Overview of Proposed Boeing Tax Breaks and Accountability Measures

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Overview of Proposed Boeing Tax Breaks and Accountability Measures

By - November 7, 2013

The worst thing that Washington state policymakers could do for our state economy would be to use scarce tax dollars, needed to support schools, health care, public safety, and other investments, on subsidies for companies that ship jobs out of state.

Fortunately, leaders in the House are proposing to apply strict accountability measures to the new aerospace tax breaks proposed earlier this week by Governor Inslee. While these measures will do much to help ensure the benefits of these tax breaks remain here in Washington state, more could be done to protect Washingtonians should Boeing fail to keep its end of the deal.

In order to convince Boeing to manufacture the 777X, a new variant of the 777 airliner, in Washington state, legislators gathered in Olympia this morning to begin debating a package of new state spending items, tax breaks, and regulatory reforms.

Introduced this morning at the request of the Governor, House Bill 2089 would:

•    Extend a preferential B&O tax rate for commercial airline manufacturers: In 2003, lawmakers enacted a 0.2904% business and occupation (B&O) tax rate for the activity of manufacturing commercial airplanes. This rate is far lower than the typical manufacturing rate of 0.484 percent and, as a result, reduced state tax resources by about $160 million in the previous 2011-13 budget cycle. This preferential rate is currently scheduled to expire in 2024. HB2089 would extend that deadline to 2040.

•    Expand sales tax exemptions on materials and services related to aircraft construction: Also in 2003, policymakers enacted sales tax exemptions on computer software and hardware used in aircraft production in addition to construction materials and labor services used in the construction of “super efficient” aircraft (787) assembly buildings. Those exemptions are also scheduled to expire in 2024. HB2089 would extend them to 2040. It would also expand the exemption on construction materials and labor to include those used on building of all kinds of commercial aircraft, not just super efficient ones. We will report the cost estimates when the fiscal note is published.

•    Extend several other business tax preferences: HB 2089 would also extend the expiration date to 2040 on several other aerospace related tax breaks—including a preferential B&O of 0.2904 percent for aircraft repair stations; a B&O credit for certain expenses related to aircraft construction; and a B&O credit for property taxes paid on facilities used to manufacture commercial aircraft. We will report the cost estimates when they become available.

Few accountability measures were applied to these tax breaks when they were adopted in 2003. Consequently, Washingtonians had little recourse when Boeing, having requested these tax breaks in the first place, subsequently decided to locate a significant portion of 787 production in South Carolina. House leaders are working to ensure that doesn’t happen again.

House Bill 2089 includes the following accountability measures:

•    An automatic “off switch” if Boeing fails to build the 777X in Washington state: As written, the preferential B&O rate for manufacturing aircraft would automatically terminate if Boeing does not locate 777X production facilities here in Washington state by 2017.

•    Frequent performance evaluations by state auditors: Under HB2089, beginning in 2019, state auditors from the Joint Legislative Audit and Review Committee (JLARC) would be required to conduct performance evaluations of these tax breaks every five years. Under these evaluations, auditors would look closely at aerospace employment data and other metrics to ensure these tax breaks are creating the promised jobs here in Washington state.

•    Clear goals, performance metrics, and policy objectives: Unlike many previous tax breaks, this measure clearly states that the goal of these tax breaks is create and maintain aerospace jobs in Washington state. That’s important because, without clear objectives established by the legislature, auditors can have a difficult time determining whether or not a tax break is successful. The bill also instructs JLARC to review unemployment insurance and other relevant data source to conduct its evaluation.

This is a good start towards ensuring accountability, but more needs to be done.

Stay tuned to schmudget tomorrow as we discuss additional components that need to be in place to ensure these tax breaks benefit all Washingtonians.

This morning our Executive Director Remy Trupin issued a statement on the special session. Read it here.

About Andy Nicholas, Senior Fellow

Andy specializes in state budget and tax policy. Since joining the Budget & Policy Center in 2009, he has served on a Legislative Task Force on Tax Preference Reform and has conducted numerous analyses of Washington state’s tax code.

Read more about Andy