By Roy T. Meyers and Eric Stokan
The Maryland General Assembly is considering a bill intended to attract Amazon to Montgomery County.
If this legislation is fast tracked after last week’s hearings, Maryland will lack some of the information it needs in order to make a smart decision about whether it should subsidize Amazon.
While attracting quality employers is an important responsibility for state and local governments, research shows that many governments fail to do a thorough job analyzing the likely outcomes from their subsidy offers to corporate employers. Overly generous offers can produce a “winner’s curse,” where costs exceed benefits for the citizens who live where the corporate employer locates. The national impact is a “race to the bottom” that rewards big corporations, and that penalizes the small businesses that generally do not receive economic development subsidies but which can create many new jobs.
Particularly because the stakes in this case are Amazon-size, it’s important that Maryland do a great job in analyzing its offer. In fact, if Maryland does not conduct a quality analysis, that might turn off Amazon–a company known for its analytical skills–by signaling that the state government is not very sophisticated. That is, this case may be unlike many economic development auctions, where employers are looking for governments that are easy marks.
A “blank check?”
What has Maryland done so far? Governor Hogan has said that the state will offer $5 billion to bring Amazon to Maryland–$3 billion in tax credits, and $2 billion for transportation. But no one except a select few within Maryland government knows exactly what the state and county have offered. Important details are hidden from public view, on grounds of not giving an advantage to competitors.
Some states have publicized even bigger dollar offers, such as New Jersey’s $7 billion.
In Maryland, Secretary of Transportation Pete Rahn was quoted as saying that Maryland was writing a “blank check” for transportation improvements. Governor Hogan, who in past years has trumpeted fiscal responsibility and canceled expensive mass transit projects such as Baltimore’s Red Line, quickly corrected Rahn’s statement. But that “blank check” idea was accurate in the sense that Maryland hasn’t released a detailed plan for meeting the transportation needs an Amazon development would create.
It is widely assumed that White Flint Mall is the preferred site. Rockville Pike and the surrounding area are extremely congested, and the safety, financing, and capacity problems of Metro are well known. Amazon’s projected increase to the area’s workforce would necessitate massive improvements in mass transit–yet there is no plausible description of how this would be accomplished.
It’s a risky bet to assume that landing Amazon will force the state to make a big enough investment in mass transit to reduce congestion. And if that investment is made, but only in Montgomery County, it will add to concerns that this project promotes economic development in the area of the state that least needs it.
Cheerleading by the Department of Commerce
On the day of Senate and House hearings for the “PRIME” subsidy bill for Amazon, the Department of Commerce released a projection of the deal’s “economic contribution,” produced by its consultant Sage Policy Group Inc. The intended headline number is $7.7 billion in employee compensation in 2017 dollars.
This analysis is remarkably short at eight pages of text, plus a two-page “methodological appendix. It’s cheerleading, rather than the even-handed and comprehensive analysis that the state needs. Here are some of its major flaws:
Important assumptions and possible effects are not disclosed. In economic development policymaking, assumptions are often manipulated to generate overly optimistic projections. We do not accuse Sage of doing this, but instead note that the credibility of the projections is diminished when important assumptions are not revealed.
For example, the study should disclose what percentage of economic activity stimulated by Amazon would be locally purchased. Sage only says that it counts impacts in the study zone, which includes Montgomery, Anne Arundel, Frederick, Howard, Prince Georges, and Baltimore counties, and Baltimore City. What isn’t shown is how much of the economic impact would leak out of state, especially to DC and Virginia. Analysts could then determine how much revenue Maryland would be giving up to benefit neighboring governments. If, on the other hand, using the model’s default assumption that all purchases are made within the study zone would artificially inflate calculated impacts.
The analysis is static rather than dynamic. Sage uses a regional economic model, IMPLAN, for its projections. We agree with Sage that this is a widely used model that often generates valuable information. However, IMPLAN is a static model that fails to account for broader structural changes in the economy that are likely to occur given the size of the Amazon development.
For example, it would not project how adding 50,000 new employees will likely increase the costs of housing. While the eastern part of the county has diversified, gentrification is also a concern, and Amazon’s location would accelerate this. The state should instead use a dynamic model that counts such effects.
Sage offers a rosy qualitative description of the upside, and doesn’t mention the downside.
The study says that “Conceivably, total economic impact may turn out to be far larger than these estimates suggest.” This may be true, but an even-handed analysis would use “sensitivity analysis” to guess at the magnitudes of upside and downside uncertainties. For example, what if Amazon falls short on the number of employees hired, a very common outcome in major deals? Sadly, most states don’t even independently verify job numbers even though they have clawback provisions that would allow them to reduce their subsidy when firms fail to meet their employment thresholds.
Incomplete discussion of fiscal impacts. The Sage report says on p. 4: “Fiscal impacts are generated within our IMPLAN model and verified for accuracy by hand using effective tax rates calculated with data made available within the Maryland Comptroller’s Certified [sic] Annual Financial Report” (CAFR).
In fact, the “C “in “CAFR” stands for “comprehensive,” which this report is not. The study only calculates the gross revenues that would be generated. It does not subtract the large subsidies that the state would convey under the PRIME bill.
On the tax side of the budget, the Department of Legislative Services has estimated $6.5 billion in state and local revenue losses from 2019 to 2054. But there is no public analysis of the spending needs resulting from a successful offer to Amazon–for schools, transportation, and other government services—which could be very costly.
The real bottom line here is: without a more comprehensive, transparent, and accurate analysis of the possible effects of subsidizing Amazon’s location, it is impossible to tell if the state is minimizing the fiscal cost per job created.
Impulse purchases of big, shiny goods don’t always work out
Given these analytical inadequacies, it would be unfortunate if the Maryland General Assembly rubber-stamps the bill. At the hearings on the bill, there was only minimal questioning about the state’s offer; legislators who are typically active and insightful questioners of administration proposals were mostly silent.
Unfortunately, this case now resembles many other economic development offers, where legislators delegate the design of economic development subsidies to a few officials, and do not demand quality analysis that shows the likely range of outcomes.
This might especially be the case now because Amazon is a huge and profitable company. But it is also ironic that, in its understandable desire to diversify its economy away from dependence on the federal government, Maryland would put so many eggs into the Amazon cart.
Yet assuming that the bill’s promise of subsidies for “a Fortune 100 company” is approved, it may become be hard to justify, on fairness grounds, why similar subsidies should not be extended to smaller companies. An inadequately vetted but very generous Amazon subsidy could create a precedent that will greatly erode Maryland’s revenue base, making it impossible for the state to fund essential services.
We are both subscribers to Amazon Prime, and appreciate the two-day delivery. But in the case of subsidizing Amazon, Maryland should not use “one-click ordering.” Instead, it should take its time to compare options, and choose policy much more carefully than it now appears to be doing.