Rebuilding Place in the Urban Space

"A community’s physical form, rather than its land uses, is its most intrinsic and enduring characteristic." [Katz, EPA] This blog focuses on place and placemaking and all that makes it work--historic preservation, urban design, transportation, asset-based community development, arts & cultural development, commercial district revitalization, tourism & destination development, and quality of life advocacy--along with doses of civic engagement and good governance watchdogging.

Saturday, January 27, 2018

An example when I may disagree with Richard Florida: incentives for landing the Amazon HQ2

See the past blog entries, "The Amazon second headquarters "****show": Part 1 | Where could it go?" and "Amazon second headquarters list of finalists."

From email:
From Richard Florida:

The level of incentives being talked about for Amazon HQ2 is pretty bad. Worse is that so many of these bids are not even public. We are talking about BILLIONS in public handouts - the worst in modern history.

This will take precious public money that could be used for housing or schools or transit or inclusive development and hand it over to one of the most valuable companies and richest men on earth. It will set a precedent for these billion dollar mega-deals and more companies and cities will follow suit.

I am organizing an open letter imploring the cities and states that are finalists to avoid these giveaways and perhaps even organize themselves into a pact which limits or avoids such incentives.

Robert Putnam, Ed Glaeser, Robert Reich, Amy Glasmeier, Jeff Sachs, Jason Furman, Stephanie Kelton, Alan Kruger, Ben Hecht, Bruce Katz, Saskia Sassen, Pat Sharkey, Scott Stern, Erik Brynjolfsson, Joel Kotkin, Dani Rodrik, Genie Birch, Michael Storper, Allen Scott, and a variety of other prominent economists, urbanists and social scientists have already agreed to support this effort.
Also see "Amazon sweepstakes can be great even for the losers," Bloomberg. From the article:

... there’s a worry that the scramble to lure HQ2 will give rise to wasteful urban policies and set a bad precedent. Already there is speculation that Apple Inc. will build an HQ2 of its own, sparking a similar competition. What if this sort of industrial sweepstakes, used in the past to win everything from auto plants to sports teams, becomes the norm?

Many urban policy experts are worried that Amazon-style competitions will hurt cities by enticing them to spend too much on tax incentives and other giveaways. A recent roundup of opinions by the Penn Institute for Urban Research showed that this concern is widespread.

My response:

you guys make me feel like a conservative neoliberal, when I think of myself as a progressive. Yes, generally incentives work out in favor of the recipient, because local jurisdictions are in asymmetric and very negative positions, especially vis a vis the competition from other localities.

But wrt this specific project I will say:

1. The cost/benefit is a helluva lot better compared to a stadium or other sports facility
2. It doesn't involve competition for the relocation of an already existing facility (e.g., Mercedes Benz moving to Atlanta from New Jersey; GE moving from Connecticut to Boston; etc.)
3. The firm seeking the incentive package has a high quality track record making the proposal significantly less risky compared to a business not already operating in the US or a start up firm or a project seeking to redevelop a brownfield site.
4. There are clear, monetizable benefits from landing this project

For cities like Washington or counties like Montgomery in Maryland, which have "local" personal income taxes, the economic benefits can be even greater compared to cities that rely on property and sales taxes for the bulk of their locally generated revenues.

Plus, while I am not too sure on how they are calculated, the company will pay some level of corporate income taxes which a locality would not normally reap from a firm of Amazon's size.

So I would argue that the Amazon project--because it is decidedly 100% new economic activity not likely to be otherwise generated by a company with a real track record--and similar projects like Foxconn (Wisconsin) and Toyota-Mazda (Alabama) are quantumly different from the typical incentive-based project, which tends to involve poaching of existing businesses located elsewhere or sports facilities.

How much is the right amount to offer is another question, and I am not so well versed in financial calculations to be able to say.

But it's a combination of a multi-year stream of revenues from (1) commercial property tax; (2) commercial income tax revenues; (3) the likely percentage of workers you can capture as residents and the income, property, and sales taxes they generate; (4) the economic impact of visitors to the complex, both daily employees who don't choose to live in the locale plus business related travel.

Versus the opportunity cost of the incentives. (E.g., I don't see why DC is prioritizing the hiring of veterans at $30,000 each; I just don't see how that is specifically a local priority vis a vis other segments of the unemployed/underemployed _within the city_.)

Figure out the first and you can lay out a reasonable Net Present Value and a range of incentive packages at which the economic return from incentives remains positive.

Sports facilities/relocation of existing facilities: often a bad deal.  But concerning incentive projects for:

1. sports facilities
2. competition for relocating already existing facilities

I'd say the concern is real and I wish there were overarching federal legislation to limit this.

