Maryland legislators approved Wednesday an $8.5 billion incentive package to lure Amazon’s second headquarters to Montgomery County. Governor Larry Hogan (R), who proposed the plan, is expected to sign the bill.
I love it! This is the best of all worlds for Virginia. Amazon has estimated that the headquarters will invest $5 billion and employ 50,000. If Amazon puts its second headquarters just across the Potomac River in Montgomery County, Md., Northern Virginia will benefit from many of the positive spillover effects without undermining its tax base to bribe the company into locating there.
Nonpartisan analysts with Maryland’s General Assembly said the incentives would cost the state $5.6 billion in tax breaks, $2 billion in transportation spending, and $924 million in local tax credits, for a total of $8.5 billion. While a solid majority of Maryland legislators backed the package, a sizable minority objected to the massive subsidies, reports the Washington Post.
“Amazon is getting the gold mine and we’re getting the shaft,” said Del. Herbert H. McMillan, R-Anne Arundel. He described the package as “corporate welfare.”
(Virginia has offered an incentive package as well, although nothing that has required approval by our General Assembly. The details remain confidential, despite efforts by anti-Amazon groups to obtain them through Freedom of Information Act requests.)
Let’s game this out. Let’s assume that Maryland’s bribery package is so generous that it outweighs anything Virginia can cobble together under existing legislation and appropriations. Let’s assume that Amazon builds an 8-million-square-foot headquarters campus in Montgomery County, invests $5 billion, and hires 50,000 highly compensated workers, as it says it will. Where does that leave Virginia?
In the cat bird seat.
Maryland and Montgomery County hired the Sage Policy Group, Inc., to study the economic impact of an Amazon relocation to Montgomery County. The study finds that a full build-out would support more than 101,000 jobs in Maryland, generate nearly $7.7 billion in employee compensation, and boost economic activity by more than $17 billion. (Presumably these are annual figures, although the study’s Key Findings does not say so explicitly.) Writes Sage:
Complete development of Amazon’s HQ2 will create approximately $112 million in augmented tax revenue at the County level. The bulk of this will flow to Montgomery County through direct income and property tax effects, though indirect and induced activities will also augment local tax revenues as far north within Maryland as Frederick and Baltimore Counties. This tally includes nearly $64 million in property taxes and nearly $34 million in income taxes.
At the state level, tax receipts will increase by an estimated $190 million over the duration of development, including $84 million in sales tax revenues, $62 million in income tax revenue, and more than $10 million in nontax revenues (e.g., fees, and permits.)
Here’s what the Sage study overlooks: the costs associated with an added workforce of 101,000 in an era of full employment.
Unemployment for the Washington metropolitan area was 3.6% in February. That verges on a labor shortage. Indeed, for IT-related jobs, there is a labor shortage. To fill those jobs, Amazon will either (a) induce skilled employees from other metros to move to the Washington area, or (b) recruit skilled employees from local employers, who in turn will have to induce skilled employees from other metros to move to the Washington area. Those people will have to live somewhere, and they will require state and local government services.
The increased economic activity resulting from the Amazon headquarters will more than offset the drain from $8.5 billion in subsidies. But will it also offset the cost of building new infrastructure and providing state/local government services, including schools, to the tens of thousands of households moving into Maryland?
Let’s assume for purposes of illustration that a third of those 101,000 employees joining the Maryland workforce have children, and let’s assume that they have only one child at home on average, and let’s assume that only 75% of those children are of school age. That means we can expect an enrollment increase of 25,000 students in Maryland schools. The average cost per K-12 student in Maryland is about $15,000. Let’s say a 20% of that is overhead and that the variable cost per child is only $12,000. That pencils out to $300 million in added K-12 school expenditures.
Guess what. The total anticipated increase in state and local tax revenues is…. $300 million. That leaves nothing for public safety, public works, higher education, health care, social services, the environment, or the mandatory bloated bureaucratic overhead. Fiddle with the numbers in my assumptions, if you want, but understand the principle: Sage’s economic impact formula considers only tax benefits, not fiscal costs.
By contrast, Virginia will enjoy economic benefits from Amazon in Maryland without the tax giveaways.
The Sage study does not publish an estimate of the economic impact of an Amazon-in-Montgomery-County scenario on Virginia or Washington, D.C. scenario. I suspect there’s a reason why Sage didn’t disclose those numbers — because an embarrassing proportion of the benefits of an Amazon move to Maryland will accrue to the entire metropolitan area.
“Entrepreneurship related directly or indirectly to e-commerce, cyber-security, big data analysis, and other segments would accelerate,” states the report. As it happens, cyber-security and big data analysis are industry sectors at which Virginia excels. It is inevitable that Amazon will do business with Virginia companies, and it is likely that Amazon or former Amazon employees will seed new enterprises in Virginia.
No doubt some Amazon employees will live in Virginia and drive across the Potomac. We’ll have to provide schools and other public services to them. Here’s the difference: We won’t have to eviscerate our tax base to do so.
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