The Going Price to Stay in Bed with Boeing? About $9 Billion

By Darshan Chulani, Senior Staff Writer

Earlier today, Washington Governor Jay Inslee signed into law the largest tax break awarded by a state to a single company – Boeing.[1] The measure, totaling roughly $8.7 billion, had immense support in both the House and the Senate, passing by a margin of 75-11 and 42-2, respectively.[2] The bill was aimed at ensuring that Boeing’s next-generation fuel efficient airplanes, the 777X series, would be produced in Washington.[3] The airplanes will incorporate lighter materials and smaller, more efficient engines, thereby making them more attractive in an era of high fuel costs.[4] However, in order for production planning to commence, an extension of the current labor agreement between the company and the local machinists’ union must be reached.[5] The proposed agreement will be up for vote amongst the entire Machinists District 751 membership this week.[6] The major question is whether the incentives will actually lead to new jobs in the state while stemming the flow of unionized jobs to right-to-work states.

The measure that was signed into law extends most current exemptions and credits, while adding a few new ones, all of which will be in effect until 2040.[7] First, it extends virtually all of the tax breaks that Boeing currently enjoys and which were slated to expire in a few years, including business and occupation (B&O) taxes (paid on gross economic activity). Second, it expands exemptions for sales and use of new airplane manufacturing facilities.[8] Both of these provisions are conditional upon Boeing’s actual production of certain key 777X components in Washington state, most notably the wings (the most complex part of the airplane) and final assembly.[9]

Boeing has enjoyed preferential tax treatment in Washington state for decades, the most recent incentive package being authorized in 2003.[10] The elements of that package that will be extended until 2040 include sales and use tax exemptions for computer and design equipment, leasehold excise tax exemptions for port facilities, and a host of B&O taxes relating to airplane repairs, airplane development, and aerospace expenditures.[11] The expanded sales and use tax exemptions apply to Boeing and its suppliers for the construction of buildings to manufacture “super efficient airplanes” and their components.[12]

Proponents of the measure cite to job retention and growth as primary motivators. The incentives are estimated to preserve or add 56,000 within the state.[13] Legislators are right to fear the exodus of well-paying technical jobs to right-to-work states such as South Carolina, where Boeing already manufactures some aircraft.[14] Others are worried about these jobs being moved overseas, with Japan being touted as a possible location for wing assembly.[15] Additionally, Governor Inslee cited data showing that the $8.7 billion investment is expected to produce new state revenue over the course of its lifetime, as measured by Boeing’s current yearly economic activity of $76 billion a year.[16]

Critics of the measure point to the fact that the incentive package is one-sided in favor of the company, and that the legislature should have demanded more.[17] They argue that the bill lacks language regarding clawback provisions if Boeing does move some jobs, whether relating to the 777X or older aircraft models, out of state in the future.[18] Additionally, Republicans in both houses point out the unfairness of not awarding similar incentives to small and mid-sized businesses not in the aviation sector.[19] Some commentators have pointed out that the incentives will allow Boeing to, in effect, offer its products to foreign airlines (the largest anticipated buyers of 777Xs) at subsidized prices at the expense of Washington taxpayers.[20]

However, it seems as though the majority of state legislators saw no choice but to approve the package as a means of maintaining Washington’s enviable position as the hub of aircraft manufacturing in North America. The real question is whether Boeing will honor its end of the bargain and continue to invest in its Washington-based facilities and workforce. The decentralized nature of airplane manufacturing has already seen Boeing open a new plant in South Carolina in 2004, one year after the most recent Washington state tax incentives.[21] The impact of the measure should be clear by 2019, when the state Joint Legislative Audit and Review Committee (JLARC) is first required to review the public policy objectives and results.[22] Alternately, if Boeing does not open a new 777X facility by 2017, the incentive package will automatically be void.[23] All this depends, of course, on whether the labor agreement will be agreed. However, many suggest that the 777X will be produced in Washington regardless of outcome of the current labor negotiations.[24]

 

A version of this posting was originally published on Funding Society: A Tax Law & Policy Blog.

 


[1] See Reid Wilson, Washington Just Awarded the Largest State Tax Subsidy in U.S. History, Washington Post GovBeat (Nov. 12, 2013), http://www.washingtonpost.com/blogs/govbeat/wp/2013/11/12/washington-just-awarded-the-largest-state-tax-subsidy-in-u-s-history/.

[2] See Washington State Clears Boeing Tax Breaks, NYTimes.com (Nov. 10, 2013), http://www.nytimes.com/2013/11/11/business/washington-state-clears-boeing-tax-breaks.html.

[3] See Warren Wise, Washington Governor Signs Boeing Tax Incentives Into Law; Union Vote Set for Wednesday, The Post and Courier (Nov. 11, 2013), http://www.postandcourier.com/article/20131111/PC05/131119906/1010/washington-governor-signs-boeing-tax-incentives-into-law-union-to-rally-against-proposed-contract-today.

[4] See Id.

[5] See Inslee Touts Boeing 777X Deal While Region Waits for Union Vote, Federal Way Mirror (Nov. 11, 2013), http://www.federalwaymirror.com/news/231496851.html.

[6] See Id.

[7] See generally S.B. 5952, 63rd Legis. Sess. (Wash. 2013).

[8] See Id.

[9] See Senate Bill Report, ESSB 5952, 63rd Legis. Sess. (Wash. 2013) at 3, available at http://apps.leg.wa.gov/documents/billdocs/2013-14/Pdf/Bill%20Reports/Senate/5952-S.E%20SBR%20APS%2013%20E3.pdf); see also Wilson, supra note 1.

[10] See Dominic Gates, Union Deeply Split on Boeing’s 777X Offer, Seattle Times (Nov. 11, 2013), http://seattletimes.com/html/businesstechnology/2022237073_boeingmachinistsxml.html.

[11] See Senate Bill Report, supra note 9, at 2.

[12] See Inslee Touts Boeing 777X Deal, supra note 5.

[13] See Gates, supra note 10.

[14] See Alwyn Scott, Analysis: Boeing, Washington Machinists May Find Compromise on 777X, Reuters (Nov. 12, 2013), http://www.reuters.com/article/2013/11/12/us-boeing-777x-analysis-idUSBRE9AB04J20131112.

[15] See Washington State Clears Boeing Tax Breaks, supra note 2.

[16] See Wilson, supra note 1.

[17] See Jim Camden, Some Question if State Getting Enough for Boeing Tax Breaks, The Spokesman-Review (Nov. 7, 2013), http://www.spokesman.com/blogs/spincontrol/2013/nov/07/some-question-if-state-getting-enough-boeing-tax-breaks/.

[18] See Id.

[19] See Senate Bill Report, supra note 9, at 5.

[20] See Wilson, supra note 1.

[21] See Scott, supra note 14.

[22] See Senate Bill Report, supra note 9, at 4.

[23] See Id.

[24] Scott, supra note 14.

 

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