Snagging Amazon HQ2: Who Wins When Tax Subsidies Lure Big Business To PA?

Oct 19, 2017

It was Sept. 7. A quick glance at the morning’s headlines revealed President Donald Trump had made a debt ceiling deal with Democratic leaders.

The Pittsburgh Post-Gazette’s district fishing report detailed a good season for walleye and clear skies were forecast in the Pittsburgh region. All in all, it was a pretty normal day.

Then Amazon announced it was kicking off a continent-wide search for a second headquarters: HQ2. Phones lit up across Pittsburgh. The city’s Chief Development Officer Kevin Acklin said he remembers it clearly.

"(It was) 7:30 in the morning. It was a Thursday. I was stuck in traffic, I got a phone call— ‘Did you hear?’” he said. Calls started coming in from friends in New York and California. "'This is perfect for Pittsburgh, you guys gotta get on this.’”

Around the same time, Allegheny County Executive Rich Fitzgerald said he looked down at his phone and did a double-take.

“Like, ‘Whoa, what happened?’ I knew something had happened because when you see that many missed calls, texts. And the tweets that went out, it was just a frenzy,” he said.

Strategy meetings were scheduled for the very next day, eventually coalescing into HQ2PGH, a regional partnership tasked with creating a winning proposal to send to Amazon.

Economic development happens every day, but an event like this is something special. 

“It’s the World Series, the Super Bowl, and the Stanley Cup all rolled up into one,” Fitzgerald said.

Local officials were not alone in their excitement; Amazon’s search for a new second home prompted salivation nationwide. The company projects an investment of $5 billion as it builds out its new headquarters, up to 8 million square feet of development and 50,000 mid- to high-paying jobs.

It’s the kind of economic game changer no public official can resist, but bringing home the Jeff Bezos bacon could be pricey. In its request for proposals, the company made clear it’s looking for ways to offset the costs associated with building a gigantic, brand new headquarters, telling municipal hopefuls that state and local incentives “will be significant factors in the decision-making process.”

Pennsylvania has a long and complicated history of trading incentives for business; is this time different? And is it worth it?

“The Rabbit That Ate Pennsylvania”

The idea of nestling a brand new employment ecosystem into a region is irresistible: Think of the jobs, the taxes, the money for the school system. But Amazon isn’t the first company to make visions of prosperity dance in Pennsylvanians’ heads.

In April 1978, then-Gov. Milton Shapp stood in front of a crowd and called the day, “Perhaps the most significant economic occurrence in western Pennsylvania since the days of Andrew Carnegie,” the captain of industry widely credited with launching the region’s steel industry into the stratosphere.

The occurrence in question was the opening of a Volkswagen plant in Westmoreland County. Four years prior, VW began to look for a U.S. base, the first foreign carmaker to do so. News of the investment—an estimated 5,000 employees building 200,000 VW Rabbits a year—sparked a national bidding war. To snag the company, and beat out Ohio, Shapp promised what was then the largest subsidy in state history.

Pennsylvania rolled out the carpet. The state bought an abandoned Chrysler plant in East Huntingdon Township, refurbished it, and leased it to VW at low cost. They extended the railroad and a highway. To come up with the money, they even borrowed against the state pension funds.

Writing in the January 1978 edition of Mother Jones magazine, reporter Ron Chernow excoriated the deal in a piece entitled, “The Rabbit That Ate Pennsylvania.”

...when you strip away the rhetoric from the VW deal, you are left with the fact that Pennsylvania has made a risky, substantial investment in a privately owned foreign corporation. If the Rabbit sells well, the state will at least recoup its investment in the form of jobs and taxes. But if the venture fizzles...then the state has wagered away tens of millions of dollars on the gaming tables of international finance. In short, the losses will be socialized, the profits privatized.

VW faced stiff competition in the U.S. small car market and had a tough time making the numbers work. By 1987—$90 million in state investment and 10 years later—the company decided to close up shop, leaving thousands jobless.

Mike Tamblyn worked in the plant’s body shop and said he remembers getting the news.

“Oh,” he sighed. “It was pretty grim, you know, because they gave us a deadline. They announced it, they said it would be within six months.”

Tamblyn said Volkswagen was the best-paying job around, so when the plant closed, people missed mortgage payments and car payments. It was devastating. A union official from that time estimates 25 employees committed suicide. Tamblyn said he and his wife, Nikki, did OK, that they adjusted.

“It happens, you know? [Losing your job] happens to a lot of people. Plants close, you hear it all the time,” he said. “But what are you going to do? Life goes on.”

The day VW announced its plans to close, former Gov. Shapp said, “We did get 10 years out of it, so you can’t call it a total loss.”

