Ill Prepared for the Coming Debate

By Evan D. Robertson, , Senior Project Associate

It’s the end of the year, a time that welcomes the simultaneous mix of reflection and looking ahead. What a year it has been for economic development. And what a year it will be for the field in 2019. Perhaps the most pivotal event this year was the Amazon HQ2 process. From the get go the process was tailor made to attract attention and generate hype among politicians and economic development stakeholders throughout North America. An unintended consequence of this was great public debate. Where most economic development projects undergo little scrutiny by the general public, the HQ2 process brought economic development incentives into the fore. With school systems and transit struggling to keep pace with growth, many rightly question whether Washington or New York can afford rather sizeable foregone tax income to support a project which almost certainly will place even more stress on public assets that so desperately need revenue.

It is fortuitous then that 2018 also coincided with local governments’ wider spread adoption of the Government Accounting Standards Board (GASB) Statement 77 – a policy that provides guidelines for local government tax abatement disclosures. Increased tax abatement visibility among constituency groups combined with newly released data on their local impact could culminate into a disastrous backlash as the public overreacts (as we tend to do in a social media driven world). For decades tax abatements have gotten a free pass largely because no one measured the long-term impacts of foregone revenue. Next year could be when that free pass vanishes. A minimum community and economic development professionals must be prepared to answer critical questions about past, current, and future returns on investment from tax abatement and incentives. Leadership and stakeholders should also prepare for greater public involvement in their provisioning.

Tax abatements and foregone revenue strike at the very heart of things that political constituents care about locally: schools, transportation infrastructure, park and recreation amenities, and millage rates. These are not tax revenues that have already been set aside for an economic development purpose. When things don’t work (i.e. stagnant teacher pay, crumbling infrastructure, low test scores), these abatements could become a scapegoat. In December of 2018 Good Jobs First gave a glimpse of the coming pushback. According to the study, schools in 28 states lost an estimated $1.8 billion in the last fiscal year.[1] Good Jobs First is certainly transparent in their intentions – the report estimated that the ten most impacted states could hire almost 28,000 teachers at each state’s average teacher salary.[2] Combined with ongoing teacher strikes, low test performance, and trailing per pupil spending in some states, abatement data strike at a sensitive nerve.

As Statement 77 data undergoes further scrutiny, we as community and economic development professionals must come to terms with the fact that the profession has historically done a poor job measuring, tracking, and communicating foregone tax revenue and its impact on future community objectives. Given our charge, it is understandable. At the front-lines of economic prosperity, future tax rolls are often sacrificed for immediate job creation. At the same time, the shortcoming of the data to public discourse is that it makes no estimation for what a local government’s tax revenue would be without the job creation induced by the abatement or incentive. School systems in the Good Jobs First study might be short $1.8 billion, but they also might be short more than that if abatement supported employees living in those districts were elsewhere.

Community and economic development is soon entering a new climate after much needed change. In a data driven world, optimization is the soup-du-jour. Much talked about artificial intelligence and machine learning technologies are, at their core, tools to optimize process and decisions – these tools find the most efficient path to make a delivery, discover the most appropriate price to pay for a stock, or estimate how much a customer is willing to pay for a plane ticket among other problems. With greater insight on tax abatement data and outcome metrics (job creation, wages, etc.), Statement 77 might just give community and economic development professionals an opportunity to improve efficiency and effectiveness.

Over the long-term, tax abatement data will prove to be a vital piece of information that affords the profession an opportunity to optimize the provision of economic development incentives. Once all local governments around the country report abatement and incentive data, we as a profession can answer a critical question that has plagued us for so long: how much does my community need to give up to sway this company? At the end of the day, this is an optimization problem and one, in the absence of data that has historically been solved at the other end of the table. While Statement 77 will undoubtedly give professionals a short-term headache, it may also bring greater balance to the site selection process – particularly during negotiations. Preparing to listen to constituents, address their concerns, and show economic development metrics that prove ROI – for residents rather than investors – might be good preparation for 2019.

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[1] Good Jobs First. “The New Math on School Finance: Adding Up the First-Ever Disclosure of Corporate Tax Abatements’ Cost to Public Education.” Good Jobs First. December 2018.
[2] Ibid

HQ2, Brute?

By Alex Pearlstein, Vice President

I know it’s probably as exciting as a turkey sandwich the day after Thanksgiving, but I have to write about Amazon. I mean, it’s the only economic development project that’s ever penetrated the national zeitgeist! After 15+ years of consulting on economic strategic plans, my family finally understands what I do for a living. “Oh, like that Amazon thing?” So, yeah, I feel compelled to give my 2 cents on what some have called the “project of the century.”

Whether Amazon’s announcement proves that “spiky” talent hubs will Hoover up the lion’s share of future tech jobs like the New Geography of Jobs’ Enrico Moretti would argue, masks the trend of Silicon Valley behemoths increasingly investing in large regional headquarters outside of California as Richard Florida notes, or, per Conor Sen, opens up new opportunities for lower-cost metros, the long-term effect of the Battle for Bezos will be an evolving discussion.

As Caesar lamented the betrayal of his erstwhile friend and protégé, many regions must feel like Team Bezos has stabbed them in the back. After a massively public RFP garnered 238 responses, a host of ridiculous-in-retrospect publicity stunts, and dizzying incentives packages, 18 of the 20 finalists learned officially on Tuesday – to butcher Soup Nazi – “No HQ2 for you!”

