In an attempt to lure businesses to move within their borders, states offer everything from piles of cash to tax-free land and low-interest loans to state tax credits — all in the name of economic development. In theory, the free giveaways will pay for themselves because of increased employment and other economic benefits that come from landing a major industry.
But in reality, the economics of such largesse rarely make sense. States rarely review their economic development programs to determine whether reality matches the promise but, when they do, many have found the programs fail to even break even.
Since 1997, aircraft maker Boeing has received many billions of dollars in grants, subsidies, low-interest loans and tax breaks from 10 different states. And it’s at the taxpayer trough again.
“The best economic incentive is not to need one,” said Matt Mitchell, a senior research fellow at the Mercatus Center, a free market think tank based at George Mason University. “What you’re basically saying is that your situation is not good and you have to suspend the rules for certain places and for certain people in order to get them to move somewhere.”
Incentives Tied to Lower Growth
In his studies of state and local tax incentive programs, Mitchell has found a remarkable correlation: rather than increasing economic activity and growth, as they are supposed to do, handouts and tax breaks for companies actually correlate with slower growth.
That’s because the benefits given to certain privileged companies have to be paid for by everyone else, he says.
Yet they continue.
The mad scramble over where Boeing will build its new jetliner is the latest example of states playing a game that no one will win – no one, that is, except Boeing.
After Boeing union members last month voted down a contract offer, Boeing began looking for a new location to build its brand new 777X commercial jetliner.
Missouri Rushes Through Incentives Package
If the project lands in the state, Boeing could reap $150 million in tax credits annually by creating approximately 8,000 jobs over the lifespan of the incentives. The proposed manufacturing site is on the edge of Lambert International Airport in St. Louis.
As recently as November, Nixon called for a moratorium on economic incentives that simply move jobs across state lines. He said such economic competition between Missouri and neighboring Kansas was bad for taxpayers, the states’ budgets and the economy.
Less than a month later, he was signing the incentives package to lure Boeing to Missouri.
Other states, including Alabama, Pennsylvania and South Carolina, are considering similar deals in an attempt to woo Boeing.
Washington Approves $9 Billion Deal
In Washington state, where Boeing has long been operating, lawmakers last month approved nearly $9 billion in tax incentives for the company, the largest tax incentives package in U.S. history.
“Whatever money we don’t collect from Boeing we have to collect from someone else,” state Rep. Liz Pike, R-Camas, told Northwest Watchdog. “I was fearful that, you know, this may be just a bargaining chip to take to other states.”
When it comes to a new manufacturing facility, the estimated 8,000 jobs that would come with the new manufacturing plant would barely make a dent in most states’ unemployment rates.
The real incentive here is a political one. Governors and lawmakers would get to show up for the ribbon cutting and campaign for re-election with shiny pictures of the new factory and tales about how they improved the state’s economy. Corporations have learned to use that incentive to play states against one another in search of the best deal.
Boeing is no stranger to corporate welfare.
Since 1997 it has received more than $13 billion in grants, subsidies, low-interest loans and tax breaks from 10 states, according to Good Jobs First, a group that tracks economic incentives to promote transparency and accountability for such handouts.
Full Costs Impossible to Know
But as the Times reported, a full accounting of taxpayer-funded economic development programs is not really possible. The financial deals are often so murky that it is impossible to determine the actual economic value of the incentives, or the full cost to taxpayers.
In part because of that murkiness, and in part because of the political incentives, state economic development programs are rarely reviewed for their effectiveness, despite academic data that suggests they don’t work.
“This knowledge gap is particularly worrisome at a time of tight budgets and sluggish economic growth,” wrote Susan Urahn, managing director for Pew. “If policymakers do not base their decisions about tax incentives on good information, they could be spending scare resources unwisely.”
Disappointments When Studies Done
The few states that do review their tax incentives frequently find the reality did not live up to the expectations, according to Pew.
Wisconsin lawmakers recently limited their state’s tax credit for film production after a study found that it ineffective.
In Louisiana, a review of one incentive program found that it created only one-third as many jobs as it had promised.
The Pew study suggests states should also look at the trade-offs created by their economic development programs.
“Lawmakers must recognize that choosing to give these tax breaks will reduce valuable revenue needed for other investments,” said Remy Trupin, executive director of the Washington State Budget and Policy Center, a progressive think tank.
Mitchell, of the conservative Mercatus Center, agrees.
Even though the cost to taxpayers outweighs the benefits of the economic incentives that Boeing and other corporations pursue, the privileged companies are so few and those who bear the cost are so many that taxpayers don’t really notice it.
“The benefits, you can point to them. You can point to a physical plant and show up on opening day to cut the ribbon,” Mitchell said.
“The costs are unseen – that doesn’t mean that they aren’t there.”
Used with permission of Watchdog.org.