Weighing The Cost Of Investment

Pennsylvanians have invested more than $120 million in Volkswagen’s former home. After the German automaker departed, Sony moved into the old plant with the help of state subsidies. Twenty years later, when the company decided not to purchase the plant and ultimately moved to Mexico, the state offered subsidies to battery-maker Aquion, which recently moved to China. In June, Siemens Corporation signed a long-term lease there.

The Regional Industrial Development Corporation of Southwestern Pennsylvania, or RIDC, partners with the Westmoreland County Industrial Development Corporation, or WCIDC, to manage the site. Thinking about the site’s history, WCIDC’s Executive Director Jason Rigone said he takes issue with the idea that companies win at the expense of taxpayers.

“There’s always that perception,” he said. “But it’s really in the details.”

Much of the subsidy Pennsylvania gave to Volkswagen went toward infrastructure improvements, said Rigone, including extending a rail spur and the highway.

“That still has value to all the companies that are here and to the residents of Westmoreland County,” he said.

Today, there are more than half a dozen tenants on the site, and RIDC is confident they’ll reach full capacity soon.

Weighing investment from a company against state and local subsidies is hard math, said Tim White, RIDC’s senior vice president of development.

“How do you evaluate those? I think the key thing is focusing our public investments on people and infrastructure,” he said. “Because those things will continue to return and make our region a better place.”

Bob Dick disagrees. Dick, a senior analyst with free market think tank The Commonwealth Foundation, said the state picks winners and losers by providing subsidies to specific businesses.

“Basically it’s state officials saying, 'You know what, we know what businesses are ready to thrive. We know what industries need a boost from state government,'” he said. “So we’re going to make those investments for taxpayers.”

That approach is both unfair and ineffective, he said. He pointed to a 2014 report from the state auditor general found that in a three-year period, just over half of government-subsidized businesses created and retained the jobs they promised. It wasn’t necessarily that the state made bad investments, but that the state largely failed to hold companies to their agreements.

“It’s not creating economic growth in the commonwealth,” Dick said.

The Comcast Effect

Cities need flagship corporations, said former Philadelphia mayor and Pennsylvania Gov. Ed Rendell.

“The big names help to attract other companies,” he said.

Subsidies can lure or retain businesses when used correctly, Rendell said, citing Comcast as an example. In 2004, when the company threatened to leave its Philadelphia headquarters, a $30 million subsidy helped convince them to stay. Rendell is clear about how that’s paid off.

“An amazing success story,” he said. “A transformational success story for the city.”

He gave four reasons. One: Comcast promised to hire 1,200 people and hired 4,000. In less than 10 years, the state made back its investment through income taxes. Two: Property taxes. Any business in Philadelphia can qualify for 10 years of tax abatement, so the city will start seeing money from Comcast next year. Three: The boost for local businesses such as vendors, restaurants and dry cleaners. And four: Those new employees buy homes, rent apartments and boost real estate values.

The company’s decision to locate to a new Center City office tower also influenced other businesses to commit to Philadelphia’s downtown.

“Do the math,” said Rendell. “It’s a huge, huge, huge, huge, huge, huge, win for the taxpayers.”

Around lunchtime on a recent weekday, hundreds of Comcast employees and others flooded in and out of Comcast Center. Besides office space, the building boasts a food court and the updated train facilities that formed part of the state’s deal; Comcast is now building a second tower for another 4,000 employees.

Incentives can work, Rendell said, and Philadelphia and Pittsburgh should absolutely woo Amazon.

“Isn’t it worth the risk to do it," he said, "the risk that you might lose them, regardless of what the money is?”

In It To Win It

The task force working on the Pittsburgh region’s Amazon proposal has been camped out for more than a month on the fourth floor of one of PNC’s towers downtown. At any given time, as many as 60 people are spread through five or six rooms, scribbling on whiteboards and guzzling gallons of coffee. They’re intent on landing Amazon, but not at any price, said Allegheny County Executive Rich Fitzgerald.

“Rather than give the benefits up front, like, 'Here, here’s some money, we hope you provide jobs, we hope you provide economic growth.' Some of the things we’re doing now is after you’ve proven and after you’ve hired so many people,” he said. “We’re willing to give you tax breaks kind of after the fact."

Financial analysis company Moody’s Analytics ranked Philadelphia and Pittsburgh first and second, respectively, in terms of the likelihood of landing Amazon HQ2 based on geography and the company’s criteria. If the company were to build in Pennsylvania, how beneficial it would be depends on how prepared the cities are for rapid growth and the kinds of agreements on the table.

But we might not know what the Pittsburgh region is offering for a long time. Fitzgerald said they don't want to tip their hand to competitors. Plus, they're under a nondisclosure agreement with Amazon, so the details of the proposal submitted this week will not be released to the public.