Putting the Aerospace Tax Incentives in Context: A Positive, Enduring Benefit to the State Economy

Boeing recently disclosed that it saved $305 million as a result of aerospace tax incentives while investing a breathtaking $13 billion in Washington in 2015. We wrote about it last week, concluding

…the investments made by business in this state, including Boeing, provide good jobs for state residents, support education and other essential public services, and help make Washington a state of opportunity and shared prosperity.

We’d say that’s a very good return on a sensible tax policy.

As expected, the company’s disclosure has prompted renewed interest in state tax policy and the role of incentives. For example, the Everett Herald reported

Individuals, business and other taxpayers are expected to avoid about $20 billion in taxes this year thanks to a long list of tax breaks, according to estimates by the state’s Department of Revenue

What often gets overlooked by people reviewing that “long list of tax breaks” is that the list is a mixed bag, containing a host of tax policies that should not be considered “breaks” at all. As we wrote in our foundation report, 

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. 

The Washington Research Council has written of the Revenue Department’s list,

The 2012 edition of the study [Note: the 2016 study is not significantly different.] examined 452 tax preferences and estimated that they would save taxpayers $24.1 billion in state taxes during the 2011–13 biennium. Numbers this large attract a lot of attention. Over the years, some have argued that the state could painlessly raise a great deal of money by ending policies referenced in the study.

It is not that simple. The tax policies that generate the majority of taxpayer savings apply broadly, represent mainstream tax policy nationally, define the intended tax base, have been adopted by state voters, or avoid double taxation of a transaction or good.

The $20 billion cited in the Herald story, then, is illusory. But let’s look at how the state benefits from the policies in place. The Everett mayor told the Herald,

Everett Mayor Ray Stephanson said he’s “absolutely perplexed” when he hears people talking about “how much we could do with that money” from Boeing and other companies.

“I think what people are missing here is if we didn’t have Boeing … we wouldn’t have the $13 billion investment,” he said.

“I think it’s a very good deal for the state of Washington and the city of Everett,” he said. “If we can’t be competitive, those jobs will go somewhere else. Without them, we would be a different city.”

State Sen. Reuven Carlyle, who championed the disclosure legislation while he chaired the House Finance Committee,  supports the aerospace incentive package

As an architect of the Boeing tax and investment package, I’m proud of the fact that today Boeing proactively met the spirit of the law as well as the letter and opened the books of their tax preferences….

Acknowledging compromises made as the package evolved, he concludes

Yet, I stand by the overall package as a compelling return on investment for the taxpayer of Washington as we march into the 21st Century of aerospace with the 777x and carbon fiber as the material of tomorrow.