Business

Why Dallas Should Hope It Doesn’t Land Amazon’s HQ2

Could an Amazon HQ in the wrong location cannibalize Dallas' tech sector, and is wooing big corporations a bad investment of public dollars?

In about a week, metro areas from around the country will hand their relocation proposals over to Amazon to see if they will end up the lucky courtiers for the massive technology company’s second headquarters. There’s been a lot written about the deal, a handful of mock headquarters location in Dallas drawn up, and some understandable excitement about what an Amazon HQ in Dallas could mean to this city’s economy, the growth of its tech sector, the future of the urban core, and the city’s overall brand.

But what if not winning the Amazon bid could play out better for Dallas in the long run?

Follow me down this speculative rabbit hole. 

Last week, I wrote about how Amazon wants potential suitors to submit regional bids for the new headquarters. Dallas, unlike most of the other regions in the hunt, sits in a region that has two urban cores. Since Amazon may likely want to place HQ2 in an urban setting, even if DFW wins the bid, that means Dallas and Fort Worth may end up competing for the location. And Fort Worth winning the headquarters may be worse for Dallas than if Amazon simply headed to another part of the country.

Here’s why. Dallas-Fort Worth is a major economic player in the national economy. It is the nation’s 8th largest metropolitan region by population, and it boasts the fourth largest GDP of any U.S. metro area. Put in a global context, DFW’s GDP ($511.6 billion) is roughly equal to that of Sweden ($511 billion).

But that economic generating power is spread out and shared over a huge geographical area. DFW is the nation’s 6th largest metropolitan region by land area, and it ranks 80th in metro area density. Taken as a region, it’s about as dense as Lincoln, NE. When you look at the metro areas with larger GDP’s than DFW, they all rank closer to the top of metro area density as well. Curiously, famously sprawling Los Angeles is also the nation’s most dense metro area, while Chicagoland is the only metro with a larger GDP than DFW that slags in its density, thanks to the hinterlands of Naperville, Aurora, and the rest. Even still, it is 20 percent more dense than DFW.

What does this all mean? Because DFW is so spread out, major investment in one part of the DFW region doesn’t always have a major effect on other parts of the region. Case in point: the success of the Alliance logistics center in northern Fort Worth has been detrimental to the growth of the southern Dallas inland port. Transforming northern Fort Worth into a major hub of distribution, shipping, and logistics is a major boon for the region’s economic growth, but it doesn’t help southern Dallas one bit — in fact, it hurts it. As far as Southern Dallas is concerned, it would be better if Alliance was located in Sweden.

Outside of shared resources like the airport, sports franchises, and entertainment facilities, does DFW even function like a single region, or is it two adjoining regions with a sometimes symbiotic, sometimes cannibalistic relationship? And would an Amazon relocation to one part of the region negatively impact the tech sector in another part of the region?

This kind of intra-regional competition sets up a familiar storyline: When companies come knocking, communities and cities throughout DFW line-up with rich tax incentive packages to make sure they settle in their particular part of the region. That has created a region with a job center that is continually migrating northwards, major sports franchises that are located far from any semblance of real public transit, and wealthy suburban communities — some of whom direct would-be public transit funds into sales tax slush funds to lure business — that pay out huge subsidies to attract big corporations. There is little reason not to believe that if Amazon goes for DFW, the Amazon end game will boil down to a battle over which city in DFW can shell out the most tax incentives.

And when it comes to tax subsidies, cities can’t really win in the long run. At least, that’s the argument Jeffrey Dorfman, a professor of economics at The University of Georgia, makes in an op-ed on Forbes.

With an eye on two huge recent corporate “relocations” — Foxconn’s move to Wisconsin, which doled out $3 billion in tax breaks and incentives, and Boeing’s staying-put in Washington, which gave the company upwards of $8.7 billion in order to keep the production — Dorfman argues that the math for the governments shelling out those tax dollars never pencils out. And it won’t for the Amazon deal as well:

Yet if the cities and states in the running do the math they will find that a deal anywhere near that rich makes no economic sense. From a taxpayer point of view there is no hope of recovering the money in taxes from any economic growth generated by HQ2. To make this clear, let’s do the math.

First, there is a potential increase in corporate income tax revenues. Yet, Washington state has no income tax and given the ability of a company such as Amazon to shift the location in which it declares profit, it seems safe to assume that the winning city and state will collect nothing in income taxes from Amazon. Next up is property taxes. It seems safe to assume Amazon is going to require tax breaks that exempt it from paying any property tax. On $5 billion in property value, that might be $50 million per year or so, accounting for perhaps $1 billion in tax breaks over twenty years. The remainder of the deal is likely to be in tax credits that offset wages, free land and infrastructure improvements (like a new, dedicated subway stop), and a variety of other giveaways.

