Governments Rob Taxpayers of Billions to Fund Ill-Advised Incentive Programs

Less than two years after Kansas used $43 million in taxpayer money to build a 230,000-square foot training center for aerospace workers in Wichita, Boeing (NYSE:BA) announced on January 4 its decision to close its 2,160-employee plant. Only a few hundred jobs will be moved to Texas and Oklahoma.

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With the closing, Boeing ends its more than 80-year history in Wichita, where it built planes used in World War II’s Normandy invasion. Losing Boeing’s plant will cost Kansas workers $1.5 billion in lost wages over the next 10 years.

Now Sedgwick County commissioner Dave Unruh favors putting up as much as $100 million more as a “closing fund” to draw new employers to Wichita, the self-styled “Aviation Capital of the World.”

Unruh insists that the $43 billion training facility will not go to waste. “We have a community DNA for aviation assets and we’re going to compete,” he said, though the commissioner doesn’t know from where he will be able to source the funds.

Furthermore, the $100 million fund Unruh hopes to create may only serve as a down payment, since the bar to attract new and expanding businesses continues to rise for state and local governments.

Boeing won incentives estimated at more than $700 million in 2009 to build a $750 million factory in South Carolina. Under a bill signed this month by New Jersey Governor Chris Christie, at least $200 million will go to aid employers expanding in the state, while Illinois agreed in May to provide $100 million in payroll credits to Motorola Mobility (NYSE:MMI) just to keep the company from moving its operations to another state.

“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 non-profit organization in Washington. The Illinois pension system had assets to cover just 45 percent of promised benefits in 2010, well below the median of almost 75 percent.

The problem with incentives is that, while they don’t hurt, business leaders often put more weight on such things as wage rates and profitability, according to Sam Staley, a professor of politics and urban planning at Florida State University in Tallahassee who has studied the issue for more than 25 years.

“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.”

“Incentives weren’t a factor in our decision to close,” confirmed Boeing spokesman Jarrod Bartlett. “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.”

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

Boeing’s decision to consolidate production to existing programs in Oklahoma City and San Antonio has nothing to do with the millions the states have spent on facilities, tax abatements, and other incentives over the years, but rather the need to scale down operations as business slows.

The case of Wichita is not an uncommon one — many states find themselves shelling out money in the hopes of creating jobs, only to have businesses abandon their plants after a few years, laying off hundreds or thousands of workers and leaving taxpayers with a hefty bill.

North Carolina approved a $242 million package for a Dell (NASDAQ:DELL) factory in 2004 that was expected to house 1,900 jobs, but after five years, Dell decided to close the plant, which had peak employment of 1,100, saying it needed to simplify the business and improve efficiency.

Massachusetts provided $58 million in subsidies to Evergreen Solar (ESLRQ) to build a wafer factory that would employ 800 workers. Evergreen shut down the plant less than three years later in 2011 when the company filed for bankruptcy protection, citing competition from China.

The economic downturn has forced many businesses around the country to scale down operations, and in response, states are offering even greater incentives.

Annual spending on employer incentives by states and local governments has increased more than 80 percent since 1995 to a combined value of about $47 billion. In the last two years, states provided 20 incentive packages valued at over $100 million, including a $2 billion subsidy offered to Boeing by Washington state.

But the incentives aren’t helping. “Big companies make these location decisions on much bigger issues than what most local politicians understand,” said Staley, who is also a research fellow with the Los Angeles-based Reason Foundation, a non-profit organization that promotes libertarian principles.

Production numbers will ultimately outweigh incentives. If production levels or costs don’t justify the size of a plant or its workforce, than companies are bound to leave. Even if a company does not shut down or relocate, the cost of incentives to taxpayers often exceeds the benefit, and results in budget deficits that force state and local governments to lay off public workers.

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com