Tax Analysts Blog

States Should Just Say No to Boeing

Posted on Dec 11, 2013

After the milquetoast political leaders in Washington agreed to give Boeing a tax break that will last well past all of our retirement years, the aircraft manufacturer could not come to terms with its union. So Boeing decided to take its toys and find another playground to build its 777X jetliner. This proves that tax incentives don’t work. You see, taxes are a relatively small part of the overall cost of doing business. They are important, but much less so than labor costs. Boeing is smart. But to outfox most state legislators on economic development issues, you needn’t be all that smart. Boeing actually announced publicly that any state that wanted to hand over public money for the privilege of enriching its shareholders had to do so by December 10.

With that announcement, the Boeing extortion show went nationwide. It first landed in Jefferson City, Mo. There, the equally courageous Missouri politicians promptly handed over $150 million in incentives. The next stop was Alabama, where the pols know a thing or two about tax incentives. The governor’s staff was reportedly working on a plan that would “knock Boeing’s socks off.” Alabama has other things going for it, like the fact that Boeing’s big rival, Airbus, is building an assembly plant in the state. Apparently, Alabama is not content with being the world’s foremost provider of auto industry tax incentives.

By the time you read this, Kansas, North Carolina, Utah, South Carolina, Texas, and California will have also offered tax incentives to Boeing. Some of them, like those in South Carolina and Utah will likely include substantial tax breaks. Texas Gov. Rick Perry (R) tweets a lot. And on this issue, he tweeted that “Texas is a right to work state w/low taxes, smart regulations & skilled workers – perfect for Boeing.” South Carolina already gave Boeing $130 million earlier this year to build the last-generation airliner.

Every state should want the Boeing plant. It represents substantial economic activity. But Boeing will base its decision on a variety of factors, of which taxes will rank far behind labor costs and access to markets. All the states are vying for the plant tax business income, some more than others. Boeing has smart tax lawyers, so even if it did not receive incentives, it could minimize its state corporate tax burdens to virtually zero. What bothers me, and should bother you, is that politicians 1) are trying to insert themselves into the marketplace like North Korean commissars, and 2) have no backbone. Boeing is acting rationally -- politicians are willing to give things away, and Boeing is willing to accept those things. But politicians should try saying no once in a while. Maybe we would respect them a little more.

Read Comments (5)

vivian darkbloomDec 11, 2013

Gee, this sounds almost like it is a response to the comment I left a couple of
days ago on your earlier Boeing post:

vivian darkbloom December 10, 2013 at 11:10 AM
"First, this corporate welfare will cost the state $8.7 billion."

I read the following today in the WSJ which made me think of the above quote
and this post which I am belatedly responding to.

"Washington's legislature last month approved sweeteners valued at $8.7 billion
over 16 years—which experts say is the largest corporate-incentive package in
U.S. history—in an effort to keep the jobs in what has been Boeing's primary
manufacturing base for commercial jets. But Boeing then began looking elsewhere
after its largest union rejected an eight-year contract deal that would have
made significant changes to employees' wage structure and retirement and
health-care benefits."

The article made me question whether the Washington offer is entirely
"corporate welfare".

As the article makes clear, and it is really common sense, Boeing is evaluating
where to locate production based on the cost structure. Tax is just one of
those costs. If the cost of labor in Washington is higher than elsewhere, then
Washington state may need to make up for that with a sweeter tax deal. So, who
is being subsidized here? Is this corporate welfare, labor welfare, or both?

In this case, I vote for the latter.

The incidence of the tax burden and the benefits of tax breaks is not always
straightforward.

--------

Now you write:

"This proves that tax incentives don’t work."

Not really. Tax incentives definitely can make the difference as to where
businesses locate. Like everything else, including labor costs, they can tip
the balance.

States have gotten themselves in a bidding war. Saying that tax incentives
only "don't work" is a lot like saying "low bids don't work".

But, they are still bad policy.

emsig beobachterDec 11, 2013

It's not surprising that states are willing to provide huge tax breaks during a
severe recession. They need the jobs for their residents; and, those ribbon
cutting ceremonies do add to the governor's and the legislature's standing with
the citizens who see the new plant but don't add in the costs.

It's a shame that state political leaders haven't read John Nash's work on Game
Theory and collusion. With modern communications, they could form a common
defense against firms looking for tax breaks. The state and local governments
would then compete on economic, location, and other factors. I suppose lack of
trust among elected leadership and/or the competitive spirit prevent states
from colluding.

edmund dantesDec 11, 2013

I agree with Vivian, the Washington tax breaks are an attempt to offset the
sharply higher labor costs of being in that state. In CT, we have higher labor
costs, utility costs, health care costs and sharply higher taxes for everyone.
No business in its right mind would consider locating here, even with big tax
incentives (which are only presently granted to the governor's cronies).

To the larger question, there is no action whatsoever that might cause me to
respect politicians.

travis rechDec 11, 2013

People complain about American jobs being outsourced to low cost foreign
labor. I'd say this kind of "internal outsourcing" is more troublesome. It's
a race to the bottom into who can convince their state legislatures to
eviscerate workers' rights the most the quickest.

Ed WaltonDec 14, 2013

If the only way you can bring in an employer is with tax cuts; then the taxes
on everyone is to high.

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