Amazon likely won’t get mega-subsidies from California, but new headquarters could still land in L.A.
When Amazon rolled out its public search for a second headquarters last week, the tech giant detailed attributes it deems key in selecting a winner: a large metropolitan area, an international airport, recreational opportunities and a top-notch university system.
Included in its request for proposals was something else Amazon said would be a “significant” factor in its decision: public subsidies.
“They are asking these communities to dress up and go to the dance,” said Larry Kosmont, a Los Angeles-area urban development consultant. “What would you do for us, and what would you do for the area to make it better?”
The reality show-like announcement, economic development experts said, is likely to spark a race among American governors and mayors to offer public subsidies to land the company and its promise of up to 50,000 new jobs.
California and Los Angeles are sure to play along — but if history is a guide, they will be less generous than other states and municipalities, economic development experts said.
California has relied more on its inherent attractiveness, rather than large public subsidies such as those being debated in Wisconsin to give Taiwanese electronics company Foxconn a $3-billion package to open a flat-screen factory with 13,000 workers.
“California can afford to be stingy because it has all these magnificent assets helping it grow,” said Greg LeRoy, executive director of Good Jobs First, a Washington think tank that’s critical of tax credits and other public subsidies.
Those assets include top-notch research universities like UCLA and UC Berkeley and major tech companies such as Google and Facebook. There’s the beach, Hollywood and the largest port complex in the nation in San Pedro Bay.
Southern California and the Bay Area also boast a deep pool of highly skilled workers. That is both an attraction to incoming employers and a reason why the state has less incentive to pull out the stops on tax breaks and other incentives to attract or keep employers.
Since 2012, the state economy has tended to grow faster than the rest of the nation, with the number of nonfarm jobs rising 15% in California since January 2012, compared with 10% nationwide. And given the state’s size, any one relocation, either to or from California, is a drop in the bucket.
For example, the 50,000 jobs Amazon said it hopes to create is huge for a corporate move, but it still represents only 0.3% of California’s total 16.8 million nonfarm jobs. If Amazon chose Denver, on the other hand, that would represent 1.9% of Colorado’s 2.6 million nonfarm jobs.
California officials have largely held their purse strings compared to other states, despite losing out on some high-profile competitions in recent years, including when Toyota announced in 2014 that it was moving its North American headquarters to Texas and Tesla chose Nevada to build its so-called gigafactory, also in 2014.
After losing Tesla’s lithium-ion battery factory to Nevada and its nearly $1.3-billion package, Gov. Jerry Brown said California “fought hard for Tesla.”
“But Tesla wanted a massive cash upfront payment that I don’t think would be fair to the taxpayers,” Brown said.
That doesn’t mean Southern California cities can’t prevail in the bidding for Amazon’s second headquarters site, known as HQ2. Los Angeles and Irvine already have said they will submit proposals, and any lack of mega-subsidies may not be a deal breaker.
Economic development experts said the primary reason companies move or grow in an area is not a subsidy, but rather proximity to a skilled workforce, distribution routes, a strong customer base and an area in which executives want to live.
Christopher Thornberg, founding partner of Beacon Economics, said Amazon’s decision likely will be based on such factors. He said the public search serves as an opportunity for the company to leverage a lucrative offer from a city where it has no intention of moving to get a better deal from the city it ultimately wants to call its second home.
“From a business perspective, it makes total sense,” said Thornberg, who thinks the Washington, D.C., area is a likely candidate because Amazon already has a West Coast base in Seattle. “If someone is willing to give you money, you are a fool not to take it.”
Peter Fisher, an expert on tax incentive programs, said only company executives truly know whether a subsidy made a difference. But research indicates the programs are an expensive deal for taxpayers and rarely needed.
“It probably means in 90% of incentives, the company would have made that decision anyway,” said Fisher, a professor emeritus of urban and regional planning at the University of Iowa.
Timothy Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research, agreed, but said incentives can tilt the scale when a company decides two cities would work equally well.
“Incentives do make some difference,” he said.
Even if California hasn’t shown an eagerness to offer packages on the scale of Nevada and Wisconsin, it does have some tools at its disposal.
The California Competes program has given out $555 million in state income tax credits for more than 750 companies since its launch in 2014, according to Sid Voorakkara with the Governor’s Office of Business and Economic Development.
Amazon was among the recipients in the inaugural year of the program when it got a nearly $1.6-million tax credit to build and expand warehouses in the Inland Empire and San Francisco Bay Area, projects it said would create 1,550 new full-time jobs.
The program — unlike those in some other states — functions as a credit, rather than an upfront payment. Companies have to hit specific job-creation milestones to get the break.
There also are one-off deals that can be crafted by the state Legislature or city councils such as Los Angeles. The city, in an effort to spur the revitalization of its downtown, has given subsidies to build new hotels in the city center.
For example, last year, the Los Angeles City Council approved a $198.5-million financial aid package for Related Cos. to build a hotel and residential project across from Walt Disney Concert Hall.
The deal allows Related to keep nearly half the $396.9 million in tax revenue that would be generated for the city by the project over 25 years. That money normally would flow into the general fund, which pays for police, firefighters and other city services.
In a statement Thursday, following Amazon’s announcement, Los Angeles Mayor Eric Garcetti did not mention any public subsidy, but said: “L.A. is the perfect place for a company like Amazon to find talented workers, and an environment that nurtures growth and innovation.”
Garcetti spokesman Alex Comisar declined to say whether the mayor would support subsidies. “We are developing our bid, and look forward to participating as the process moves on,” he said in an email.
Amazon declined to comment, besides saying it hasn’t yet settled on any location.
Voorakkara of the governor’s economic development office declined to say whether Brown was willing to support an aid package for Amazon, citing a policy of not commenting on specific projects.
Carrie Rogers, senior vice president of business assistance and development with Los Angeles County Economic Development Corp., said the organization is meeting with cities this week to put forth a regional proposal for L.A. County.
She said possible incentives could include the California Competes tax credit, which she said has successfully persuaded businesses to invest when they otherwise wouldn’t. Other possibilities include partnering with LAX and the ports of Los Angeles and Long Beach to make the movement of goods easier.
One of the last times California engaged in a campaign similar to Amazon’s request for proposals was when it tried to woo Tesla in 2014.
At that time, the state offered a number of tax breaks worth as much as $500 million. Legislation also was drafted that would have waived large portions of the landmark California Environmental Quality Act to speed construction of the battery factory.
However, the CEQA breaks stalled, and Nevada offered more than double the amount of incentives, including large breaks on local property taxes. Critics said the deal would starve local schools and agencies that would be providing services for the new workers.
Amazon could turn out different.
California’s bid for Tesla’s sprawling manufacturing plant was likely hurt by high land, labor and housing costs, experts said.
Besides subsidies, the things Amazon says it is seeking play more to California’s strengths and are much harder to replicate than empty land and manual labor: a top-notch university system, highly skilled labor and rich cultural amenities.
“California is going to win on looks, not its wallet,” said Kosmont, the development consultant.
Follow me @khouriandrew on Twitter
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