The Amazon HQ2 New York Debacle: Tax Incentives and Superb Fiscal Policy Exceptionally Misunderstood

Amazon’s HQ2 Long Island City Expansion Plans
and the Severe Cost to the State, City and the People of New York

The recent Amazon turmoil in Long Island City (“LIC”) has left many scratching their heads and wondering, where did so much misinformation come from? Was this a case of inexperienced public policy analysis? Where were the economists in the room? Was the policy condemned because certain aspects of negotiations were held in secret, and perhaps some constituents affected by the decision were not consulted? And now, as the dust settles, do opponents recognize the impact of losing out on what would have been an incredible generational win for LIC and the people of New York?

Many opponents of Amazon’s HQ2 LIC expansion and development project viewed the incentive package crafted by state and local officials as a nearly $3 billion-dollar handout from the government. However, a thorough examination of the details of the proposed initiative reveals a vastly different perspective. Did opponents truly believe that New York Governor Andrew Cuomo and New York City Mayor Bill de Blasio had an extra $3 billion to finance other public works projects? In truth, the reality is very, very different.

By offering Amazon a compelling tax incentive package, the State and City of New York proposed a transfer of value, if you will, in return for direct economic investment in the local community. Amongst other commitments, the company would have needed to employ 25,000 full-time, high-paying and quality jobs; indirect support of an additional 82,000 jobs; approximately $2.5 billion in direct investment; 4 million square feet of energy-efficient office space developed with an opportunity to expand to 8 million square feet; and incremental tax revenue estimated at more than $27 billion over the next 25 years.[1]  And like all recipients of negotiated incentive offerings, the company would have been required to agree to a checks-and-balances regimen (compliance) to ensure it was delivering on its end. Failure to comply at any point during the lifecycle of the proposed incentives (e.g. not hiring as many people as promised) could result in a clawback, recapture, or forfeiture of the tax incentives.

In losing out on the opportunity to become the next big tech hub in America, LIC also potentially lost tens of billions of dollars of ancillary and additional economic activity, property value increases, and vast improvements to public services to support the permanent infrastructure that would have been the benefactor of Amazon’s Big Apple expansion. Contrary to what opponents of this once-in-a-lifetime opportunity may believe, this deal had the makings of a truly sound economic development policy. Perhaps the location of the next Silicon Valley and vital tech-hub will be in another American city, but there is no guarantee of that. The competition for high value jobs and good corporate citizens like Amazon is global in nature and incentives have been cropping up around the world to woo them. The only thing we know for sure at this moment, is that it will not be in Long Island City.

It should be added, the negative impact on New York will not be limited to this one event. How many corporations seeking to invest billions in new facilities and jobs will be willing to risk entering a good-faith negotiation with New York state and local officials only to have it fall apart in a PR nightmare at the last minute?

Not only is the damage from this event potentially long-lasting, but the opponents’ hypocritical nature is also quite interesting. For example, consider the fact that Amazon’s HQ2 package paled in comparison to that of the expansive real estate development project about to open on Manhattan’s West Side known as Hudson Yards. To attract investors to this development initiative – which will include luxury retailers, major corporate headquarters, and residential buildings (with one-bedroom apartments renting for $5,000+ a month to penthouse condos selling for over $30 million) – incentive packages have reached over $6 billion according to public records (and a study by the New School), all without the outrage bestowed upon Amazon. Where is the opposition to this project? Would a project like Hudson Yards happen in the future, once investors reflect upon the turmoil to which Amazon was subjected?

Capital will flow where it is well-treated, and the Amazon executives were balancing their fiduciary duty to maximize value for their shareholders while also seeking to create long-term, multi-billion-dollar investments as a good corporate citizen. Contrary to beliefs by opponents, New Yorkers are not $3 billion ‘richer’ due to HQ2’s failure to launch. Quite the contrary. The people of New York and particularly, the people of LIC and the surrounding areas, will never realize the potential benefit of billions of dollars additional tax dollars and increased economic activity flowing into their local economy.

