SC Policy Council: A Bailout for Boeing

By The South Carolina Policy Council*

In a year marked by huge job losses (80,000 from August 2008 to August 2009), the news that Boeing is expanding in North Charleston has been greeted with unbridled enthusiasm by many in South Carolina. For its part, the legislature is claiming credit for having sealed the deal by offering Boeing a record incentives package valued at between $170 million-plus and $450 million. This is not quite true because Boeing would likely have expanded in South Carolina without the subsidy. Worse still is that this bailout is going to end up costing more jobs than it is supposed to create.

Before describing the details of the deal – which was crafted for an unnamed “taxpayer” – let’s dispense with the myth that: 1) this legislation (H 3130) was not passed specifically for Boeing; and 2) that this is a sudden development that somehow took the legislature by surprise. These are the details of the plan as ratified by the General Assembly yesterday evening:

• Boeing will be required to create 3,800 new, full-time jobs within 7 years and invest at least $750 million in a single manufacturing facility.

In return, the company will receive:

• A sales tax exemption on construction materials for the manufacturing plant
• A sales tax exemption on computer equipment
• A sales tax exemption for the transportation of unfinished aircraft from one facility to another
• A sales tax exemption on fuel used to test fly aircraft
• $170 million in economic development bonds to help pay for the construction of Boeing’s new assembly line

A corporate tax break worth hundreds of millions is also reportedly part of the deal.

Are the Incentives Really Necessary?

What lawmakers in South Carolina have not told us is that Boeing was thinking of expanding its current operation in Charleston anyway. This past summer, Boeing purchased a 787 components plant that already employs 900 workers. The cost: $1 billion. Boeing also owns half of a neighboring plant that employs 1,600 workers. In addition, talks between Boeing and union representatives at its Everett plant in Washington state have stalled. A 52-day strike last summer cost the company billions, with analysts projecting the cost of the work stoppage at $100 million a day or $5.2 billion in deferred revenue. Meanwhile, employees in Charleston voted in early September of this year to disband their union.

Thus when we describe this incentives package as a bailout what we really mean is not so much a financial one, as a bailout from Boeing’s union commitments in Washington state. Add to this that Boeing has long wanted to expand its operations on the east coast and it becomes clear the company was already very interested in building a second assembly line in South Carolina.

Moreover, Boeing has been through this type of courtship before. In 2004, Washington state provided $3.2 billion in incentives to keep Boeing. Given that Boeing was so quick to spurn Washington despite such a gargantuan deal, lawmakers should think twice about any future benefits this economic incentives package may bring to South Carolina. As North Carolina recently discovered regarding an ill-conceived incentives plan for computer manufacturer Dell, special interest tax breaks are no guarantee of a company’s loyalty.

How Much Will They Cost?

The legislation authorizing Boeing’s bailout declares the plan “will have a significant beneficial economic effect on the region for which it is planned and that its benefits to the public will exceeds its costs.” Is this true? To begin with, it remains unclear how much the Boeing deal is actually going to cost state taxpayers. This is primarily because the state Board of Economic Advisors has failed to provide any kind of analysis regarding the proposal’s price tag (more on that below).

What we do know is that the incentives package includes $170 million in economic development bonds. The sales tax exemptions are also worth several million dollars. According to some news reports the deal includes hundreds of millions in corporate tax breaks that push the cost of the package up to $450 million. The exact details of the agreement – certified by the state’s Advisory Coordinating Council for Economic Development to be beneficial to taxpayers – have not been disclosed.

What is clear, though, is that the state doesn’t have the money to pay for these incentives; thus the use of the economic development bonds, which are supposed to pay for themselves. After all, it was just last month that the Budget & Control Board slashed the FY09-2010 budget by 4 percent due to declining revenue. Thus, we’re borrowing money we don’t have to pay off Boeing.

As an aside, the constitutionality of using general obligation bonds to fund economic development projects is at best questionable. The General Assembly asserts “as a fact, that the primary beneficiaries” of such economic development projects “are the State of South Carolina and its residents.” But this is because the S.C. Constitution requires all such debt be incurred for a “public purpose.” So, that’s the question … is this package really going to help all taxpayers – or only the single, anonymous taxpayer featured in H. 3130?

