Amazon’s Proposal to California

A few days ago, made a proposal to the California state government: in exchange for repealing the state’s new sales tax on internet sales, Amazon would build several new distribution centers in California.  Amazon estimates this will create 7,000 jobs in California.

I was curious about the winners and losers under each proposal, so I did some number-crunching in Excel.  There are several critical assumptions:

  1. The new jobs hire only Californians not currently working,
  2. There is no migration from other states,
  3. The annual income of the new workers is $25,000,
  4. The discount rate is 4%, and
  5. Amazon’s estimate of a tax liability of $200,000,000 per year if the current law stays in place and is upheld by the courts.

These assumptions are spelled out on the “Assumptions” tab of the Excel workbook (see below).  Using my assumptions, the present value of the tax revenue under current California law is about $2.89 billion between 2012 and 2034.  I used 2034 as the cutoff date because that’s 20 years from Amazon’s promise to create the 7,000 new jobs by 2015.  If the government accepted Amazon’s proposal, there would be two impacts.  First, the state would collect sales tax and income tax revenue from these workers.  The present value of the government revenue is $229.5 million.  Slam-dunk, right?

Not so fast.  Those workers will be earning income.  In fact, the present value of the newly-created income is $2.58 billion, about the same as the tax revenue that would be created under the new California law.

The lesson is clear: if the government gets the revenue, that’s terrific.  If California residents get the revenue (and jobs) that’s not so good.  If you live in California, this is yet another example of your government watching out for your interests.

Don’t like my assumptions?  You can try it yourself. The Excel 2007 workbook I used for this analysis is available for download.

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.