A Word of Advice for Amazon HQ2 Communities

High-profile location projects like Amazon HQ2 magnify the importance of some economic development basics. Most important piece of advice I give to local governments, which doesn’t necessarily hold in the case of Amazon, is to get absolutely clear on the potential property tax impact from a new economic development project.

Forget Property Tax for Amazon

Property tax accounts for 73% of tax revenue for local governments across the U.S. so if you’re looking for tax benefit – start with understanding property taxes. Many times incentives will directly affect the net property tax collections (abatement, exemption, rebate, IRBs, PILOTS) so it is critical to (1) estimate the new property’s taxable value, (2) divvy up the property tax based on the specific rates for city, county, school, and other districts, and (3) model the effect of proposed incentives.

Amazon’s investment is laid out in vague terms; with a wide range of possible investment amounts (Phase I $300M to $600M), no explicit discussion of investment timing (over 15-17 years), and no distinction between types of property invested (buildings vs. equipment). The lack of specificity can be expected at this point in the location search; Amazon is considering greenfield sites, infill sites, existing buildings, or a combination. It would be difficult at best to produce property tax estimates based on the information provided in the Amazon HQ2 RFP. In the case of this project and other large-scale location projects, the incentives will likely eliminate the property tax entirely or at least reduce it significantly over many years. In large-scale projects, it’s okay for local governments to waive their hand at property taxes in favor of digging in on harder questions.

Focus on Amazon-Related Population Growth

The biggest question that should be investigated for Amazon HQ2 as an economic developer is where will the 50,000 workers come from and how will this project affect the population growth of the region and the city specifically? Again, the estimate is 50,000 jobs over 15-17 years potentially. An increase of 50,000 workers would represent an increase in excess of 10% in all but 50 metropolitan statistical areas (MSAs) in the U.S. Even within the 50 largest MSAs, an increase of 50,000 will be significant. It is likely Amazon will choose a growing, vibrant metro area which means that Amazon will displace growth that would have otherwise occurred.

In so many “impact studies” prepared for economic development projects, the report focuses on indirect and induced jobs, economic output, and expected tax revenues. I concede those are important benefits to evaluate – but what about the costs associated with the population growth? In my experience, very few states and local governments have a method to evaluate the costs associated with growth. More often, governments simply compare benefits to the incentive being offered. The bottomline for state and local economic developers considering any project is to develop a methodology to account for the costs of growth they invite by incentivizing economic development.