One of the interesting outcomes of the HQ2 story is that it will create a controlled economic experiment of sorts. Because there was to be two new headquarters, one in LIC and one in Crystal City, Virginia, it will be fascinating to observe the changes in economic wellbeing in say, five years, between LIC and Crystal City. Particularly, it will be interesting to look at the change in tax dollars generated from 2019 to some point in the future. It’s a fair bet to say tax dollar growth in Crystal City will far outpace LIC.

Leveraging the Economic Advantage of Tax Credits and Incentives

Despite our belief that smart economic incentives are an inevitable fact of life in today’s technologically wired world and that they can present great outcomes for all involved, skepticism surrounding the checkered past of these types of arrangements is not misplaced. Critics can point to numerous circumstances where the government didn’t get what it bargained for. The reasons for this vary, from lack of oversight, lax regulation, improper cost-benefit analysis, and sadly, also due to greed and corruption among policymakers and certain recipients.

That said, governments have an increasingly difficult time mandating certain economic behavior from companies and thus are having to find ways to entice desired behavior. This shift in the business/government balance of power is directly attributable to the proliferation of modern information technology. In today’s wired world, organizations large and small can efficiently manage assets and employees wherever they’re best treated and effortlessly conduct business through integrated information technology. Bottom line: companies no longer need to have one physical ‘home base’ but rather operations can be managed from anywhere on the globe and at any given moment.

Therefore, government at all levels must be smarter about working with businesses, and progressive legislative policy in the form of tax incentive packages are the best tools they have at their disposal to stimulate and encourage investment and compete in a global economy. Why? Because they work. Tax credits and incentives are simply a necessity in today’s economy so the real question is how can they do it best? The answer is technology and transparency.

Can FASB 832 and Modern Tax Technology Dispel the Negativity around Tax Incentive Policy?

We at The OIX believe that in this pivotal moment of regulatory evolution – with the approaching implementation of FASB 832, the logical descendant of GASB 77 – government at every level has a fantastic and consequential opportunity to embrace and improve tax credit and incentive policy. Through proper technology – coupled with a regulatory mandate to force best practices – businesses and policymakers alike can weigh the economic benefits, both direct and ancillary, which for the latter will result in legislating successful programs for the collective benefit of all its citizens and improving critical investment decisions by the former. These new regulations and the accompanying emphasis on disclosures and reporting are critical if incentives are to remain in the Government’s tool chest. With transparency and supporting data, taxpayers and voters will for the first time be able to formulate an informed perspective so as not to thwart a once-in-a-generation opportunity like AMZN HQ2 LIC.

Now is the time to be smarter about dealing with the reality that companies use information technology to think and expand globally. With each passing year, an ever-increasing amount of global wealth is created. And with it comes growth in economic power, while political power remains relatively static and is generally limited to local geography. So, when a local government and a business from afar make an agreement that promises the creation of new jobs and investment in a community, how does the government confirm that specified conditions, job creation, and investment pledges (mandated to receive the incentive and tax advantaged treatment), actually happen? How do they know what’s occurring in real time? How do they measure the results of those new jobs and other economic impacts?  Did those additional jobs increase or decrease taxable revenues to the jurisdiction? With respect to the subject at hand, how might the City and State of New York have been able to monitor what Amazon promised to deliver and share that information with taxpayers (proponents and opponents alike), and the very administration who drove the policy? The answer is quite simple: through modern technology and tax credit and incentive reporting and analytic solutions.

While FASB 832 and GASB 77 were great first steps, the next logical bridge is the smart application of existing tax technology and specialized software designed to measure credits and incentives on every level. As this measurement requires transparency, the implementation of technical and reporting standards will allow companies to report compliance in real-time, which in turn will allow government to analyze results and ensure end-to-end compliance.

We may be biased… but cue The OIX.

The OIX Tax Credits & Incentives Management System, which is specifically architected to address government incentives, provides a layer of technology that helps companies manage their responsibilities and compliance needs related to maximizing their tax credits and conforming with regulation.  From the other side, this technology offers the government a solution for monitoring a real timeline of deliverables and making those findings public.

Learn more about why the world is taking notice of The OIX.

[1] Amazon selects New York City and Northern Virginia for new headquarters; New York Needs Amazon