Bloomberg News

Boeing Job Grab Shows Peril of Offering Tax Dollars for Growth

January 27, 2012

Jan. 19 (Bloomberg) -- Using $43 million in taxpayer money to build a training center for aerospace workers was a good idea for Wichita, Kansas, the self-styled “Aviation Capital of the World,” said Dave Unruh, a Sedgwick County commissioner.

It remains money well-spent, Unruh said, even after Boeing Co.’s Jan. 4 decision to close its 2,160-employee plant in Wichita, the county seat. Hundreds of those jobs will move to Texas and Oklahoma. He favors putting up as much as $100 million more as a “closing fund” to draw new employers.

“We ought to be run out of office if we don’t respond,” said the Republican, a commissioner since 2003. “We have a community DNA for aviation assets and we’re going to compete.” Still, Unruh didn’t know where the money would come from.

That fund may serve only as a down payment, since the bar to attract new and expanding businesses keeps rising for state and local governments. Boeing, the world’s biggest aerospace company, won incentives estimated at more than $700 million in 2009 to build a $750 million factory in South Carolina. At least $200 million will go to aid employers expanding in New Jersey, under a bill signed this month by Governor Chris Christie.

Illinois, which Moody’s Investors Service rates lower than any other state, agreed in May to provide $100 million in payroll credits to Motorola Mobility Inc. over the next decade to keep the company based in the state. Last month, lawmakers guaranteed $15 million in state tax breaks for Sears Holdings Inc. to retain its headquarters. Sears subsequently announced plans to shut in more than 100 locations.

Pressure on States

“State officials feel like they have to go on playing the incentives game even when budget pressures are severe,” said Phil Mattera, research director for Good Jobs First, a nonprofit organization in Washington. The group promotes “corporate and government accountability in economic development and smart growth for working families,” according to its website.

Illinois lawmakers last January approved record increases in personal and corporate-income taxes. On Dec. 13, they passed rate rollbacks for exchange operators CME Group Inc. and CBOE Holdings Inc., both based in Chicago, after threats of relocations. A study by Bloomberg Rankings said the state’s pension system had assets to cover just 45 percent of promised benefits in 2010, less than the median of almost 75 percent.

Long History

A more than 80-year history in Wichita, where Boeing built planes used in World War II’s Normandy invasion, wasn’t enough to compete against tax credits and newer facilities in Oklahoma City and San Antonio. Losing Chicago-based Boeing’s plant, which modifies military aircraft such as B-52 long-range bombers, may mean $1.5 billion in wages that won’t go to Kansas workers over 10 years, said Jeremy Hill, the Wichita State University Center for Economic Development and Business Research director.

While incentives don’t hurt, business leaders often put more weight on such things as wage rates and profitability, according to Sam Staley, who teaches politics and urban planning at Florida State University in Tallahassee. He has studied the issue for more than 25 years.

“Big companies make these location decisions on much bigger issues than what most local politicians understand,” Staley said. He’s also a research fellow with the Los Angeles- based Reason Foundation, a nonprofit organization that promotes libertarian principles, according to its website.

Strategic Motives

“When a Boeing decides to close a plant with hundreds or thousands of people, it’s rarely because of tax incentives,” Staley said in a telephone interview. “It’s more about realigning strategic policies and determining where they believe the most efficient deployment of resources will be.”

In response to questions about Boeing’s pullout, Jarrod Bartlett, a company spokesman, said: “The primary reason to close the Wichita operation is that our current work is winding down and we don’t have enough future work or prospects for more work to justify the size of the facility.”

“Incentives weren’t a factor in our decision to close,” the Kansas-based spokesman said. “We made a business decision based on our current and future work.”

Such calculations are the norm rather than the exception, Staley said.

“The overall business climate of a state is much more important than individual tax incentives,” he said. Still, he added, “If states offer these things, then companies are going to take them.”

Will Apply

Boeing will eventually apply for incentives under existing programs in Oklahoma and Texas, Bartlett said.

Since 1998, Texas and San Antonio have spent more than $12 million on facilities, tax abatements and other incentives to attract 2,500 Boeing jobs. No incentives were used to spur the company’s latest move, according to Rene Dominguez, the city’s economic development director.

Oklahoma offers tax credits of as much as $12,000 a year for new aerospace engineering jobs, half for the company and half for the worker, said Dustin Pyeatt, a Commerce Department spokesman. Kansas doesn’t offer a similar program, according to Dan Lara, a Commerce Department spokesman.

“It’s a story of if they come, they can leave and you are always at risk,” said J. Mac Holladay, an economic development consultant in Atlanta who has led industry recruitment efforts in three states. “Wichita is a very good example that American manufacturing companies are taking a real, hard look at their productivity numbers.”

Backfire Risk

While incentive advocates say defense facilities in Huntsville, Alabama, and automotive assembly plants in Tuscaloosa, Alabama, and Greenville, South Carolina, have helped transform local economies, the subsidies can backfire.

North Carolina approved a $242 million package in 2004 for a Dell Inc. factory in Winston-Salem that was expected to house 1,900 jobs. Five years later, Dell said it was closing the plant, which had peak employment of 1,100, to simplify the business and improve efficiency.

Massachusetts provided $58 million in subsidies to attract an 800-employee Evergreen Solar Inc. wafer factory on the former Fort Devens army base. The plant shut less than three years later in 2011 while the company sought bankruptcy-court protection, citing competition from China.