Even so:

Some sports facilities better than others.  Some locations are better than others.

1. with regard to sports facilities, depending on the type (baseball, basketball, hockey vs. football), up to a point, it may be worth laying out some level of incentives, if a reasonable and independent case can be made for positive economic return.

With regard to DC, while I am against incentives for sports teams generally, objectively speaking, the return to the city of hockey and baseball at the now named Capital One Arena (its third name in 20 years) was an important element of rebranding and the city's currently positive trajectory. Similarly, the Washington Nationals stadium helps to anchor and brand the ever developing Capitol Riverfront/Navy Yard district.

To the contrary, Detroit hasn't been so successful in getting suburbanites to attend events at the new Downtown hockey and basketball arena--basketball relocated from the suburbs, hockey has never left the city ("New arena hasn't led to new fans for Pistons," Los Angeles Times).  Similarly, the New York Islanders hockey team hasn't been so successful at attracting fans to Brooklyn and is relocating back to Nassau County.

However, it's only a few months into the new Detroit arena and it's far too soon "to judge." (Also see "An arena subsidy project I'd probably favor: Sacramento.") It took a few years, and the parallel improvement programs of the Downtown DC Business Improvement District to fully reap for the city the benefits of the sports arena as an anchor and image builder.

Residential property tax abatements: Philadelphia.  Separately, Philadelphia City Council President Darrell Clark has raised the issue of the city's generous 10-year property tax abatement on new residential properties (both conversion of existing buildings and construction of new buildings as well as certain investments in current properties) costing the economically pressed city too much money. See "Time for an honest discussion about fair taxation in Philly," Philadelphia Inquirer.

-- Philadelphia Tax Abatement Program, Building Industry Association
-- "Dispelling common myths about Philadelphia's 10-year tax abatement," Philadelphia Business Journal
-- "No property taxes, no problem: Study finds controversial abatement has been positive for Philly," Philadelphia Inquirer

The abatement program, launched in 2000, was an important initiative that helped to rebalance and reposition the attractiveness of residential living in Philadelphia at a time when the city had lost out to the suburbs in competition for residents, commercial activity, and retail. But after 20 years, maybe it's time for a reassessment. From the article:

From 2014 to 2016, the city granted 10-year tax abatements on 4,286 properties, thus forgoing more than $420 million in revenue. Nearly $8 billion in taxable property value is currently abated, resulting in $111 million in forgone revenue in 2016. A conservative estimate based on recent market trends finds that more than $1 billion in property tax revenue will be withheld from the School District and the city over the next 10 years.

Without a doubt, our rapidly transforming skyline and growing population are in part the result of the abatement program. But, given the larger fiscal and policy environment in the commonwealth and in Washington, it is time to revisit the 100 percent, 10-year tax abatement in its current form as part of a broader conversation about equitable growth.
The city's school system continues to face significant problems and there isn't enough money to invest properly in transit. Maybe it's time to adjust the abatement program?

Note that Baltimore has a similar but subtly different issue wrt residential property tax abatements. There, it creates two classes of owners, legacy property owners paying higher taxes, and newer property owners paying lower taxes. Often newer owners are higher income, so older property owners are subsidizing the better off. Then again, especially now, the city needs more initiatives that can successfully attract new investment.

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At 11:15 AM, Anonymous charlie said...

1. RF is doing this to gain eyeballs, not mindshare. He thinks mindshare follows eyeballs.

2. Nobody is address that corporate tax incentives don't matter to amazon. They barely make a profit. The "50K" figures indicate they expect to do the same for the next ten years.* On a state level the corporate income tax is low enough that incentives aren't worth squat.

3. You could give property tax incentives, but again unless Amazon plans on buying the land I don't see much there.

4. Looking at the incentives for the SLU campus they were minimal. Developer got some breaks from affordable housing requirements, maybe $1.5 M.

5. They seem to be a very good corporate urban citizen. I went over their retail policy. They funded a streetcar extension themselves,, and realized a key problem with SLU was lack of residential so people could walk to work.

6. I'd day DC's bid -- with an emphasis on workforce training is a good one. Id agree that the possibility of doing that training is minimal. I think the biggest problem with DC is lack of affordable childcare and schools. DCPS and charters willl not cut it.

7. Is Bezos enough a philosopher king that is running this to see which governments are the biggest whores -- and then avoiding them. If I was DC I would include building streetcar/metro lines straight to the area.

8. Initial space requirements are modest -- 500K SF. Allegedly builds to 8M SQ if 10 years. That is plenty of time for them to back down.