As many have reported, Amazon is essentially ramping up hiring and investment at its two biggest East Coast employment hubs, New York City and Northern Virginia – albeit $2 billion richer for their effort. Potentially to demonstrate that it wasn’t a fait accompli, Amazon also announced 5,000 new jobs in a Nashville operations center. No small potatoes but likely scant comfort to regions wondering if aspiring to “Amazon headquarters” status will ever be a realistic ambition.

Lots of soul searching probably going on in economic development circles right now, and that’s probably not a bad thing. “What do we want to be?” is always the most important question to inform strategic investment. My perspective is that being an incredible Indianapolis is better than being a poor man’s Boston. Fight in your weight class, but train harder than everyone else. HQ2’s legacy reinforcing the primacy of talent, mobility, access, quality of place, regional collaboration, and business climate to compete in the technology economy is likely the most important outcome of this whole HQ2-ring circus. (Okay, I’ll stop with the puns.)

The fact that HQ2 is actually HQ1+1=2 was truly a surprise, mostly because the company’s rhetoric had always been an independent, equal headquarters to complement its home base in Seattle. Who knows if the feeding frenzy of proposals would have been as intense if Amazon had more strongly hinted that a split second headquarters was a real possibility. Of course, my belief is that the two-HQ2 contingency became a more logical internal option as anti-Amazon rhetoric began to intensify over the 14-month process. Even the diminished impact of “only” 25,000 jobs on the two selected sites has been a field day for critics.

Alexandria Ocasio-Cortez, Congressmember-Elect from New York District 14 (which includes Bronx and Queens), tweeted this to her followers:

Writing in Citylab, Derek Thompson from The Atlantic not only called HQ2 “shameful,” but argued that Amazonian incentives themselves should be “illegal.”

At the very least, a global spotlight has been shone on the economic development machinations of prospect attraction. What that will mean for the future of mega-incentives deals is anyone’s guess. Truth be told, the industry has been moving away from an attraction-centric model for years now as prospect and project flow has declined and the importance of talent has skyrocketed in the dawn of the Fourth Industrial Revolution. Talent was clearly Amazon’s most important selection criterion.

Rather than throwing the incentives baby out with the strategic bathwater, the tool should be integrated into a truly holistic growth plan that maximizes a community’s competitive position for companies and talent. This is tricky stuff which, as I can now explain to my family at Thanksgiving with fewer blank stares, is why I still have a job.

Amazon HQ2 could lead to uncharted waters

By Matt DeVeau, Project Manager

One morning this past September, I stepped out of the office for a few minutes, forgetting my cell phone at my desk. I came back to a screen full of disquieting text message notifications.

“Woah, can you believe this?!?” 

“Did not see this coming!”

…and a few unprintable variations thereof.

When I opened the first one to see the attached link, the reactions of my friends and colleagues made sense. Amazon had opened a search for a second headquarters – HQ2 – that would bring 50,000 jobs and $5 billion of investment to a city in North America. And this news was not a product of a leak but rather a press release; this search would be conducted at least somewhat within public view.

There was never a doubt that this would be massive, workflow-altering news for much of the economic development community, and that has indeed been the case. But it did not occur to me how much this would capture the attention of the general public. (Though maybe it should have been given the company’s consumer-facing stature.)

Without exaggeration, nearly everyone who knows me well has asked me what I think is going to happen with HQ2 or shared their own theory. This includes friends with whom I rarely if ever discuss work and people who have no idea what I do – rideshare drivers, travelers at airport bars, and so on. By contrast, I can’t recall a single conversation with someone outside of the economic development world about Foxconn’s planned manufacturing facility in Wisconsin that could receive $4.5 billion in public funds.

I have yet to come across an analysis of the extent to which HQ2 is being discussed in traditional and social media. But a quick look at Google Trends data suggests that HQ2 is a different animal. The following figure is an index with values between 0 and 100 showing the prevalence of Google searches for “Foxconn” in the United States between July 1, 2017 and February 8, 2018. There is a massive spike of interest around the announcement of the Wisconsin facility in late July with only small peaks since that time. Additionally, searches for the term have been heavily concentrated in Wisconsin.

Meanwhile, the following figure shows the search volume for “HQ2” using the same parameters as above. The announcement of the site selection process on September 7, 2017 is a small blip compared to the activity around the deadline for bid submissions in October and the announcement of 20 finalist communities in January. Additionally, searches have been far more evenly distributed from a geographic perspective. (It’s true that these two searches are not exactly apples-to-apples comparisons. There are of course major substantive differences between the projects, but searches for the term “Amazon” also seem to spike around the holidays and “Prime Days.”

Amazon’s HQ2 search is unprecedented. That much is obvious to everyone in economic development. But I think it’s important to acknowledge that the attention it has garnered could have broad implications. Both Amazon and local communities have used the process as an opportunity to learn about one another, and some economic developers have reported that it has helped foster regional collaborations that were previously elusive. The mere possibility of landing Amazon has also influenced public policy discussions in some communities.

But the HQ2 search has also been folded into conversations about housing affordability, congestion and transit connectivity, and the role of public incentives that are heating up in many of the nation’s most economically successful regions. Speculation has even begun about a potential backlash in some communities.

The above is presented without editorial comment merely as an illustration of how HQ2 could have wide-ranging impacts far beyond the community in which the project ultimately lands. And what these impacts will be is just as uncertain this point as which community Amazon will ultimately select.

The takeaway for people in the community and economic development world is to watch this situation closely and be prepared to adapt to how HQ2 could dramatically shift the conversation around economic development. This time around, everyone is paying attention.