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While Utah is vying for Amazon's $5B HQ2, the price of the prize may be too rich

FILE - Crews work to place utility infrastructure on a lot that will be home to an Amazon fulfillment center on 5600 West in Salt Lake City on Wednesday, July 5, 2017.
FILE - Crews work to place utility infrastructure on a lot that will be home to an Amazon fulfillment center on 5600 West in Salt Lake City on Wednesday, July 5, 2017.
Spenser Heaps, Deseret News

SALT LAKE CITY — Utah is going to be among hundreds of applicants vying for Amazon's planned secondary headquarters, but one official says the state is unlikely to be drawn into a bidding war that could see competing enticements expressed in billions of dollars.

Thanks to the company whose corporate logo has been variably interpreted as a smile or an arrow, a frenzy is afoot among North American cities, states and provinces hoping to lure Amazon and its prize of $5 billion in capital investment and the gargantuan economic impacts that come with the 50,000 expected to eventually work there.

But critics say the trend of overextending on incentive offers — a practice they say is simply taxpayer-fueled corporate subsidizing — typically leads to economic results closer to the aftermath of an encounter with an arrow than a smiling face.

"State and local governments have been in a destructive race to attract capital and have been spending and squandering resources in these pursuits," said Iowa State University economist David Swenson. "It's frequently the case that these deals don't pencil out and the recipients never generate the kind of economic activity that makes the taxpayers whole again."

Swenson said the practice of government entities offering incentive packages has devolved over the past decade. Public entities once had the goal of maximizing economic impacts, like job creation, with a minimum investment of public dollars, but a new approach has upended that philosophy.

"In the case of what Amazon is doing, and what others have done, it's become a strange public auction," Swenson said. "One where communities auction away their tax base and gross economic gains for the prestige of saying they won the contest."

Utah government agencies have long taken a more conservative approach in how they work to reward the investment of outside companies looking to add a Utah presence, or in-state companies with expansion plans. In the case of the current Amazon opportunity, staying that course appears to be the modus operandi.

"We don't get flashy and our incentives are never the most lucrative," said Val Hale, executive director of the Governor's Office of Economic Development. "We protect the taxpayer by not paying companies up front. We'll always be fundamentally based on post-performance."

That post-performance approach offers tax incentives in the form of a rebate, i.e. companies must hit their promised goals before any checks are written.

How big those checks can get in the national landscape is reflected in several high-profile incentive deals struck in the last few years. Those include one in 2014 with Tesla, which made the decision to locate its mega-battery manufacturing facility in Nevada, but not until the Silver State ponied up $1.3 billion in enticements.

In another opportunity, Utah competed against Washington, Texas, Missouri, North and South Carolina and others in 2013 for the chance to host facilities and workforce to manufacture the Boeing 777X passenger jet. The eventual winner, Washington, managed to keep that business in-state, but the price for the prize was $8.7 billion.

Critics in both Nevada and Washington called these deals bad for taxpayers, a situation that Hale said would not be replicated by Utah.

"We're never going to be throwing money out in terms of just trying to buy a project," Hale said. "We know, if it comes down to the highest bidder, Utah would never be in first place in something like that."

Instead, Hale said the agencies collaborating on putting the Amazon proposal together ahead of the Oct. 19 deadline — GOED, the Economic Development Corp. of Utah, Gov. Gary Herbert's office and others — will highlight the state's selling points. Those include, according to Hale, excellent quality of life, a strong, diverse economy, business friendly environment, limited regulatory realm, competitive tax rates and "one of the best workforces out there."

While Amazon has laid out some minimum requisites for applicants, including being a metropolitan area in excess of 1 million residents, close proximity to an international airport and major highway, direct accessibility to transit and a site that will accommodate as much as 8 million square feet of facility space over the next 15-17 years (all of which Utah does or can meet), the key to becoming a winning applicant may be in the information found between the lines.

Brooks Rainwater is the director of the National League of Cities' Center for City Solutions in Washington, D.C. The organization is a resource for research, best practices and technical assistance for the league's 19,000 member municipalities. Rainwater said that while Amazon's base requirements winnow the list of potential candidates, other, more subtle criteria may play a significant role in how the company assesses proposals.

"When we read through the RFP, what we’re heartened to see is a focus on a number of areas that are particular to the work we do," Rainwater said. "Walkable neighborhoods, multi-modal transit options, diverse communities, robust education systems and an urban or downtown location. While the process does have some elements of a bidding war, there is much more there that goes to what cities have to offer, their amenities ... and the people of the city itself."

While the Center for City Solutions is not consulting on members' proposal efforts, he did note that the opportunity has created significant interest.

"We haven't been collecting data specific to participation but based on communications, it appears the vast bulk of members who qualify under Amazon's base requirements are preparing to submit proposals," Rainwater said.

A recent Chicago Tribune story cited that over 100 U.S. and Canadian cities are actively working on proposals. Chicago Mayor Rahm Emanuel and other Illinois officials have not been subtle in proclaiming their interest in bringing Amazon to the Windy City.

Rainwater also highlighted that the winning applicant will face some enormous challenges alongside the much-touted potential economic benefits. Those will include 50,000 employees who will need housing, schools for their kids, and roads and transit options to accommodate their commutes to the so-called HQ2. The associated public infrastructure costs, depending on the chosen locale, could dwarf the expected cost of luring the company.

"How communities are approaching this includes looking at their current infrastructure and gauging where new development is coming from," Rainwater said. "Many places will be facing a drastic need for infrastructure investments from state and federal government agencies."

And while Amazon appears to be on an unstoppable trajectory of growth and success, economic conditions and corporate health are subject to change. Utah’s largest tax incentive to date, an $85 million post-performance package offered to Procter & Gamble back in 2007 for a new facility in northern Utah, was based in part on a projection that the company would employ 1,000 by 2017. GOED reports the current employment rolls there are in the range of 200-300.

Hale said 60 percent to 70 percent of companies granted Utah incentive packages go on to qualify for their tax rebates.

When asked about the incentive approaches favored by League of Cities members, Rainwater said the post-performance approach was becoming more the norm, but some entities were still involved in granting offers to companies that included “front money” that preceded the attainment of economic goals like job creation and/or generation of tax revenues.

Utah will not be alone in taking an interested but thoughtful approach to the Amazon bidding process, according to Rainwater.

“We have heard from some of the larger market cities who’ve said they’d love to have Amazon’s site,” Rainwater said. “But, they’re not going to give away the store to win.”