Also worth mentioning is that on the very same day the state extended a multimillion incentives package to the multibillion dollar Boeing, other state officials were calling for a tax increase. Testifying yesterday before the Taxation Realignment Commission (TRAC), Department of Transportation Secretary Buck Limehouse argued that the state should increase the current 16 percent gas tax by adding an additional 6 percent sales and use tax. That’s an increase of 38 percent! The further irony here is that at the same time TRAC is meeting to supposedly reform the tax code to eliminate special-interest tax breaks, the legislature is passing additional special-interest tax breaks.

What we also know is that the Boeing bailout is going to cost more than its face value. Economists estimate that every $1 in government spending shrinks the private sector by 0.20 cents. That means $1 spent by the government actually costs $1.20, which would put the cost of the Boeing bailout at a minimum of $204 million – and likely as much as $540 million. At the upper limit, that’s twice the amount collected by the state’s 5 percent corporate income tax for FY08-2009. In other words, for the cost of giving Boeing a 10-year corporate tax break, we could eliminate the tax for two years for every business in South Carolina. Eliminating the state income tax would increase South Carolina’s business tax climate ranking from 26^th to 11^th. It would also create jobs and raise wages. According to the Tax Foundation, the average worker loses $2.50 in real wages for every $1.00 increase in the corporate income tax.

As it is, South Carolina has the 4^th highest state unemployment rate in the country and the 46^th lowest per capita income. Clearly, the economic incentives game is not working in our favor. What we need is fundamental tax reform that depoliticizes the state’s economy by letting the market and consumers decide which companies should come to and expand in South Carolina. Not only would this strategy result in lower taxes and reduced government spending, it would create more jobs and encourage innovation and creativity. Eliminating the corporate income tax, in particular, would also increase private sector investment and boost the state’s Gross Domestic Product.

What Analysis?

Of course, the reason no one really knows how much the Boeing deal is going to end up costing taxpayers is because the state Bureau of Economic Analysis (BEA) neglected to conduct any such analysis. The revenue impact statement released by the BEA coyly asserts that “since we are not currently collecting any tax revenue from a manufacturer that meets these criteria, this section is not expected to reduce state General Fund revenue in FY 2009-10.” According to state economists, in other words, lost tax revenue should have no impact in calculating the cost of the Boeing deal. The assumption here is that Boeing would not have come to South Carolina without the incentives package. Yet with strikes costing Boeing $100 million a day, it is clear South Carolina’s strong right-to-work laws were more valuable to the company than the $450 million incentives package.

More to the point, the BEA completely disregards what economists call “opportunity costs.” Such costs are the price one pays for using resources to attain one goal instead of another. One of the opportunity costs of a $450 million incentives package for Boeing is lost revenue for thousands of other businesses that could have seen their corporate income taxes cut. Another cost are the tax increases necessary to pay for the package. And these taxes will have costs as well – as mentioned above, lost jobs and reduced economic growth. The BEA, however, fails to account for any of this – or for that matter, provide any kind of estimate regarding the costs and benefits of the Boeing deal.

Why the Lack of Transparency?

The most disturbing aspect of the Boeing deal was the manner in which it was passed. Until just a few days ago, the public and rank-and-file legislators were led to believe the General Assembly was going into special session to extend emergency unemployment benefits. Instead, the legislative leadership amended the sine die resolution governing the special session so as to permit the “receipt and consideration of any matter necessary to address economic development opportunities.” Likewise, the measure (H 3130) ratified by the General Assembly originally had nothing to do with economic development. In the apparent rush to pass the incentives package, however, the legislative leadership cast about for a bill that had already passed one chamber and found their mark in H 3130. The bill was then gutted behind closed doors and passed unanimously with no debate. But if the legislative leadership thinks this deal is so beneficial to South Carolina, why all the backdoor maneuvers? Why not release the details of the incentives package and let legislators and the public have an open and honest debate about its merits?

In the end, many questions remain about the Boeing incentives package. How much is it going to cost taxpayers? Will South Carolinians actually benefit from the new jobs or will these positions be filled by transplants or foreign workers? Is the deal even constitutional? If these questions will be answered soon enough, it is already too late for ordinary taxpayers – again left holding the bag on the state’s wrong-headed economic development efforts.

*To learn more about the S.C. Policy Council, click here.