Taxpayer Price Tag for Amazon Climbs to $61 Million

July 5, 2011

Investigative Reports

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The NerveA state cost-benefit analysis projects that the deal to bring Internet retail giant Amazon to South Carolina will cost taxpayers nearly $61 million over 10 years – about $21.5 million more than was originally estimated.

And the revised analysis doesn’t reflect the expected millions of state sales tax dollars that will be lost annually under an exemption Amazon was granted through a just-enacted state law, or the loss of millions in local property taxes under a fee-in-lieu-of-taxes agreement with Lexington County.

It also doesn’t take into account the potential harm to existing businesses from the exemption granted to Amazon, as required under the model developed for the analysis, The Nerve’s review found.

“The Department of Commerce used the data supplied by the company,” said Lindsey Kremlick, spokeswoman for the S.C. Budget and Control Board, which oversees the Board of Economic Advisors, when questioned recently by The Nerve about the Amazon analysis.

Kremlick said the BEA developed the model for the analysis, but she declined to answer specific questions, referring The Nerve to a description of the BEA’s model printed in a 1996 edition of the State Register.

S.C. Commerce Secretary Bobby Hitt, other Commerce officials and Amazon representatives did not respond to recent written or phone messages from The Nerve.

The initial and revised cost-benefit analyses were prepared by the Department of Commerce on behalf of the state Coordinating Council for Economic Development (CCED), made up of the heads of state agencies involved in economic development, including Commerce, which provides staff support for the group. By law, the Commerce secretary chairs the 11-member council.

The Nerve earlier this year obtained the initial analysis, dated Sept. 7, through an S.C. Freedom of Information Act request. The revised analysis, prepared May 24, was provided after a follow-up FOIA request to Commerce.

The initial analysis was revised after Seattle-based Amazon promised to create at least 2,000 full-time jobs at its distribution center under construction near Cayce – up from its original announcement of 1,249 jobs – and invest at least $125 million, up from the $100 million initially announced.

The original analysis projected the public costs of building a distribution center near Cayce at nearly $9 million in the first year and $39.5 million over a 10-year period. The revised analysis puts the first-year public cost at about $12.1 million and the 10-year cost at $60.9 million.

The projected 10-year public costs under the revised analysis work out to be about $30,500 for each of the promised 2,000 jobs.

The increased investment and job-creation thresholds are part of a law that took effect on June 8 – without the governor’s signature – exempting Amazon from collecting state sales taxes on purchases made by S.C. residents until Jan. 1, 2016.

The latest analysis doesn’t specify the projected cost of the sales tax exemption, though according to other news media, the initial cost is estimated at $2.5 million yearly.

Following is a breakdown of the 10-year public costs, as cited in the revised analysis:

  • Job development credits:  $20,515, 444;
  • Corporate jobs tax credits:  $12,500,757;
  • Multi-county industrial park tax credits:  $8,333,838;
  • “Special” schools (the readySC program through the S.C. Technical College System):  $6 million;
  • Increased state education costs:  $6,237,113;
  • Increased local education costs:  $4,907,067;
  • State set-aside grant:  $2.5 million;
  • Total: $60,994,229

Job development credits are refunds of a portion of employee state tax withholdings, based on a sliding scale tied to hourly pay rates and the location of the company. Job tax credits, which reduce a company’s corporate income tax liability, are fixed amounts per new job created, based on the location of the company.

The revised analysis estimates that the project will generate $15.4 million in local property taxes over a 10-year period.

But the company, which had net income of $1.15 billion in 2010, likely will save millions under a fee-in-lieu-of-taxes (FILOT) agreement with Lexington County that would assess property at 6 percent for 20 years, instead of at the typical 10.5  percent rate for industrial property.

As an example, Amazon would owe $3.8 million for one year if its $125 million investment were assessed at the regular industrial property rate and taxed at the millage rate specified in the agreement with Lexington County, The Nerve’s review found.

In comparison, the initial analysis projected Amazon would pay $1.7 million in FILOT fees in the first year, with the annual bill steadily declining to $676,633 in year 15.

Both Amazon analyses list the state’s average annual salary at $26,596, though according to the S.C. Statistical Abstract, which cites figures from the U.S. Bureau of Economic Analysis, the per-capita personal income in South Carolina as of 2008 was $32,495.

The average annual salary with the Amazon project is listed in both analyses at $33,370, or $16.69 per hour.

The revised analysis lists the overall “net benefit” of the project at nearly $1.7 billion over the 10-year period, including an estimated $128.8 million in state revenues – up from about $1.1 billion overall under the initial analysis.

But much of that total is based on the payroll of the projected 2,509 “indirect” jobs, which aren’t defined.

Under the model analysis developed 15 years ago by the BEA, indirect income is estimated by applying a “payroll multiplier” for the industry sector of the business. In the Amazon analyses, the multiplier is 2.

“The analysis assumes that these jobs will remain during the entire time horizon and that the labor force will not be affected by economic slowdowns or by the corporation ceasing operations due to decreased demand for its product,” according to a description of that section of the analysis printed in the State Register.

Given the Great Recession that officially started in December 2007, however, that assumption would be grossly off target for projects started during the downturn.

Also, according to another part of the model analysis, if “it can be shown that a project has a detrimental effect on existing businesses, the BEA and CCED will include that effect in its calculation of benefits.”

But that didn’t appear to be done in the Amazon analyses, despite critics’ contention that the sales tax exemption granted to Amazon would hurt certain existing South Carolina businesses that have to collect the tax.

Some of those companies, such as Wal-Mart, fought unsuccessfully against the exemption in a high-profile showdown that pitted bricks-and-mortar retailers against the Internet-based Amazon.

Reach Brundrett at (803) 254-4411 or rick@thenerve.org.