Boeing asks for suspension of aerospace tax incentives to resolve WTO dispute

The Boeing Company is asking Washington lawmakers to suspend the the aerospace tax incentives package in an effort to resolve a dispute with the World Trade Organization. The Associated Press reports,

Washington state lawmakers announced Wednesday they will introduce bills, at The Boeing Co.’s request, to suspend the aerospace giant’s preferential business and occupation tax rate until the United States and European Union resolve their long-running international trade dispute.

Democratic Sen. Marko Liias and Democratic House Majority Leader Rep. Pat Sullivan are the sponsors of the companion bills in the Senate and House. The legislation will suspend the 40% tax break that the Legislature adopted for the aerospace industry in 2003 and was expanded in 2013.

The Everett Herald reports,

A resolution could help reduce trade tensions and discourage retaliatory tariffs that could hurt Boeing and other industries…

The preferential rate was a factor in an ongoing dispute between the World Trade Organization, which mediates international trade disputes, and Boeing and Airbus.

The WTO has ruled that both Boeing and Airbus are the recipients of illegal subsidies from their host governments. And Boeing and Airbus have accused each other of failing to take steps to end the disputed subsidies.

By requesting that Washington legislators remove the preferential tax break, Boeing may be hoping to avoid “a ruinous trade war over jetliners,” said Kevin Michaels, managing director of AeroDynamic Advisory, a Michigan-based consulting firm.

From The Seattle Times,

“We’re working with Boeing,” said Rep. Pat Sullivan, who introduced the companion measures with Sen. Marko Liias. “This is a bill that they suggested and asked for us to drop.”

In a statement, Boeing said “we fully support and have advocated for this action.”

The ST points out some elements of the coming legislative negations.

One wrinkle is that the bills call for a process that could reinstate the tax incentives if the U.S. and EU come to an agreement that settles their trade dispute and allows some subsidies.

Gov. Jay Inslee made clear Wednesday that this possibility of restoring the tax breaks after such a trade deal is not something Boeing can take for granted.

Unions and others have sharply criticized how the aerospace tax incentives, while intended to preserve Boeing jobs in Washington, did not commit the company to any employment levels.

The terms of any restoration of the incentives will therefore be the subject of intense negotiation as these bills progress through the Legislature.

“Lawmakers and I have discussed this and we agree today’s bill is just a starting point,” Inslee said in a statement. “I will be working with the company, its machinists, engineers and others to get this done in a timely fashion.”

There’s a lot at stake.

The board of the state’s Aerospace Futures Alliance (AFA) industry trade group, which includes Boeing, voted to support elimination of the B&O rate reduction, even though many member companies take advantage of the tax break.

Lisa Brown, executive director of the state Department of Commerce, said that if the WTO were to authorize retaliatory tariffs against the U.S., “they can be administered on any product and there is a very real threat that tariffs could be imposed on agricultural products in Washington state.”

The leaders of the Association of Washington Business and the Washington Wine Institute expressed support for the legislation to avert such tariffs. Alex McGregor, president of The McGregor Company, a provider of seeds, equipment and research to agricultural growers, agreed, saying “any possibility of retaliatory tariffs would further harm an industry that’s faced significant challenges in the last several years.”

The AP and other cite this statement from Boeing.

In a statement, Boeing spokesman Bryan Watt said Wednesday that the company advocated for and supports the legislative action to “resolve the sole finding against the United States in the long-running trade disputes between Europe and the United States over government support for the production of large commercial airplanes.“

“This legislation demonstrates the commitment of Washington – and of the United States – to fair and rules-based trade, and to compliance with the WTO’s rulings,” he said.

An issue to watch in the closing weeks of the legislative session.

 

Today’s forecast adds more than $600 million to state budget revenues. A healthy private sector economy benefits everyone.

As expected (see here and here), today’s state revenue forecast lifted estimates of revenue collections. Here are the bottom line bullet points from the report. 

