Maryland’s Amazon loss prompts questions about its competitiveness

By Katherine Shaver posted December 3rd, 2018 on www.washingtonpost.com

Maryland’s pitch to land Amazon’s second headquarters started with a catered dinner at Bethesda’s homegrown Honest Tea company and continued with a top-floor view from a glitzy hotel overlooking a new pedestrian-friendly shopping and restaurant development.

During Amazon executives’ two-day visit in March, Montgomery County leaders tried to showcase the best the suburb had to offer — diverse residents starting and growing companies, a top-ranked school system, and enough of a hip, urban vibe to attract millennials.

Dangling over the proposal was the biggest financial carrot of any publicly known bid for what Amazon called its HQ2 — a state and local package of tax breaks, transportation investments and other perks valued at up to $8.5 billion.

Moreover, Amazon’s point person on the search, Holly Sears Sullivan, had personal ties to Maryland. Before joining the online retail giant, she worked to recruit companies to the county as president of what was then the Montgomery Business Development Corporation.

None of it was enough. Amazon split the project between Long Island City in Queens and Crystal City in Northern Virginia, renewing long-standing concerns about Maryland’s economic competitiveness, especially against its neighbor across the Potomac River.

Anirban Basu, chairman of the Maryland Economic Development Commission, said he has been left pondering, “Why would Amazon turn away billions of dollars in subsidies to go across the river?”


Virginia Gov. Ralph Northam (D), right, shakes hands with Amazon’s vice president of public policy, Brian Huseman, following a news conference in Crystal City on Nov. 13. (Susan Walsh/AP)

Basu, an economic consultant appointed by Maryland Gov. Larry Hogan (R), said he has concluded that Amazon must have rejected the state’s “antiquated” regulations and higher taxes for corporations and top-earning residents. Amazon has said salaries at the new headquarters will average $150,000. Unlike in Virginia, Maryland jurisdictions impose a local income tax in addition to the state tax.

“One of the reasons Maryland created such a large incentive package for Amazon is because we know our business climate is not as competitive,” said Basu, whose Baltimore firm, the Sage Policy Group, conducted the state’s economic impact study of Amazon’s potential benefits but was not involved in the bid.

“We know we need a massive package to attract them,” Basu said. “Even with that, Amazon said, ‘Thanks but no thanks.’ ”


White Flint’s Metro station (Astrid Riecken/For The Washington Post)

Stephen S. Fuller, an economist and professor at George Mason University, said he, too, believes Maryland and Montgomery, the state’s economic engine, have work to do.

Losing the Amazon bid to Northern Virginia “should be a confirmation of an ongoing problem, that [Montgomery] has lost its competitive edge in the region,” Fuller said. “It was still in the national finals, so it’s not a total defeat, but the county needs to understand what its competitive advantages are in the region and in the global economy. . . . It was a test, and they didn’t win.”

(Amazon founder and chief executive Jeffrey P. Bezos owns The Washington Post.)

If state and county leaders are doing any soul-searching about losing the biggest economic development prize of a generation, they’re not saying so. They call Northern Virginia’s selection a win for the entire Washington region as it continues to try to diversify beyond being a government town. Maryland, they say, is primed to woo the smaller firms that are likely to follow Amazon.

Timothy Firestine, Montgomery’s former chief administrative officer who led the Amazon bid, said the company didn’t tell him why the county’s proposed site, the White Flint area of North Bethesda, came up short. But he said he was “ecstatic” that Montgomery even made the Top 20 list out of 238 bids, showing it was highly competitive among the largest U.S. cities.

“We checked all the boxes,” Firestine said. “I don’t think we need to say, ‘Oh, my God, where did we fail?’ Instead, it should be, ‘We’re happy we made the top group.’ ”

Economic development experts credited Hogan with persuading the state legislature, including lawmakers from areas farther from potential Amazon jobs, to approve the package of unprecedented corporate subsidies.

Karen Glenn Hood, spokeswoman for the Maryland Department of Commerce, said the state and county worked together on a “really comprehensive and competitive proposal.”

“The fact that the Greater Washington region will now have one of the headquarters means great things for Maryland in terms of talent attraction, jobs for our citizens, and opportunities for our business community to expand and work with Amazon,” Hood said.

An Amazon spokesman declined to comment on the selection process. In announcing its headquarters decision, the company said it chose Northern Virginia and Long Island City as the best locations to attract talent.

Of course, Maryland shares the same deep pool of highly educated workers as Northern Virginia. But some economic development experts say Amazon probably chose its place in the Washington region based on practical needs beyond government subsidies.

Basu cited Virginia’s “creative stroke of genius” in pledging to invest $1.1 billion statewide in higher education for computer science and related fields. The plan includes $250 million toward Virginia Tech building a $1 billion “Innovation Campus” near the future Amazon hub.

“That was a lesson learned,” Basu said.

