The World Trade Organization has announced that it will look into Washington state’s aerospace tax incentives, at the request of the European Union (Airbus). The policies adopted in November 2013 have been repeatedly and mistakenly characterized as an $8.7 billion subsidy, a claim nicely debunked in this Washington Research Council report.
The WTO will, naturally, do its own homework. But the charge provides an opportunity to revisit the role played by tax policy in stimulating business activity, creating and retaining jobs, and avoiding distortions like double taxation of commercial transactions.
Like all states, Washington has adopted tax policies that lower rates and make adjustments to the economic activity being taxed for specific purposes and activities. In addition to the four major Business and Occupation (B&O) tax rates, there are a number of specialized B&O rate classifications designed for different industries. Similarly, the sales tax base has been defined to exclude certain types of transactions, such as food purchases and purchases of various personal and professional services. These adjustments generally promote specific public policy objectives. The business tax burden would be considerably higher — and the state less competitive in attracting and retaining these types of businesses — were it not for such policies.
Although some of the modifications are designed as incentives to promote a specific type of business investment, others are designed to offset disincentives to economic development or competitive inequities that our tax system would otherwise create. (Such disincentives and inequities exist in all state and local tax systems, but they are particularly prevalent in a system like Washington’s that relies heavily on business taxes relative to other states.) In this way, the policies perform a special role in normalizing the tax structure and maintaining a level field of competition.
Additional Washington Research Council reports examine how certain tax policies level the playing field, promote research and development, and explain why the great majority of perceived “breaks” survive our state’s careful review of their effectiveness.
The EU and WTO may be slow to understand. But it’s very important that policymakers in Olympia get this right.