California, other states, should rethink big tax breaks to companies, economists say

What's Boeing worth? (Johan Nilsson, AFP/Getty Images)

Sometime early next year, Boeing will make one state very happy and more than a dozen others very sad. It will select the location for a new manufacturing plant to build its 777X airliner, gifting what it promises will be thousands of good-paying jobs to the winner.

Those jobs are shaping up to be one of the most sought-after economic development prizes of 2014. Every state that covets them is, at Boeing’s urging, preparing a package of tax breaks and other government incentives, reaching into the billions of dollars. It’s the latest example of a decade-long trend: As good jobs have become harder to find, states have approved bigger economic handouts to attract or keep individual companies.

New economic research suggests that’s often not a good idea, and it implies that states could be bidding too much to attract the Boeing plant.

Two economists — Owen Zidar, a doctoral candidate at the University of California at Berkeley, and Juan Carlos Suarez Serrato, a postdoctoral fellow at Stanford University — write in a forthcoming paper that companies aren’t nearly as mobile as economists have long assumed. Cutting taxes, they conclude, might not be the best way to boost firms’ bottom lines and keep them around.

As Zidar put it in a recent interview, the research “throws some cold water” on the idea that higher tax rates on businesses always push companies away, whether to other states or other countries.

“Corporate taxes,” he said, “aren’t as bad as we thought.”

Economic models have long assumed that taxing businesses hurts workers and local economies because companies can operate more or less anywhere and workers can’t always move to follow the jobs.

The growing concern that any big employer could pack up and leave town has led states to approve lucrative incentive packages to attract or retain companies. Indiana recently cut corporate taxes and has aggressively courted companies from neighboring Illinois, following the example of Texas. Oregon, on the other hand, called a special legislative session last year to approve a tax-incentive package mainly targeted at retaining Nike’s headquarters.


Boeing has upped the stakes. According to a company document obtained and reported by the St. Louis Post-Dispatch, Boeing is asking states to foot most or all of the bill for a new facility that could cost $10 billion, and for tax breaks and training for its workers. Suitors are already opening their wallets.

Missouri lawmakers this month approved a nearly $2 billion package. Washington state, where the aerospace giant has substantial operations, approved incentives approaching an estimated $9 billion earlier this year. Other states, such as South Carolina and Texas, are hoping to win the plant but are keeping their bids close to the vest.

Zidar and Serrato challenge that strategy, starting by reevaluating just how mobile firms are. Their results are partly intuitive — if all that mattered to company location was tax rates, they reason, tech firms wouldn’t cluster in high-tax California. Other factors, including housing costs, labor costs and the ready supply of workers with the skills the company needs, contribute to how productive a company is in a particular location. Often those other factors overwhelm modest differences in tax rates.

States can influence all of those factors, not just taxes, and often they can improve those areas for a lower cost than the tax breaks. That’s the second half of the economists’ conclusion, as it applies to Boeing: Maybe the bidders should be thinking about how to improve infrastructure or labor supply, or whatever their advantage is over other states.

“If I were the governor” of a state with a major Boeing presence, Zidar said, “I would try to figure out how much cost savings Boeing would enjoy by being in Washington versus their next-best option — in terms of productivity, transportation costs, start-up costs to roll out a brand-new major plant and tax savings, etc. — and bid based on that.”

He also said the state shouldn’t bid beyond a “reasonable cost” per job. But that’s the rub. The underwhelming recovery has made many states desperate for economic activity and has redefined “reasonable cost” upward.