But experts said Northern Virginia’s greatest assets were impossible for Maryland to match or beat. One was geography: It’s closer than White Flint to Capitol Hill and downtown Washington’s urban living. While also suburbs, Crystal City and Pentagon City in Arlington County and an adjoining property at Potomac Yard in Alexandria offer more of the walkable urban feel that Amazon cited as a priority. White Flint has been rezoned for denser high-rise offices, apartments and shopping but is still largely a car-centric swath of vast parking lots and strip malls.

Second, Crystal City is so close to Reagan National Airport that Virginia offered to build a walkway linking it to Amazon’s new offices. White Flint is almost equidistant to three major airports, but it’s at least a 30- to 45-minute drive to each.

In addition, Arlington and the state promised Amazon direct subsidies of $573 million for 25,000 jobs, plus investments totaling $223 million for transportation, including upgrading two Metro stations and the pedestrian bridge. The subsidies and transportation investments will increase if Amazon creates more than 25,000 jobs.

The third was real estate. One company, JBG Smith, owns most of the properties in the Northern Virginia bid, including ample vacant office space. Montgomery officials cobbled together several mostly vacant office buildings, but Amazon would have had to mostly build in White Flint, either at the Metro station or the site of the recently demolished White Flint Mall.

Montgomery County Council member Hans Riemer (D-At Large) said the county didn’t have “the best answer” for how it would provide Amazon more immediate office space beyond pledging to bring together property owners.

“We were going to juggle and figure it out,” Riemer said. “I know we would have, but it’s not like we had a big empty building with a curtain over it like they had in Northern Virginia.”

Northern Virginia’s transit and road networks also outpace the Maryland suburb’s. Virginia recently expanded its part of the Capital Beltway with tolled express lanes, and the second phase of Metro’s Silver Line, which will extend the subway to Dulles International Airport and into Loudoun County, is slated to open in 2020.

Crystal City has a Metro station; a Potomac Yard Metro station is expected to open in 2022. The area also has a bus rapid-transit line and a commuter rail station.

Steven A. Silverman, Montgomery’s former economic development director, said it would be “naive” to blame the loss on the county’s business climate.

Instead, Silverman said, Amazon probably saw that Montgomery would need to build at least a bus rapid-transit system to augment White Flint’s Metro station and expand area roads to alleviate traffic. What Amazon officials didn’t see: a bunch of other tech companies, as they did in Northern Virginia, from which it could siphon employees.

“At the end of the day, companies don’t make decisions based on incentives,” Silverman said. “They’re the icing on the cake. The cake is your workforce, transportation and educational infrastructure, and taxes. Maryland offered money, but money wasn’t the driver behind this.”

Economic development experts say Maryland still has plenty to show for its attractiveness, particularly a healthy bio-tech industry in Montgomery’s Interstate 270 corridor and cybersecurity firms near Fort Meade in Anne Arundel County. The state also has three Fortune 500 companies, including defense contractor Lockheed Martin and hotel giant Marriott International, both based in Bethesda.

David Petr, president of the Montgomery County Economic Development Corp., said its website has seen a “huge outpouring” of new Web traffic from beyond the D.C. area since making Amazon’s Top 20 list.

“It absolutely elevated us,” Petr said. “We could share the validation that Amazon shortlisted us. They recognized we have the talent and infrastructure for technology and innovation companies.”

Even so, Maryland has lagged behind Northern Virginia for years, Fuller said.

In 1983, the region’s economic activity, which reflects job growth, was split equally among Northern Virginia, Washington and the Maryland suburbs, he said. By last year, Northern Virginia’s share had grown to 48 percent, while the Maryland suburbs held about steady with 31 percent, and Washington had dropped to 21 percent.

Even local officials concede that Montgomery at least has an image problem.

Former county executive Doug Duncan (D), who now heads the group Leadership Greater Washington, said businesses have long complained about the county’s onerous permitting process and a sense that “it’s very difficult to get things done.”

The fact that Sullivan, a top Amazon executive on the search, had worked in economic development in the county might have hurt its bid more than it helped, he said.

“I don’t think she saw Montgomery County as being business-friendly,” Duncan said. “There was a lot of butting heads with county officials” during her tenure.

“I think the bigger [issue] is the lack of attention Montgomery County has paid to business growth,” Duncan said. “I think Amazon looked at [Montgomery] and said, ‘We’re not going to have a reliable partner 10 to 20 years from now. We’ll be in constant battle with the local government.’ ”

Newly elected County Executive Marc Elrich (D) rejected the idea that Amazon shied away from Montgomery’s business climate. He said Maryland couldn’t compete against the “ready-made environment of buildings” in Crystal City and Virginia’s promise to invest heavily in tech education.

“We made the top 20 in the country, so we’re not exactly dog meat,” Elrich said. “If we were anti-business, we wouldn’t be on the list in the first place. They wouldn’t waste their time. I just don’t buy that.”

Elrich said he’s ready to court the companies looking to follow Amazon to the Washington region.

“We’re going to reach out to them early and make the sales pitch of what we’ve got to offer,” Elrich said. “We know these companies are going to come here. We want to make sure we’re in that mix.”

As featured on www.washingtonpost.com