States and Corporations: A Bad Romance

Nancy Cook

At stake is the location of a new Boeing manufacturing plant, where the company plans to assemble its 777x aircraft. Politicians and local economic development leaders act as if they can already see the headlines if their lucky state wins the bid: So-and-so governor or mayor brought Boeing to the area and created thousands of new, high-paying jobs. Hello reelection campaigns!

In return, Boeing wants some goodies. Among the reported asks: Cheap or free land; easy access to railroads, a port, an airport, or highways; and some serious tax breaks. Increasingly, local governments lean on such deal-sweeteners to attract businesses.

The problem with the tax-incentive strategy is that there is little economic evidence that businesses—even ones that bring highly skilled manufacturing jobs—can boost a local economy after they receive the tax breaks and move into town. Even if a local government doubles the value of the tax incentives it offers, that will still add only about 12 percent of that investment to economic growth, says Richard Funderberg, assistant professor of urban and regional planning at the University of Iowa who's studied manufacturing tax breaks extensively.

"Tax incentives don't really matter," he adds. "And, usually, the direct effect is likely to be negative."

Another major problem with these packages is that once the tax subsidies come to life, they rarely go away. Local governments often do not examine them closely to figure out if they create jobs, or raise wages, or employ residents. A 2012 report by the Pew Charitable Trusts showed that only 13 of 50 states consistently and systematically examined the effectiveness of these state-based tax incentives.

"You have to ask yourself if the money wouldn't be better spent on lower taxes for everyone, or by investing money in education or infrastructure—stuff the government does to make its economy more attractive," says Donald Boyd, senior fellow at the Rockefeller Institute of Government.

When states do look closely at their tax incentives, they sometimes realize that the breaks do not work. Wisconsin lawmakers, according to the Pew study, scaled back the state's film tax credit after a study deemed it ineffective. Similarly, a Louisiana economic-development agency realized that one tax credit created only one-third of the jobs it had promised. Connecticut officials were happy to learn that a job-creation tax credit actually seemed to benefit the state.

It's difficult to track the growth of these tax incentives over the years, given the differences in how states award them. Political science professor Kenneth P. Thomas has estimated that such subsidies now cost local governments roughly $70 billion a year—not an insignificant sum of money.

Before states woo Boeing or other companies with tax incentives, state officials need to ask more questions, says Jeff Chapman of the Pew Charitable Trusts. Like: How does this fit into the state or city's broader economic package? Or, is this more effective than what we could be doing with the same amount of money? And, will this factory or plant create another, related mini-industry of small businesses that feed off it?

So far, local officials do not seem to be thinking along these lines as the Boeing mania overtakes them. Then again, it's hard to contemplate the long-term economic effects of granting Boeing its wish list when all lawmakers can imagine are the glowing headlines announcing they won the Boeing contract.

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