taxes, fees, tariffs, and regulations of all sorts, are lowered only for bribes put in the pockets public officials. In many countries these are well established practices, the rule, not the exception. IN NO WAY, am I suggesting that here in this case, not in the least. But it is simply a fact of life that one must be ever vigilant, on these transactions.

  5. LarrytheG Avatar
    LarrytheG

    Corruption is certainly a reality – but so can be incompetence in setting up the incentives… and even then, the whole thing can be LOT like that Johnny Cash car:

    https://youtu.be/ws-_syszg84

  6. allen22204 Avatar
    allen22204

    I’ve heard that the City of Manassas has promised a $250 million tax concession for the Micron expansion.

  7. djrippert Avatar
    djrippert

    We seem fixated by datacenters and electronics manufacturing in Northern Virginia. Where are the software developers? Where are the application development companies? Software is eating the world and Virginia is hypnotized by 1990s style technology.

    1. smoretva Avatar
      smoretva

      https://www.vedp.org/press-release/2018-03/fairfax-county-300-new-jobs

      https://www.vedp.org/press-release/2018-04/appian

      https://www.vedp.org/press-release/2017-06/fairfax-county-amazon-web-services-1500-new-jobs

      HQ2 competition focuses on a 50,000-job project for which roughly half of the jobs (~25,000) would be software engineering, machine learning/AI, and related roles

      1. djrippert Avatar
        djrippert

        I’ve long maintained that the HQ2 deal would be a great deal for Virginia although I see the 50,000 jobs as a pipe dream. There are 23,000 people employed at the Pentagon. No way Amazon needs a second HQ with more than twice that number of employees. Regardless … there will be a lot of high quality jobs for whomever lands the HQ2 deal. So, if we are running short of tax breaks to hand out for economic development then I wonder why we went for Micron instead of fully backing the Amazon HQ2 deal.

        Final point – Silicon Valley wasn’t built on the back of a single company building out a massive operation. It was built on a small set of companies like HP and Fairchild where employees spun out and started more companies like Intel. Three factors facilitated this – a very mature venture funding ecosystem, excellent technology universities working hand in hand with the private sector and a ban on non-compete agreements by the State of California. Virginia needs to do more than just throw tax breaks at Amazon of we are to make the most of this opportunity. Much of what need to be done is in the legitimate province of state government laws and operations.

        1. smoretva Avatar
          smoretva

          “Final point – Silicon Valley wasn’t built on the back of a single company building out a massive operation. It was built on a small set of companies like HP and Fairchild where employees spun out and started more companies like Intel. Three factors facilitated this – a very mature venture funding ecosystem, excellent technology universities working hand in hand with the private sector and a ban on non-compete agreements by the State of California. Virginia needs to do more than just throw tax breaks at Amazon of we are to make the most of this opportunity. Much of what need to be done is in the legitimate province of state government laws and operations.”

          I mostly agree with your broad points here.

          Consider, however, the catalytic role that Amazon HQ1 has played in the growth of the entrepreneurial and VC sectors in the Seattle area (see, for example, http://product.costar.com/home/news/shared/194751?utm_source=mc&utm_medium=email&utm_campaign=CoStarAdvisorWeeklySend&frontdoor=email).

          Additionally, Northern Virginia faces a particular challenge in that our tech sector there is too heavily concentrated in federal government-related activities. While our tech future largely will be defined by smaller high-growth firms, we also need to diversify our tech sector more broadly toward more of a private-sector, product development orientation (principal focus areas of Amazon).

          To support our smaller tech firms, we also need to be able to keep more of our computer science grads (and those with related skills) in Virginia. Many of them are currently leaving Virginia to work for companies like Apple, Google, Facebook, Uber, and…Amazon. Those in-demand tech grads want to locate in places where they have multiple high-quality employment options with a variety of tech-focused firms.

          Many top executives in Northern Virginia — from Wes Bush, CEO of Northrop Grumman, to CEOs of small and midsize high-growth tech firms — have told me that a project like HQ2 would dramatically enhance the attractiveness of the area for tech talent. They generally would expect more competition for talent in the short term, but a bigger, more dynamic, healthier tech talent market in the medium and long term.

          Of course, there are many things we can and should do to build a more vibrant tech ecosystem in Virginia. Strategically recruiting substantial operations of leading tech firms represents just one piece, albeit an important one, of the puzzle.

          Finally, I think we should acknowledge the catalytic role the federal government played in the creation of Silicon Valley with enormous, sustained outlays for sponsored research at universities in the area over several decades. My sense is that the early seeds of Silicon Valley largely resulted from those enormous research investments.

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