9. Amazon's HQ2 PR effort may be more about showing amazon contributions to local economy so questions about state sales tax evasions and lack of corporate income don't get discussed. They won that argument. Also heads with antitrust issues.

10. Again if you look at their RFP, Phase iii (ten years) is only 2-3M SF. the claim of 8M in based on 15-17 years.

* I think it very possible JB is having a major midlife crisis, wants a new wife, new life, and a new HQ. In that is the case I could see the 8M SF being reasonable. Otherwise it is not.

At 11:31 AM, Blogger Richard Layman said...

Deep. Don't know about JB's personal life. And he probably isn't in Seattle as much as he used to be.

I did think about the fact that Amazon doesn't make much corporate income as an element of the package, how it affects incentives and calculating ROI and NPV. But I didn't mention it.

I have written over the years about Amazon and their support of transit in Seattle.

Interestingly, the same kinds of issues have transpired there comparable to tech impact in SF, people focused on "Amholes," and the way neighborhoods get changed.

Suzanne and I have different positions. She sees Amazon as taking over much of Seattle, in a bad way. I say, as urbanists, we claim we want companies like Amazon to locate in center cities, not suburbs.

I don't think there is a definitive answer.

Very good point about state sales taxes. But more and more they have facilities spread around, and now depending on how the Whole Foods transaction is handled and if it is a subsidiary it's pretty clear, then they probably have nexus in most states now.

Still I think the point that I made is legitimate, just like how I had to change my mind about MCI Arena...

This is a very different case from the typical deal.

1. it's a ground up new project (not a relocation).
2. the company has a legitimate track record.

it's not a company with a bad track record (Foxconn), a startup with limited track record, a project in a bad location or a brownfield, etc.

It should be scored differently from those kinds of projects.

And that's what people like Richard Florida ought to be recognizing and defining.

I get in these debates in DC. Face it, we're in a neoliberal paradigm. Such deals will occur. So the point is to do good deals, minimize bad ones. This guy in W1 (Wm. Jordan) argues vociferously that tax abatements cost the ability to make W1 a utopia, by definition they are "moral hazards," he particularly excoriates the Donatelli firm, etc. That's too facile for me.

At 12:15 PM, Anonymous charlie said...

Yes, your points are all well raised.

On Seattle, it is a fascinating and great debate, I'd say the answer is in the tension between the two. Great city patrons shape the cities and path dependance for the future. Moses Vs Jacobs. I'm not sure either was right, or that either was wrong.

Or to be a superhero, you need a super villain. Batman et al.

On the housing market, as I've said the DC region could take it, especially if Fuller projections on future government employment become true. The big difference would be you'd introduce a class of people who have a lot more money for down payments and cash only offers.

We really don't have that corporate overclass in DC even with Caryle here. Some. I did catch some guys in the gym complaining that one of their other friends couldn't afford the $900/night hotel they were planning on doing a trip to and that he was nothing but a moocher.

Two childless GS-15 can have a pretty nice life in DC. Throw in an amazon executive who gets options and you'l find that changing.

At 5:06 PM, Blogger Richard Layman said...

The big difference would be you'd introduce a class of people who have a lot more money for down payments and cash only offers.

This does change the market in significant ways. Megan McArdle never responded when I sent her this:

But that piece focused too much on the impact of globality and people buying 2nd, 3rd homes.

That type of buying doesn't affect/effect markets like Columbia Heights, Capitol Hill, or even my neighborhood.

The high income, supergentrifiers reshape more submarkets.

That being said, do Amazon people still get lots of stock options?

... wrt Carlyle having a low profile. Same with Danaher, AES, etc.

At 9:20 AM, Anonymous charlie said...

John Delaney -- back on his first company about 15 years ago -- complained to me that businessmen get no respect in this town. Hence his run for Congress.

Absolutely true. Greet for low profile guys like the Rawls. There are other examples as well.

RE: amazon pay.

they take home isn't high, I'd add maybe 40-50K in options, and yes, after 4 years that is 250K + stock appreciation.

No question that DC's overly high income tax rates will scare off amazon. DC could cut its capital gains rate considerably and just keep the income.

and yes and you say pricing is based on highest income demand with housing (not supply!)

At 5:09 PM, Blogger Richard Layman said...

as an aficionado of used book stores, my very old joke is that DC and college towns are terrible places to find used but semi-current business books.

... yes, the stock options a good way to get people to work harder and lets you get away with somewhat lower regular pay.

At 1:11 PM, Blogger Richard Layman said...

Bethlehem PA working on an ordinance that would institute a better tracking and reporting system concerning properties-projects receiving incentives.


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