- Amazon is reportedly reconsidering its decision to develop part of its second headquarters, also known as HQ2, in the Queens borough of New York City.
- Some New York lawmakers have complained that HQ2 is not worth the roughly $3 billion in incentives the state and city have promised Amazon.
- According to a study commissioned by New York Gov. Andrew Cuomo’s office, Amazon’s presence in New York City will generate $27.5 billion in tax revenue for the state and city, much more than the incentives.
- But there are some caveats to the rosy picture painted by the study.
Amazon’s huge move into New York City is suddenly looking like it’s in jeopardy, and billions of dollars in tax revenue could be in the balance.
According to a report from the Washington Post, pushback from New York City and state politicians has forced Amazon to reconsider its decision to place a new campus in the city’s Queens borough.
One of the biggest problems raised by lawmakers who oppose the development is the roughly $3 billion in tax incentives that the city and state offered Amazon.
On the other side, New York Gov. Andrew Cuomo and New York City Mayor Bill de Blasio have been enthusiastic supporters of HQ2 because the project, they argue, will bring in more tax revenue than the government is giving out in incentives, as well as increased economic growth.
In fact, Cuomo’s office said that the HQ2 project would bring in $27.5 billion in new tax revenue over 25 years based on two economic impact studies, one commissioned by the governor and another by the city. This would well exceed the amount of incentives given to Amazon. Of that amount, $14 billion in tax revenue would go to New York state and $13.5 billion could go to New York City, according to Cuomo’s office.
Given that amount of revenue, Cuomo has touted the fact that the Amazon investment will bring in $9 in tax revenue for every $1 of revenue forgone due to the incentives.
"Amazon, by our current tax structure, would generate approximately $1 billion per year in new revenue," Cuomo wrote in a November op-ed defending the HQ2 decision. "Our proposal offered that, when and if those revenues are realized, the government would effectively reduce their $1 billion payment by about $100 million for a net to New York of approximately $900 million. New York doesn’t give Amazon $100 million. Amazon gives New York $900 million."
But, based on the study, the advantages may not be as great at Cuomo makes it seem. Inflation will take a bite out of the value of the future tax dollars generated by HQ2. Put another way, $1 in tax revenue in 25 years will not be worth as much as $1 of revenue in 2019.
Since much of the tax revenue is realized later in the report’s 25-year time frame, the New York state report estimates that HQ2 will bring in just under $9 billion in state tax revenue in 2019 dollars versus the promised $1.4 billion in state tax incentives. So, the report concluded, "the benefit-cost ratio is 6.3," well below Cuomo’s promised 9:1 ratio.
Critics of the study have also pointed out that the estimates are based on the idea that Amazon would bring in 40,000 jobs for HQ2 over 15 years. Instead, Amazon split its second headquarters between Northern Virginia and New York, so only 25,000 jobs would be coming to the Big Apple over the first 10 years.
The company also said that an additional 15,000 could come to Queens in the five years after the initial wave, but made no firm commitment.
In addition to the modeling issues, some experts have also pointed out that the study does not consider the alternatives for the area where Amazon is putting HQ2, and recent studies show that investing in preexisting, local businesses could be more economically stimulative than wooing new corporations.
On top of that, the study also does not account for the fact that the influx of workers will create liabilities for city beyond the incentives, such as increased trash collection and education costs. Critics also point to other externalities that could make HQ2 less attractive for New York City residents.
Whether the incentives are worth these costs will be a central part of the debate going forward, but Amazon may not wait around for lawmakers to untangle the complexities of the revenue benefits. According to the Washington Post, Amazon may soon make the decision whether or not to make the New York City investment.
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Source: Business Insider