IPE Case Study Colin Crawford-1 (1) (2)

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Crawford 1 Colin Crawford Case Study #3: Amazon’s Agreement to HQ2 Tax Incentive Package Causes Commotion in the Host City INTRODUCTION In a 2018 announcement that caught the attention of 238 cities, Amazon began their search to locate a host city in which to build their second headquarters. Amazon’s coveted $5 billion second headquarters created both a national and international competition to attract their investment as they initially claimed to employ 50,000 people and spark economic development. Companies, like Amazon, will establish fixed assets in host cities where they believe they can maximize profits based on locational advantages and, especially in today’s era, tax incentives. Host cities will offer publicly funded tax incentives, like tax breaks or subsidies, to corporations looking to advance their own economies through an increase in employment opportunities, the transfer of technology and expertise to educate their workforce, among other intangible assets, and access to markets. Like the locational advantages discussed in our class textbook, “International Political Economy,” Amazon considered four criteria in their search to choose a host city: largely populated areas, a stable and business-friendly economic and policy environment, areas with strong technical talent or the ability to attract such human capital, and the tax incentive package offered (Cohn 2018; Oatley 2018, 165). In the following sections, I’ll explain the reasoning behind Amazon’s decision, terms of agreement with the host city, and issues within the host city in relation to tax incentives as discussed in class lectures and debates. HQ2 DECISION & RATIONALE Jeff Bezos and Amazon decided to focus their multibillion-dollar investment on Arlington, Virginia. Per a member of the core site selection team at Amazon, their biggest

Crawford 2 motivator was Virginia’s “[commitment] to developing a technology talent pipeline for the future” (Cohn 2019). According to a CNBC study, Virginia is the top state for both education and business development, offering a workforce comprised of the country’s largest concentration of science, technology, engineering, and math talent (Cohn 2019). This allows Amazon to match the factor intensity of their production stages with the human capital abundance of Virginia (Oatley 2018, 167). Given these two main factors, Amazon found Arlington, Virginia to be locationally advantaged in having the highest value in human capital in the country. Amazon executive, Brian Huseman, released a statement saying, “It’s not just monetary incentives, but it’s looking at the comprehensive environment to allow companies to flourish,” alluding to the idea that a community’s political and economic preferences, market size, and resources are paramount in the decision-making process (Cohn 2019). Moreover, New York City placed second in the race to land Amazon’s HQ2 because—while they offered $3 billion in fiscal incentives—they are known for their unstable macroeconomic environment and heavy regulation, unlike Arlington (Cohn 2019). HQ2 TERMS OF AGREEMENT Amazon’s tax incentive agreement included deals with Arlington County and the state of Virginia. The tech giant guaranteed to create 25,000 news jobs with an average wage greater than $150,000, and phase two would increase job creation by 12,850. Arlington County is estimated to collect a progressive tax revenue of $3.2 billion over the next two decades. In return, the state of Virginia agreed to provide a cash grant close to $550 million to Amazon over the next 12 years; however, this can be revoked if Amazon does not satisfy its job creation promise. As part of these incentives, Arlington County offered $23 million in transient

Crawford 3 occupancy tax benefits over the next 15 years. Virginia also plans to allocate around $200 million to infrastructure projects, like Metro stations and pedestrian crosswalks to increase mobility for the influx of employees (Cain 2018). In terms of human capital, the incentive package also includes a $1 billion investment by Virginia in the Tech Talent Investment Fund to create 25,000 higher education degrees in STEM fields throughout the state (O'Donnell 2019). CONTROVERSY SURROUNDING THE PROBLEMS WITH TAX INCENTIVES As a result of the “the greatest economic development opportunity in a generation,” Virginia activists gathered around the central idea that Amazon—and its billionaire founder—do not need or deserve Virginia’s taxpayer dollars, especially in the amount that was offered (Schweitzer 2018). The anti-incentive ideology rests on the concern that Virginia’s incentives would lure thousands of Amazon employees, which would strain local infrastructure and school systems (Schweitzer 2018). Protestors emphasized the imbalance of negative impacts on local environment and the questionable returns on investment. Opposition to Amazon’s coming to Arlington believe local and state governments throw attractive amounts of taxpayer dollars at corporations in hopes of sparking economic development only to worsen the downward spiral of other societal issues, like affordable housing, school systems, and homelessness. As a result, local and state governments can no longer sufficiently sustain welfare systems that support low-income citizens, leaving them homeless and disadvantaged. Virginians unhappy with this deal believe tax incentives to be a means by which host states engage in high stakes bidding wars with millions to billions of dollars in taxpayer dollars that would no longer stream to education and public works funds (Schweitzer 2018). They believe Amazon is a selfish initiator of this activity.

