What Philly would need to give up to win Amazon

When cities talk about Amazon — and these days so many of them are — incentives are practically required conversation. On the fifth page of its Request for Proposal for Amazon HQ2, the e-commerce giant lists incentives as one of its main decision drivers and recommends applicants identify available programs.

So whichever city wins the Jeff Bezos sweepstakes will probably needs to ensure Amazon reaps benefits most other businesses don’t. How could that look in Philadelphia? The city and state gave fellow tech company Comcast tens of millions in incentives for its two new buildings downtown, but Amazon will likely command more, given the national competition, our high local and state taxes and the budget crisis.

“Is it a combination of upfront money or tax credits down the road?” asked Gene Barr, president of the Pennsylvania Chamber of Business and Industry. “Certainly Pennsylvania does not have a whole lot to put to those dollars.”

Leaders in Philadelphia, Pittsburgh and the Lehigh Valley have said they will apply for Amazon’s second headquarters, and Philadelphia has been mentioned by national media as a legitimate contender. Denver and Boston have also both been called favorites. Others have pointed to Atlanta, Nashville or one of Texas’ big cities as top choices.

[pullquote content=”We acknowledge a project of this magnitude may require special incentive legislation.” align=”right” credit=”Amazon RFP” /]

Those areas all have something Pennsylvania doesn’t: less-stringent tax structures. According to a recent study from the Tax Foundation, Pennsylvania’s corporate tax — set at 9.99 percent — ranks 47th in the United States. Add to that Philly’s gross receipts tax and wage taxes — unusual for big cities — and Amazon would be picking one of the toughest tax environments in the country.

“Those are all very low-tax, low-regulation environments,” Drexel economist Kevin Gillen said of other contenders. “To compete with them we’d need to offer the same taxation regulations or offset that with something they don’t have.”

To make up for these taxes, Pennsylvania and Philadelphia have been offering more grants and incentives in the last 10-plus years. The New York Times revealed in 2012 Pennsylvania gave $4.8 billion in incentive programs, ranking behind only Texas and Michigan. A study by the conservative thinktank Commonwealth Foundation indicated Pennsylvania spends about $700 million annually on economic development-related tax credits — more than any other state.

As of now, Comcast is the Philadelphia leader for incentives. The cable company received around $40 million in tax credits and grants for its first Center City building, in addition to a 10-year property tax abatement offered for new developments in the city. The Comcast II tower also received about $40 million. Of that $40 million, $30 million came from state grants, such as job creation tax credits, and $10 million from the city dedicated for public infrastructure improvements.

Statewide, according to the New York Times analysis, the Comcast projects rank among Pennsylvania’s top five most subsidized, but are far from the top. Shell was awarded an estimated $1.6 billion tax break over 25 years, based on a $2.10 tax credit per barrel of ethane used in ethanol conversion.

Experts suggest Amazon would likely command at least Comcast money and possibly more. The company even notes in its RFP, “We acknowledge a project of this magnitude may require special incentive legislation.”

[pullquote content=”We should try to attract Amazon but not at the expense of those million other businesses.” align=”right” credit=”Nathan Benefield, VP & COO of the Commonwealth Foundation” /]

Is Pennsylvania ready for this action? Probably not as much as other states. New Jersey, with the backing of Gov. Chris Christie, has already pondered $5 billion in incentives for Amazon, enough to match the expected cost of the entire new facility. Texas, known for its lax regulatory environment and tax structure, gives out up to $20 billion in incentives each year.

Incentive packages here have faced opposition from liberals, who argue against giving successful companies breaks at the expense of schools and other publicly funded entities; and conservatives, who would rather Pennsylvania have a less-regulated business environment. Nathan Benefield, VP & COO of the Commonwealth Foundation, said incentives create an atmosphere of “winners and losers.” And the losers are usually the less politically connected, smaller businesses.

“We should try to attract Amazon,” Benefield said, “but not at the expense of those million other businesses.”

Marc Stier, director of the Pennsylvania Budget and Policy Center, said in the long run tax credits are generally overrated. The biggest expenses for businesses are not taxes; they are labor costs and the costs of transporting goods.

“But you can’t change those things overnight so we always talk about tax credits,” Stier said. “Giving less tax credits in the short term and investing in infrastructure and education would be a better way to grow.”