Growing the Pie Instead of Slicing It

Working Group Explores State Incentives to Attract Business

In January 2012, aerospace manufacturing giant Boeing announced it would be closing its facilities in Wichita, Kan., which meant the loss of at least 2,000 jobs in the state.

“That’s a big blow to our state,” said Kansas Senate Majority Leader Jay Scott Emler. “Especially now, when unemployment is such a critical issue, losing that many jobs really hurts.”

Closing the Boeing plant could mean $1.5 billion in wages won’t be going to Kansas workers over the next 10 years, according to Jeremy Hill, director of the Wichita State University Center for Economic Development and Business Research. Instead, some of those jobs will be moved to Boeing facilities in other states, like Oklahoma, Washington and Texas.

The decision to leave Kansas after 80 years could be traced to one simple reason.
“It came down to the cost of doing business,” Hill said.

Although tax and financial incentives—like tax credits for job creation and loans to build new facilities—are sometimes used to lure a company from one state to another, Boeing was not motivated by such an offer in this case.

“It appears that tax and financial incentives didn’t really play a role in Boeing’s decision to move out of Wichita,” Hill said.

The Business Decision

Getting to the bottom of why companies like Boeing decide to relocate from one state to another is one of the key questions being explored by a new working group led by Emler, The Council of State Governments’ 2012 chair, as part of his Chairman’s Initiative.

“We want to understand more clearly what goes into a business’s decision to relocate or expand so that we can establish more effective economic development policies,” said Emler. “Because right now, creating jobs—and making sure we are using our resources wisely in doing so—is our number one priority as state policymakers.”

The 18-member working group is comprised of state legislators, state economic development agency officials and private sector members from across the country. The group is designed to bring together a number of key stakeholders that represent a diverse set of perspectives to investigate new ways of approaching economic development.

“By no means do we expect to find a magic bullet,” said New Jersey Deputy Majority Leader Reed Gusciora, a member of the working group, “however, we all want to go home motivated to find new ways to foster economic growth.”

A crucial issue being addressed by the working group, and one of the chief reasons behind its establishment, is the use of tax and financial incentives by states.

Traditionally, many state economic development programs have relied heavily on incentives as a key policy lever to induce job creation. In some cases, that strategy has led to bidding wars among states, each offering increasingly more lucrative tax and financial deals for companies to relocate.

“When states outbid each other using incentives, there really isn’t a net gain—jobs just move from one state to another and the pie doesn’t grow,” said Emler. “We want to get down to how states can work together to grow the overall pie, rather than fighting about how we are going to divide up the slices.”

That is, specialized incentives may benefit one state, but the group’s goal is to find ways for states to collaborate for the benefit of all involved.

The Role of Incentives

Although competition among states spurred by specialized incentives may produce big headlines, as Boeing’s move out of Kansas shows, incentives may not play as big of a role in siting decisions as state policymakers think.

“While we take business incentives into consideration when making location or expansion decisions and we need to leverage those existing incentives to remain competitive, there are a lot of other factors that also go into the decision-making process,” said working group member Dan Garry, director of public issues management for 3M Company.

For example, Garry said the capacity and availability of a state’s workforce is one of the factors 3M looks at when evaluating a particular location’s desirability.

“That is becoming more and more of an issue for us,” he said.

Ultimately, Garry said, whether a company grows and creates more jobs comes down to whether there is demand for the product or service that a company produces.

“For 3M, market demands and business needs are the primary drivers for our investment decisions,” said Garry. “It’s important to remember that job creation is an outcome of business growth. If we are successful and we are growing, we will be retaining and growing jobs.”

The group agrees the path forward will include a combination of tactics, but focusing on job growth and retention in areas where a state has a particular competitive advantage is likely a more solid bet than creating incentives to entice companies from other states in unrelated fields.

“It may well be that the best state economic development program is improving its overall job creation climate to keep the jobs it has and grow its own new jobs rather than relying on ad hoc deal-making,” said New York Assemblyman Robin Schimminger, a working group member.

Whatever the group ultimately recommends, one theme already has emerged from the discussion: Collaboration and cooperation among states is paramount to success.

“It’s crucial that we work together to find solutions so that we can remain competitive in the global economy,” said Emler.