  • Summing the changes to the GF-S, ELTA and OPA forecasts, Near GF-S revenue is forecasted to increase by $606 million in the 2019-21 biennium and $536 million in the 2021-23 biennium.

  • Forecasted Near GF-S revenue for the 2019-21 biennium is now $52.339 billion, 13.6% higher than 2017-19 biennial revenue, and forecasted Near GF- S revenue for the 2021-23 biennium is $55.690 billion, an increase of 6.4% over expected 2019-21 biennial revenue. Forecasted Near GF-S revenue for the 2023-25 biennium is $59.176 billion, an increase of 6.3% over expected 2021-23 biennial revenue.

Regrettably, these estimates have become more complicated as a result of the creation of new dedicated accounts, hence the “summing the changes” bit. Here are the changes the Economic and Revenue Forecast Council reports for the summed accounts for the current biennium..

Emily Makings with the Washington Research Council writes,

According to the ERFC, two major contributors to the increases are unexpectedly high estate tax collections and increased property tax collections (due to new estimates of market value). 2019–21 revenues are now expected to increase by 13.6 percent over 2017–19, and 2021–23 revenues are expected to increase by 6.4 percent over 2019–21. But, the ERFC notes, “The level of uncertainty in the baseline remains elevated, with downside risks outweighing upside risks.”

The 2019–21 biennial budget enacted last year was based on the March 2019 NGFO revenue forecast and about $1 billion in new taxes (including the workforce education investment surcharges). Given economic changes since the budget’s adoption, the Legislature now has $2.158 billion more to work with (from funds subject to the outlook) over the four-year period (through 2021–23). Most of that ($1.454 billion) comes from economic changes to the forecast for 2019–21.

Good gains that should make it easy to adopt a supplemental budget and preserve reserves for the anticipated downturn (those nasty downside risks).

New report examines reasons King County students leave high school before graduating

Too many students leave high school before securing a diploma. In our most recent Opportunity Washington Scorecard, we cited the problem as a reason for the drop from No. 18 to No. 25 among the states in our Achieve ranking.

Our state drops seven spots in the Achieve ranking and nine points in the category score as compared to the most recent update. This is due to a drop in graduation rate from 79.7 for the class of 2016 to 79.4 for the class of 2017. Washington also saw drops in 4th grade reading and 8th grade math performance, as well as lower associate’s and bachelor’s degrees awarded per capita.

In The Seattle Times, Neal Morton reports on a new study published by the Road Map Project and conducted by the Community Center for Education Results (CCER), Seattle Education Access (SEA), and University of Washington School of Social Work (UW) that examines why students are leaving high school without a diploma. Morton writes,

In South King County, more than 18,000 youth don’t have a diploma or a job, and that number increases by nearly 2,000 youth each year. A new report may help explain exactly what persuaded these youth to leave school in the first place — and what can be done about it.

“Homelessness, mental health, the impact of racism at school. … It’s not one factor (but) a culmination of things that ultimately may lead to somebody’s disengagement,” said Danika Martinez, a program director for Seattle Education Access (SEA)…

This graph from the report identifies the reasons for disengagement.

Morton reports,

The survey found that 26% of about 300 students listed school climate — a factor that touches on how safe or welcome they feel on campus — as the primary reason they disengaged.

Another 25% cited their academic struggles, while health and wellness, family instability, parenthood and homelessness presented additional barriers.

“One of the things that really stood out was the amount of students who told us they didn’t know they weren’t on track to graduate until late … sometimes spring of their senior year,” said Henry Joel Crumé, lead author of the report and a doctoral student at the University of Washington’s School of Social Work.

In 2016 we reported on a Washington Roundtable study identifying “the leaky pipeline” to postsecondary success.

We wrote then ,

Of 80,700 students entering 9th grade, about one-quarter of them, 20,100 will drop out before graduation. Those students have a mountain to climb to reach a career job.  

The problem remains. Research like that produced the Road Map project can help find solutions and expand opportunities for young people in our state.

