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December 26, 2013

States should rethink big tax breaks to companies, economists say

(Continued)

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.

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