Just Say No to Crony Capitalism: The Story of the Boeing and the 777X Project

Josh Elliott-Traficante

December 19, 2013

The aerospace giant Boeing is shopping around for a new location to produce one of its new wide body jets, the 777X. Rather than a design a new plane from scratch, Boeing has opted to reinvent and update its popular 777 model; hence the ‘X’. The company is running into trouble with its unions at its major plant in Everett, Washington, over a host of issues but largely over a switch from a traditional pension to a 401(k) style plan for retirement.

These difficulties have led the company to start looking at other states and locations to either build major components or the entire plane. It has already sent out requests for proposals to between 12 and 15 states. Included is a list of what Boeing is looking for in a location, such as an airport with a 9,000 foot runway, as well as easy road, highway, rail, and port access. These are requirements that one would expect most large manufacturing companies to look for when looking to relocate.

Where it gets interesting is what Boeing expects each state to offer as sweeteners (read bribes) to get the 777X plant. Among other ‘desired incentives’ (again, read bribes) is a “(s)ite and facilities at no or very low cost and infrastructure improvements provided by the location.” The company anticipates that the cost of upgrading existing facilities and machinery alone to run about $10 billion. Basically Boeing wants a state to pay all, or most of the costs for building and equipping a new production line.

As if that were not enough, once built, the company also wants preferential tax treatment with all relevant tax liabilities being “significantly reduced.”

Over the top as these requests are, states are actually submitting proposals. Washington State recently passed a package consisting of $8.7 billion in tax breaks for Boeing over 16 years; Missouri is offering $1.7 billion. Due to the confidential nature, most of the dollar figures for proposals from the other states responding is largely unknown.

While it is understandable that many states would be eager to entice a major manufacturer to relocate, these onetime perks not only often become permanent, but it encourages companies to come back asking for more.

Take Washington State for example, Boeing already has a massive facility there and the state is offering nearly $9 billion just for the company to stay put. Illinois in particular is littered with examples. After an income tax hike in 2011, Caterpillar, Sears, and John Deere all announced they were considering moving their headquarters to states with a more favorable tax environment. In response, Illinois passed nearly $300 million in incentives for the companies to remain in the state.

These types of policies not only encourages other companies to do the same but emboldens those that did get breaks to ask for more the next time around. If you give a mouse a cookie….

Beyond the sticker shock and poor policy behind these tax payer financed incentives is an issue of fairness. By offering incentives, the state picks winners and losers in the market, with the large and well-connected companies getting the reward. The result: a tax and regulatory system that favors a select group of companies, chosen by the government. Smaller companies on the other hand, are not only left without support but have to pay higher taxes and abide by stricter regulations as well. One of the key tenants of a free market is that there is one set of rules that all players abide by.

Thankfully, New Hampshire has, for the most part, resisted the temptation of offering these bribes to relocate here, instead relying on the New Hampshire Advantage to encourage companies to set up shop.

Are there changes that states can make to improve the state’s business climate to not only keep existing businesses but draw new ones as well? Absolutely. Low taxes, educated workforces, low energy prices, and common sense regulatory burdens are just a few of the qualities that companies look for when choosing where to open a new facility.

These types of reforms help all of the businesses in the state, not just the chosen few. Just say no to crony capitalism.