Latest monthly collections report shows cumulative receipts 2.5% above November forecast.

The Economic and Revenue Forecast Council’s latest monthly update, released Friday, shows continued strength in state revenue collections.

  • Major General Fund-State (GF-S) revenue collections for the January 11 -February 10, 2020 collection period came in $6.2 million (0.3%) below the November forecast.

  • During the period there were two large refunds totaling $24.1 million that were not included in the forecast. Without the refunds, collections would have been $17.9 million (1.0%) higher than forecasted.

  • Cumulatively, collections are now $162.4 million (2.5%) higher than forecasted.

As the graph below shows, the upward trend has been consistent for years now.

Washington Research Council economist Kriss Sjoblom comments

Over the three months since the November revenue forecast, collections have exceeded forecast by $162.4 million (2.5 percent). More than one half of this, $97.4 million, was in real estate excise tax (REET), however. This REET surplus was the result of legislation enacted during the 2019 session under which REET rates applicable to high value properties jumped on January 1. (See pages 4 and 5 our brief on 2019 tax legislation here.) A significant number of transactions were accelerated to beat the rate hike and this effect was not fully captured in the November revenue forecast. ERFC expects the recent REET surplus to be offset by lower REET collections in future months.

Given the modest improvements in the economic forecast and the positive collections experience for non-REET sources, it is likely that February 19 revenue forecast update will give legislative budget writers a bit more money to play with as they write their supplemental budget.

Every million helps. The ERFC notes the continued health of the state and national economies. Of the nation,

Job growth was very strong this month and the unemployment rate remained low, although layoff announcements jumped sharply. Manufacturing activity appeared to end its decline this month, consumer confidence was up and petroleum and gasoline prices were down. For all of 2019, both housing starts and residential building permits were stronger than in 2018.

The U.S. economy added 225,000 net new jobs in January. Employment data for November and December were revised up by 7,000 jobs…

Average hourly earnings increased by seven cents in January and are 3.1% above their year-ago level.

And regarding Washington,

We have two months of new Washington employment data since the November forecast was released. Total nonfarm payroll employment rose 13,700 (seasonally adjusted) in November and December, which was 500 more than expected in the November forecast. Private services-providing sectors added 7,700 jobs in the two-month period. The manufacturing sector added 1,700 jobs of which 900 were aerospace jobs. Construction employment increased by 800 jobs and government employment rose by 3,600 jobs.

The only shadow falling on the outlook is, as expected, export activity.

Washington exports declined sharply over the year for a third consecutive quarter. Year-over-year exports decreased 23.8% in the fourth quarter of 2019 following a 27.6% decline in the second quarter and a 33.4% decline in the third quarter.

We would expect a trade bounceback in the coming year. And, with all that taken into consideration, Wednesday’s forecast should be up a bit. 

Economic analysts examine job growth in the states. Coastal states, including Washington, anticipated to grow more slowly.

A new article in Chief Executive magazine by Joel Kotkin and Mark Schill covers an enormous amount of territory in a handful of informational map graphics and brief discussion. It’s a data-based analysis of job growth in the states: where it’s been and where it’s headed. The news is mixed for Washington, which has been one of the big winners over the past decade. We’re expected to continue to grow, and the tech-centric metro Seattle area is not seen as threatened. But the migration from highly-regulated and heavily-taxed coastal states to more business friendly climes is anticipated to continue. 

This pair of maps in particular caught our attention. The track job growth for the past decade and projections for the decade to come.

Washington does well in the backward look.

And not so well in the view ahead.

The authors write,

All people may have been created equal—but states are not. Simply put, the big winners are all in the Sunbelt and the Intermountain West. And we project that trend will continue…

At the top of the heap—with growth rates over 20 percent—are, in order, Utah, Nevada, Florida, Texas and Colorado. Their growth has been more than the rate of growth of states like New York and others on the Atlantic seaboard, as well as most Midwestern states. Not surprisingly, these states all boast the highest population growth rates and are home to many of the nation’s fastest growing metros. Austin leads the pack, followed by Orlando. Denver, Dallas and Las Vegas can all be counted among the fastest growing metropolitan regions.

