Boeing will give up its major Washington state tax break to avoid European tariffs

Boeing will give up its major Washington state tax break to avoid European tariffs

Washington state legislators Sen. Marko Liias and Rep. Pat Sullivan today introduced companion bills in the Senate and House that will remove the main aerospace tax break introduced into law 16 years ago to benefit Boeing.

The dramatic shift in direction will help resolve — to Boeing’s advantage — an international trade dispute at the World Trade Organization.

“We’re working with Boeing,” Sullivan said. “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.”

Boeing has saved hundreds of millions of dollars per year due to the tax breaks. According to the latest annual accounting of the aerospace tax incentives filed with the state, the tax breaks saved Boeing approximately $230 million in 2018.

The bills introduced will cancel the largest portion of that, which comes from the 40 percent reduction granted to the aerospace industry in the Business & Occupation (B&O) tax rate. In 2018, that tax break saved Boeing $99.5 million.

Smaller aerospace companies in the state who also saved millions of dollars annually will also lose that tax break.

Boeing and other aerospace companies will still be eligible for a range of state tax credits for research and development work.

In 2018, Boeing saved $67 million from a tax credit for aerospace equipment expenditures and another credit of $46 million for property taxes on its manufacturing facilities. Those credits will remain on the books.

The legislative shift in Olympia is a result of two parallel, long-running World Trade Organization (WTO) cases — one against European jetmaker Airbus and one against Boeing — alleging that the rival manufacturers each took illegal government subsidies.

Boeing is supporting the move in Olympia to avoid facing tariffs from Europe in the fall. That will leave Airbus, already facing U.S. tariffs, at a disadvantage.

A final WTO ruling against Airbus in May 2018 made its way slowly through the labyrinthine WTO process, and in October the U.S. was finally authorized to impose tariffs on imported Airbus jets.

The Trump administration introduced a 10% tariff on aircraft from Europe late in 2019 and on Friday announced it will increase the tariff on Airbus jets to 15% from March 18.

Though Airbus jets assembled at its A320 jet plant in Mobile, Ala., will not be affected, that plant cannot supply all the demand from U.S. airlines.

This week, Bloomberg Intelligence said that 113 A320 family aircraft and 8 widebody jets are scheduled for delivery to U.S. airlines in 2020 with only about 72 of those built in Mobile. Bloomberg estimated that Airbus will need to absorb approximately $300 million in tariff costs on the 49 imported aircraft.

Airbus had been counting on achieving a standoff on this issue after the WTO final ruling on Boeing, due this fall, which was expected to allow Europe to impose tariffs on U.S. jets.

However, the Washington state tax breaks are the one remaining part of the WTO case against Boeing that are still ruled illegal.

By canceling the tax breaks, Boeing said it will be in full compliance with WTO rules and the threat of tariffs should melt away.

“When enacted, this legislation will 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,” Boeing said. “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.”

Sen. Liias said retaliatory tariffs would hurt not the state’s aircraft industry and potentially other Washington-based exporters. “Our goal is to craft sound legislation to appropriately mitigate this international trade dispute,” Liias said.

Rep. Sullivan said that “family-wage, good-paying jobs provided by the aerospace industry and other sectors … will be impacted by tariffs if the legislature does not act this session.”

The bills to be introduced Wednesday will remove the 40 percent B&O tax break for all aerospace companies, pushing it up from the current .002904 of total revenue to the standard rate for all manufacturers of .00484 of total revenue.

In 2003, when Boeing first held a state-vs-state competition to find a site for assembly of what became the 787 Dreamliner, the Washington state legislature agreed to introduce the aerospace tax breaks. Those incentives, which became law in 2004 and extended out two decades through 2024, were estimated then to be worth $3.2 billion in total tax savings to aerospace companies in the state.

In 2013, the state rushed to extend the tax breaks to 2040 when Boeing again threatened to build its next airplane, the 777X, elsewhere. That extension was estimated to save the industry a massive $8.7 billion.

Of course, that also meant reducing the state’s tax revenue by $8.7 billion. However, Gov. Jay Inslee’s office projected that keeping the Boeing production work in state would produce $21 billion in extra tax revenue for the state over the 16 years of the extension between 2024 and 2040.

The original 2003 agreement Washington signed with Boeing, known as “Project Olympus,” contains a provision designed to protect Boeing’s financial interest in the event the tax breaks were withdrawn for any reason.

The agreement mandates that if anything changes the state’s financial obligations or commitments to Boeing, the state must replace the tax breaks with an economically comparable arrangement acceptable to Boeing.

There was no immediate suggestion Wednesday that Boeing would trigger that clause to try to get back in some other form the money lost by giving up the tax break.

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