By Jim Davis
The (Everett) Herald Business Journal
What’s the math behind the biggest corporate tax break in the history of the U.S.?
Boeing and other aerospace companies won the $8.7 billion in tax relief during a three-day special session of the Legislature in November in exchange for building the new 777X and its innovative carbon fiber wing within the state.
The deal guarantees thousands of jobs—and Boeing’s presence—will remain in Washington for years to come. It also ties up a large chunk of potential tax revenues for future generations.
Does it add up?
“Absolutely. The aerospace industry is a fundamental piece of the economy for the state of Washington,” said Alex Pietsch, Washington state’s aerospace director. “The 777X is a foundational piece of our ability to sustain and grow the aerospace industry in Washington state for the future.”
Soon after the deal was made, it got the label of the biggest U.S. corporate tax break ever awarded by a state.
Good Jobs First is a Washington, D.C., nonprofit that aims to promote corporate and government accountability in economic development.
The group last May had compiled a list of these tax break mega-deals around the country.
The Boeing deal is $3 billion more than the next one, $5.6 billion awarded to Alcoa, an aluminum company in upstate New York, said Greg LeRoy, Good Jobs First executive director.
He said the deal is the corporate version of the rich getting richer and the poor getting poorer.
“Elite companies like Boeing that have the ability to move capital around, they’re really taking it to the bank,” LeRoy said.
It’s not like the state is giving $8.7 billion to Boeing, Pietsch said.
It’s actually less money than the state will tax Boeing and other aerospace companies from 2025 through 2040.
During that time, the aerospace industry will still pay an estimated $21.3 billion in taxes. (State law currently prohibits the disclosure how much a company pays in taxes.)
The aerospace industry accounts for 11 percent of all of the wages earned in Washington state, he said.
“You can’t overstate the value of the aerospace industry to the economy of the state of Washington and the livelihood of almost everyone in the state,” Pietsch said.
The deal actually extends seven existing tax breaks that were first approved for the 787 during Gov. Gary Locke’s administration in December 2003.
Boeing and other aerospace companies started getting the breaks in 2006. Those tax breaks were supposed to save the aerospace industry $3.2 billion—it landed at No. 3 at the Good Jobs First list.
So far, the aerospace industry has avoided $928 million taxes on the 787 deal.
The tax breaks cover about 600 aerospace companies that build commercial planes, their components and even the tools made for building these planes.
The biggest single piece is giving a “preferential rate” on the business-and-occupation tax for aerospace companies that build the 777X and other commercial airplanes.
The deal means the aerospace industry will pay a 0.2904 percent rate on gross business receipts – the total amount of income earned by the business for products sold or services rendered – instead of the 0.484 rate for manufacturing, or about 40 percent less.
The B&O tax is what the state charges companies instead of corporate or income taxes. There are more than 100 rates in the state for different industries.
The aerospace industry is expected to avoid $4.285 billion in taxes with this lowered rate.
The next piece saves $3.524 billion for the aerospace industry by keeping the B&O taxes on preproduction development costs at 0.9 percent, what Boeing and other companies pays for engineers and scientists to develop commercial airplanes. Other service industries currently pay a 1.5 percent rate.
The aerospace companies also gets to take what they pay on property taxes for land and buildings off the reduced B&O rates. That figures to save Boeing and others $562.6 million.
Another $166 million is saved from avoiding sales taxes on computers and other computer equipment. Engineering firms that work for the aerospace company get the 0.9 B&O tax rate. That’s another $116 million.
Aerospace companies that make repairs or upgrades to commercial airplanes get $23.4 million in tax breaks.
The last tax break isn’t quantified. It extends sales and use tax exemptions for the construction of new buildings that make commercial airplanes.
All of these tax breaks come with a big caveat: The math is fuzzy.
The state is forecasting tax breaks that are years in the future. That doesn’t mean that analysts at the Department of Revenue made the numbers up.
Instead, they rely on Global Insight, a Massachusetts-based firm that provides economic and financial forecasting for countries, regions and industries across the globe.
The agency also watches projections by Boeing and Airbus on the global demand for airplanes. Still, Pietsch points to the tax breaks on the 787.
“The original number in 2003 was supposed to be $3.2 billion,” Pietsch said. “In 10 years, it has yielded less than $1 billion. Whether we actually reach $3.2 billion is the question.”
Jim Davis is the editor of The Herald Business Journal in Everett, Wash., a partner publication of The Bellingham Business Journal.