One conclusion:

We may be on the cusp of continued weakening for high-tax, highly regulated states—particularly those that lack California’s ideal weather (most of the time) and spectacular topography. New York ranked a respectable 19th over 10 years, but last year it dropped to 22nd. Massachusetts, 16th over the decade, fell to 27th last year. Other traditional leaders, like Illinois, which dropped from 17th worst over 10 years to 4th worst last year and especially Connecticut also are losing momentum, according to last year’s figures.  All have dropped off their 10-year pace.

There’s good news for metro Seattle, though we doubt anyone really enjoys a doppelgänger reference.

Yet as long as the Bay Area—and its Puget Sound doppelganger Seattle—remain the home base for the world’s top tech firms, it’s growth will likely continue as companies staff up with young workers who may not stay for long, but could power the economies.

As history tells us and the authors remind us, state economic fortunes can change quickly, shaped by both policy changes (taxes, regulation), competition, and global/national economic trends (e.g., shifts from goods to services). Generally, 

all things being equal, it seems we are continuing to experience a secular shift towards lower tax, less regulated states and away from the coasts. The stronger states, like California and Massachusetts, with their powerful innovation economies and highly educated populace, still might be able to buck the trend, but the economic future seems likely to favor places like Utah, Idaho, Colorado, Tennessee and Texas—now and in the years to come the likely locus of our most dynamic growth.

Of course, no matter how dire the picture for some states right now, things can change—especially over a decade—all you need are the right policies to fulminate growth and opportunity.

Much more in the article. We strongly recommend it.

As legislators consider expanding King County taxing authority for homelessness, Seattle council member wants higher city tax.

Lawmakers in Olympia continue to work on legislation that would give King County enhanced taxing authority to fund housing, social services and public safety programs, a regional package related to the challenges of a growing crisis of homelessness. The House Finance Committee advanced SHB 2907 February 7. Negotiations continue. Here’s a portion of the House Bill Report describing the tax:

A county with a population of at least 2 million persons may impose an annual payroll expense tax on employers engaging in business in the county. The tax must be enacted by ordinance by the county’s legislative authority.

The tax rate must be at least 0.1 percent, but no more than 0.2 percent, of the employer’s payroll expense to the tax year attributable to work performed or services rendered by an employer’s employees in the county. The tax rate must be the same for all businesses; however, the county may impose a graduated rate that increases based on employee compensation. Payroll expense includes compensation, including net distributions and incentive payment.

Deductions from the payroll expense base are allowed for any payroll attributable to an employee with annual compensation of less than $150,000 and any payroll attributable to a grocery worker.

As we wrote earlier, the regional approach has garnered the support of some of the major businesses that would be affected. Whether or not the final legislation preempts the ability of local governments in the county (including the county) to impose additional taxes remains an unresolved issue. Negotiations continue in Olympia.

Meanwhile, members of the Seattle City Council have urged lawmakers not to preempt additional local taxes. Seattle City Councilmember Kshama Sawant has unveiled what most likely represents the high-water mark for any such additional city tax. The Seattle Times reports,

Seattle City Councilmember Kshama Sawant outlined her new proposal Wednesday for a tax on big businesses such as Amazon, saying she intends to introduce legislation for council consideration that would impose a payroll tax of 1.7% on the largest 3% of Seattle corporations, as measured by payroll in the city.

The tax would apply to about 825 companies (those with at least $7 million in annual payroll) and would raise $300 million a year, Sawant said. Supermarkets would be exempted. She said her plan would direct 75% of the money raised by the tax to build affordable housing and 25% to convert Seattle homes from gas and oil to electric systems.

This may be significant.

Sawant unveiled the proposal at a City Hall news conference. The actual legislation has yet to be written, and no other council members joined her Wednesday.