Now, before you jump up and shout about how scoring Amazon is about so much more than taxes — it’s about the residual benefits of all those jobs Amazon will bring, Dorfman says not so fast:

Based on an average state income tax rate, income tax on HQ2’s wages might be $200 million a year. Sales tax on taxable spending by those 50,000 employees might produce another $150 million per year. $350 million per year, for twenty years, would be $7 billion in tax revenue.

With $1 billion already committed to property tax relief, it looks as if the total amount offered to attract HQ2 would have to be under $8 billion for a city and state to have any hope of breaking even if they won this contest. Yet $8 billion is only $160,000 per job, much less than what Boeing and Foxconn received.

Worse, that tax revenue cannot all be used to offset the tax breaks because those employees impose actual costs on the state and local governments. They drive on roads, they ride mass transit, they need police and fire protection, they require housing which needs inspecting and permitting, they even send kids to school—which is really expensive.

Dorfman goes on to argue that some of the other supposed benefits of winning the Moby Dick of corporate relocations doesn’t really pay, including all those other businesses an Amazon HQ2 promises to attract. But none of it is enough to justify the enormous cost in tax incentives that is the going rate for super-huge corporate relocations these days. In light of all of it, it is no wonder Bezos and company decided they needed to get in on the relocation game and make a splashy promotional game of the effort in the process. It’s a casino where, in the end, the winners may be the losers, and the house — in this case the corporation — always wins.

There are regions that could benefit from the relocation, despite the likely payout of massive tax subsidies. A commentator in the Dorfman piece points out that if Amazon lands in New Jersey, Philadelphia may reap an economic landfall without shouldering the incentive cost. But, again, DFW is too big and sprawling, and it doesn’t function like Philadelphia. You could argue that a Collin County Amazon might have more of an economic impact on Dallas than a Fort Worth Amazon. But a Collin County Amazon could also exacerbate many of Dallas’ familiar problems, like the migrating workforce, transit and mobility stresses, and widening income inequality.

There is another way to look at this fight for Amazon, and it is a way Dallas could win whether or not the big corporation relocates to this city. So far, the fun part of the process, the part that the media jumps on and wastes ink batting about, is the scheming and imagining of all the parts of the city that could currently fit an Amazon-style headquarters and which are ripe for revitalization. Why has it taken Amazon to get the city and its neighborhoods and perhaps even its chamber to recognize that inner-city Dallas boasts a half-dozen or so prime spots for large job and business centers? The thought exercise kick-started by Amazon has helped Dallas map parts of town with the most potentially for re-imagining.

Similarly, the regional conversations that are currently going on in coordinating the Amazon bid are getting down to the nitty-gritty of what kind of tax incentives DFW could afford to lure the big whale. Here’s an alternative idea: after the region figures out what it can do for Amazon, take some of those dollars and figure out how they can be utilized to help improve the many areas that are standing around hoping to land an Amazon and incentive home-grown growth and innovation.

These suggestions touch on one other reason why it wouldn’t be the worst thing in the world if Amazon passed on DFW. When the dust settles and the wounds are licked, perhaps city and regional leaders, scorned by Bezos, will look at why they didn’t win the bid. Perhaps they will be able to see what parts of the region need fixing, whether it is its poor public transit, its under-stewarded natural amenities, or its need to invest more in education.

Perhaps the biggest thing that needs fixing is DFW’s concept of regionalism. DFW is a big enough, spread out enough, and competitive with itself enough that you could argue it isn’t a single region at all. Perhaps, if Amazon chooses somewhere else to call home, DFW’s regional leaders will begin to see that new models and conceptions around long-range planning need to be developed.

Comments

  • Vermont Royster

    Peter—r u brain dead–Dallas has NO tech sector PERIOD—dallas pays slave wages

  • DubiousBrother

    I’ve been in the Chicago area most of the last 5 months and they think they have it here – after all they got Boeing. Illinois is bankrupt, the taxes are being raised to try to keep up and Chicago and Illinois are losing population for reasons other than just the high murder rate in Chicago.
    Bezos has milked this for millions of dollars of free advertising but just like Boeing and Tesla, I would bet he knew where they are moving to well before the “hunt” started.