“States had already gotten competitive before the recession, but with jobs so hard to come by nowadays, incentives are getting more expensive,” said Bill Alloway, executive vice president of the Texas Taxpayers and Research Association, an Austin group that studies state fiscal issues.

Boeing’s Past Incentives

States provided 20 incentive packages that each topped more than $100 million in 2010 and 2011, with Boeing receiving $2 billion from Washington state and $706 million from South Carolina, said Kenneth Thomas, a University of Missouri at Kansas City political scientist who has written three books on incentives.

“A report by the National Governors Association in 1994 said that giving a lot of incentives was bad policy, but there shouldn’t be federal control because the states would quit doing it on their own,” Thomas said by telephone. Instead, annual spending on employer incentives by states and local governments since 1995 has climbed more than 80 percent to a combined value of about $47 billion, he said.

The emergence of more fiscally conservative Republican governors such as Rick Scott of Florida and Nikki Haley of South Carolina won’t slow the growth of incentives, Florida State’s Staley said. The programs have proven popular since Mississippi in 1936 enacted the first state-sponsored economic development incentives, a measure called Balance Agriculture With Industry, according to Michael LaFaive, a director at the Mackinac Center for Public Policy in Midland, Michigan.

Politics Rule

“Cutting ribbons for new buildings is more important than the actual net impact of job creation,” Staley said. “These programs persist for political reasons.”

In Wichita, Boeing said a $35 billion Air Force fuel-tanker contract -- the largest Pentagon award ever -- would sustain the plant for at least seven years, according to U.S. Representative Mike Pompeo, a Republican whose district includes the city. That was in February. In November, Boeing said it was studying the operation’s viability as the U.S. reins in defense spending. On Jan. 4, the company said it would close the site and move some of the jobs to other locations.

“We used to fight outsourcing of work to other countries, but now we’ve got to battle insourcing, where other states are vying to compete for Boeing,” said Bob Brewer, Midwest director of the Society of Professional Engineering Employees in Aerospace, which represents 600 Boeing workers in Wichita.

Defense-Spending Outlook

President Barack Obama is proposing $487 billion in defense budget cuts over the next decade, forcing suppliers such as Boeing to make difficult decisions, said Todd Tiahrt, a former congressman from Wichita who advises the manufacturer as a consultant.

The Air Force should block Boeing’s closing in Wichita for breaching its contract, said Pompeo, a graduate of the U.S. Military Academy and Harvard Law School who calls himself a “free market believer.”

“Boeing could have told the Air Force they were going to build this tanker in St. Louis or Washington state or San Antonio, but they didn’t,” said Pompeo, a first-term Republican who was a supplier to Boeing for 10 years through his former company, Thayer Aerospace. “They said they were building it in Kansas.”

Corporate Obligation

“Fortune 50 companies have an obligation,” Pompeo said. “When you tell people things, you do them the right way. That’s a traditional Kansas concept. Boeing didn’t do that.”

Tiahrt, Pompeo’s predecessor in Congress, prefers that Kansas respond to Boeing’s decision by reducing taxes and regulations. Republican Governor Sam Brownback on Jan. 11 called for trimming the state personal-income levy to 4.9 percent from as high as 6.55 percent for anyone earning more than $15,000 a year, while eliminating deductions for mortgage interest and charitable contributions.

Cutting income taxes to better compete may hurt the state’s ability to pay for schools, roads and public safety, Unruh said. “Kansas doesn’t have oil and gas like Texas or a tourism economy like Florida,” he said, citing two competitors that lack personal-income levies.

Boeing sold its commercial operations in Wichita in 2005, creating the supplier now known as Spirit AeroSystems Holdings Inc. and hadn’t requested city-backed industrial revenue bonds to support development since 2007. “Maybe we should have seen that as a tipoff,” said Unruh, a Republican whose family has owned an automotive repair business in the area since 1947.

Committed to Aerospace

Wichita’s commitment to aviation is evident from incentives of more than $60 million offered to Canada’s Bombardier Inc. and, separately, Hawker Beechcraft Corp., a Wichita-based planemaker co-owned by Goldman Sachs Group Inc. and Canadian private-equity firm Onex Corp., Unruh said. Bombardier employs 2,288 in the city, while Hawker has about 4,000 workers.

As for the community’s 230,000-square foot aerospace training center, which opened in 2010, $20 million more will be invested this year and next to buy equipment and run training programs organized by Wichita Area Technical College, according to a 2011 report by John Dieker, a Bombardier vice president.

Hawker considered moving its headquarters to Louisiana before receiving $40 million in incentives from Kansas, $5 million from local government and contract concessions from union employees in December 2010, Chief Executive Officer Bill Boisture said in a Jan. 6 interview in Wichita. The company, which has posted annual losses since 2008, is fighting the U.S. Air Force over a $355 million contract award to Brazil’s Embraer SA for light attack aircraft.

“If I’ve got the best product and I’ve got a 25 percent lower price, we don’t have to build the plane somewhere else except Wichita,” he said.

--With assistance by Susanna Ray in Seattle, Gopal Ratnam in Washington and Darrell Preston in Dallas. Editors: Ted Bunker, Ed Dufner.

To contact the reporters on this story: David Mildenberg in Wichita at dmildenberg@bloomberg.net;

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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