And, MyNorthwest reports on the opposition to the plan from a key regional politician.

Mayor Durkan, while noting that she does support the idea of a big business tax, said that she doesn’t see Sawant’s plan as a viable solution.

“I believe that big businesses can and should pay more to address our challenges, but this proposal that is six times bigger than the failed Council head tax proposal is not a plan that I can support,” she said Wednesday, predicting a “failed, divisive fight” should Sawant’s proposal move forward.

Geek Wire reporter Monica Nickelsburg writes that Sawant’s proposal is seen as unhelpful. Unsurprisingly.

The proposal, which hasn’t been written yet, complicates a plan to tax large companies’ payroll at the county level to fund housing and homeless services. That proposal has the support of Amazon, Microsoft, and other businesses, as well as Seattle Mayor Jenny Durkan.

The Washington Post noticed.

Today is Day 32 of the scheduled 60-day session. Things begin to move swiftly now.

State Supreme Court rules for ST 3 in car-tab challenge; King County judge upholds most of I-976, but keeps measure on hold.

Opponents of car-tab taxes received mixed results in independent legal challenges this week.

The state Supreme Court agreed with Sound Transit that the fee schedule supporting ST 3 can stand. Mike Lindblom reports in The Seattle Times,

Sound Transit may continue to charge car-tab taxes at current rates that sometimes reach hundreds of dollars per vehicle, despite a class-action lawsuit that claimed the law is unconstitutional, the Supreme Court ruled Thursday.

A 7-2 majority of justices agreed with the argument by Sound Transit attorney Desmond Brown, that the Legislature’s 2015 language authorizing the taxes correctly referenced laws from the 1990s that explain how taxes should be calculated…

Thursday’s ruling denies a claim, filed by eight taxpayers in June 2018, that vehicle owners in three counties are owed refunds of $240 million, a sum that would have grown to $400 million.

The decision helps Sound Transit afford its voter-approved expansion, called Sound Transit 3 (ST3), that features 62 miles of light rail and two major bus-rapid transit lines over 25 years, delivering a network similar in length to the Metro in Washington, D.C. 

The court’s decision puts that challenge to bed. But as Lindblom writes, there’s another car-tab challenge working its way to the court, one with significantly greater implications.

The class action is separate from another car-tab case involving Tim Eyman’s Initiative 976, which seeks to slash car registration fees to $30 statewide. A King County judge on Wednesday ruled most of I-976 is constitutional, but kept the measure on hold while other claims in the lawsuit are considered.

ST reporter Heidi Groover writes,

A King County judge has largely upheld Initiative 976, the voter-approved measure to cut car-tab taxes. But the measure will remain on hold and the judge’s decision is likely to be appealed.

King County Superior Court Judge Marshall Ferguson rejected most of the arguments Seattle, King County and others made that I-976 was unconstitutional, including their claims that it contained too many subjects, wrongly rolled back local taxes with a statewide vote and that the ballot title was misleading.

Ferguson did not rule on two other claims, one about the initiative’s directive that the state use the private company Kelley Blue Book to calculate car-tab taxes and another dealing with the city of Burien, where the city has sold bonds to be paid back with car-tab tax revenue.

She adds,

Because his ruling “does not dispose of all” the claims by King County and others, the initiative will remain on hold, he wrote.

This, too, will end up before the state Supreme Court, where initiative sponsor Tim Eyman has not fared well in the past.

Appeals are expected in the I-976 case until a decision is granted by the Washington State Supreme Court. In past years, two other car-tab initiatives sponsored by Eyman have been partially or fully struck down in court. Uncertain of the legal outcome for I-976, state lawmakers say they plan to budget transportation spending this year as if the tax cuts will be upheld.

More to come.

Measuring state regulation: Washington’s administrative code contains 196,028 restrictions and 17.3 million words.

