Boeing departure presents challenge for Wichita and Kansas

The announcement of the departure from Wichita of Boeing presents challenges for the Wichita area and the state of Kansas. The response of government officials over the next few years will need to depart from past and present practice if Wichita wants to build a dynamic and sustainable economy. With a few exceptions, our current elected officials will likely proceed with targeted economic development, and Wichita and Kansas will miss an opportunity to implement meaningful and lasting change.

Aid offered to Boeing

Boeing has been the recipient of much targeted economic development incentives over the years. From 1979 to 2007, Boeing received tax abatements through the industrial revenue bond process worth $658 million, according to a compilation provided by the City of Wichita.

In his remarks, Kansas Representative Jim Ward said “Boeing is the poster child for corporate tax incentives.” Kansas Legislative Research has compiled a list of legislative measures that benefited Boeing, which may be viewed at Kansas and Boeing. This document contains only those measures passed by the state, not by cities and counties to help Boeing.

Some of the legislation on the list really should not be included, as it benefited all companies, not just Boeing. An example is the 2006 machinery and equipment property tax exemption. The author correctly notes that Boeing often received targeted relief from this tax through the IRB process. Still, this is an example of good economic policy that affects all businesses, which is important.

Similarly, the repeal of the franchise tax — another bill on this list — benefited not only Boeing, but everyone, and should not be on this list.

An example of legislation crafted specifically for Boeing was 2003’s Economic Development and Revitalization Reinvestment Act, which became statute 74-50,136. This law awarded Boeing with $80 million, the money to be repaid by the withholding taxes of Boeing’s employees — in other words, at no cost to Boeing. This bill passed the Kansas House of Representatives by a vote of 107 to 6, with Rep. Ward voting with the majority to pass.

Now, Ward says “We will be less trusting in the future of corporate promises.”

The danger going forward

The danger we in Kansas, and specifically the Wichita area, face is the overwhelming urge of politicians to be seen doing something in response to the departure of Boeing. Wichita Mayor Carl Brewer, in his statement, called for the community to “launch an aggressive campaign of job recruitment and retention.”

It is likely that we will become susceptible to large-scale government interventions in an attempt to gain new jobs. Our best course would be to take steps to make Kansas and Wichita an inviting place for all firms to do business. The instinct of politicians such as Brewer, however, is to take action, usually in the form of targeted incentives as a way to spur economic development.

We’ve seen the results of this. Not only with Boeing, but also in a report showing that Wichita has declined in economic performance compared to other areas.

These targeted economic development efforts fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. This, however, does not stop governments from creating policies for the awarding of incentives. It also doesn’t stop the awarding of incentives willy-nilly without a policy, as the Wichita City Council has done for a hotel.

This “active investor” approach to economic development is what has led to Boeing escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita is sure to undertake in response to the loss of Boeing: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.’”

There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Abating taxes for specific companies through programs like IRBs is an example of precisely the wrong policy.

We need to move away from economic development based on this active investor approach. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances.

Kansas tax policy

One person reminded me of this: “The real point about Boeing’s departure that no one is discussing is the fact that the positions leaving here are going to three states: Oklahoma, Texas, and Washington. Two of these states have no income tax while the third, Oklahoma, has tight limits on both state and local tax increases while reducing state income tax rates in recent years.”

While Governor Brownback and many members of the legislature want to reduce income rates in Kansas to make our state more competitive for business, there is much opposition. It has been thought that the plan would be to gradually reduce income tax rates over several years. If anything, the departure of Boeing means we should act to reduce tax rates sooner rather than later.

Those who oppose reducing taxes raise the problem of how to replace the income lost due to lower tax rates. They fear that the state will raise the sales tax, or that local governments such as cities, school districts, and counties will raise sales or property taxes.

But the answer should be: Don’t replace the missing income. Instead, spend less at the state level. That will improve the Kansas economy as more money will be left in the private sector instead of being transferred to an unproductive and wasteful government. And if the state can be successful in nurturing a competitive business and economic climate, that will bring more jobs, which will reduce the demand on the state for various social services. More jobs mean more revenue to the state in other forms besides income taxes, too.

Our challenge is this: Boeing said that costs in its San Antonio, Texas facility are 70 percent lower than in Wichita. We need to figure out why this discrepancy — if it is real — exists. We need to eliminate this differential cost of doing business in Kansas. The instinct of politicians and bureaucrats will be to offer targeted relief to the companies they believe deserve it. For those few companies, perhaps this differential can be reduced.

But this is the wrong policy. All business firms deserve relief, and by doing that we can create a dynamic Kansas economy so that we all will prosper.