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Crawford 4 Furthermore, concerns regarding Amazon’s impact on Seattle, home to their HQ1, caused many to become skeptical of how HQ2’s business practices might impact the local Arlington community. In the past, Seattle’s city council attempted to seek approval of a measure that would tax large corporations in order to allocate funds to affordable housing in underdeveloped areas. Amazon immediately rejected this proposal, which sparked concern and highlighted their unethical business values and strategic legal avoidance of taxes. Among these poor traits, Virginia activists also condemned the corporation’s harsh corporate culture. Local residents are also concerned by the company’s potentially negative “impact on already-high rents,” given the uncertainty of where exactly the eight-million-square-foot facility would be constructed as well as the income and age breakdown of the mass employee influx (Schweitzer 2018). CONCLUSION In conclusion, Amazon’s search for a HQ2 location and their tax incentive deal with Arlington, Virginia represents a conflict of interests in modern American democracy. The deal appears to utilize and further benefit and increase Virginia’s human capital fostered by a business-friendly, noninflationary policy environment. However, these tax incentives packages illustrate just how harmful the impacts of fiscal offerings can be, especially impacting low- income citizens. Amazon’s competition to determine the most valuable incentive package resulted in significant amounts of taxpayer dollars to Amazon and removed from the state and local agencies funding Virginia’s education system and public works. This case shines a bad light on the unjust imbalance in allocation of state funds caused by tax incentive packages to appease corporations. Additionally, as learned in class, this case displays how corporations will make decisions largely due to locational advantages and its opportunity to maximize profits.

Crawford 5 Bibliography Cain, Áine. “Arlington, Virginia, Lured in Amazon with Promises of a Helipad and a Cash Grant of up to $550 Million.” Business Insider. Business Insider, November 13, 2018. https:// www.businessinsider.com/arlington-virginia-amazon-hq2-agreement-2018-11. Cohn, Scott. “Amazon Reveals the Truth on Why It Nixed New York and Chose Virginia for Its HQ2.” CNBC. CNBC, July 10, 2019. https://www.cnbc.com/2019/07/10/amazon-reveals- the-truth-on-why-it-nixed-ny-and-chose-virginia-for-hq2.html. Cohn, Scott. “These Cities Are Finishing Strong as Amazon Narrows down Choice for New Headquarters.” CNBC. CNBC, August 28, 2018. https://www.cnbc.com/2018/08/16/as- amazon-narrows-choice-for-hq2these-cities-finishing-strong.html. Oatley, Thomas. International Political Economy: Sixth Edition. United Kingdom: Taylor & Francis, 2018. O'Donnell, Cara. “Arlington Approves Amazon HQ2 Performance Agreement.” – Official Web- site of Arlington County Virginia Government. Arlington County, March 16, 2019. https://www.arlingtonva.us/About-Arlington/News/Articles/2019/Arlington-Approves- Amazon-HQ2-Performance-Agreement. Schweitzer, Ally. “'Amazon Doesn't Need the Money': In the D.C. Region, Resistance Is Grow- ing to Tax Breaks for HQ2.” WAMU. WAMU, July 19, 2018. https://wamu.org/story/ 18/07/19/amazon-doesnt-need-money-d-c-region-resistance-growing-tax-breaks-hq2/.

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