Quantifying regulatory burdens is famously difficult. Some good work has been done on the federal level, identifying regulation as a tax on the economy that costing  0.8% of GDP growth a year. The Mercatus Center at George Mason University  notes continued progress at the federal level,

Regulation has traditionally been an understudied topic among economists because it is difficult to measure effectively, but that’s started to change in recent years. The size, scope, and complexity of federal regulation in the United States, as well as in other countries, is now better documented and, more importantly, quantified in various dimensions.

Mercatus Center researchers have recently undertaken the challenge of providing a state-by-state comparison of regulation. They take a quantitative approach.

To gain a better understanding of the reach of state-level regulation in the United States, the Mercatus Center at George Mason University launched the State RegData project and has gathered and analyzed the regulations of 46 states plus the District of Columbia. (Unfortunately, the regulatory codes of Arkansas, Hawaii, New Jersey, and Vermont were not able to be analyzed owing to data limitations.) Mercatus researchers then used text analysis and machine learning algorithms to quantify how many words and regulatory restrictions each state’s regulations contain as well as to estimate which sectors and industries of the economy those regulations are likely to affect. As in all RegData datasets, regulatory restrictions are a metric designed to act as a proxy for the number of prohibitions and obligations contained in regulatory text, as indicated by the number of occurrences of the words and phrases “shall,” “must,” “may not,” “required,” and “prohibited” in each state’s regulations.

Counting has obvious limitations. A few well-chosen works can shut down a lot of economic activity, while a thousand words may restrict placement of a a floor drain in a commercial garage. But it’s a useful proxy. Last year, Mercatus published a Snapshot of Washington State Regulation.

State RegData also reveals that the 2019 [Washington Administrative Code] contains 196,028 restrictions and 17.3 million words. It would take an individual about 961 hours—or more than 24 weeks—to read the entire WAC. That’s assuming the reader spends 40 hours per week reading and reads at a rate of 300 words per minute. By comparison, there are 1.09 million additional restrictions in the federal code.

That may seem like a lot. It is. But as the map below shows, Washington comes in far behind California and–surprisingly–Texas.

Mercatus reports,

California’s regulations contain the most regulatory restrictions, with almost 396,000 in total. New York is second, with just over 300,000. Rounding out the top 5 are Illinois (approximately 260,000), Ohio (approximately 246,000), and Texas (approximately 227,000). Meanwhile, South Dakota has the least restrictive regulations, with almost 44,000 restrictions. Alaska, Arizona, Idaho, Kansas, Montana, Nevada, and North Dakota are other states with fewer than 75,000 restrictions. Sixteen states have fewer than 100,000 regulatory restrictions in their administrative codes.

In our 2017 report, we wrote,

Economic growth through innovation and entrepreneurship is also affected by the state’s regulatory environment. Over the decades, Washington has added new regulatory systems intended to protect the natural and built environment. That said, the Pacific Research Institute ranks Washington No. 42 in regulatory burden on a scale that has No. 1 as least burdensome.29 This is reflective of regulatory regimes that often do not fit well together, multiple layers of regulation, and requirements that contradict one another in intent and practice. Indeed, in 2015 the Washington State Auditor’s Office found that “Washington does not have a strategic approach to identify and prioritize new opportunities for . . . multi-agency coordination.”

Regulatory reform in Washington has been an on-again, off-again priority, as documented in a 2018 Washington Research Council report, which focused on how regulation affected manufacturing. We again commend it to you. The WRC found:

Washington ranks poorly in interstate comparisons of state regulatory burdens.

Washington has laws that require analysis and review of regulations, and several governors have made regulatory reform a priority. Streamlining, coordination, and communication have been recurring themes. Efforts haven’t always delivered, though, as the State Auditor’s Office found in a recent series of performance audits.

A number of bills addressing some of these problems have since been adopted nearly unanimously, demonstrating the noncontroversial nature of regulatory reform. Still, the regulatory environment is costly, unpredictable, and untimely. An improved regulatory environment would increase the competitiveness of manufacturing in Washington.

And not just manufacturing.