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The $3.5 billion sweetener the state has offered Boeing

By Drew DeSilver
Seattle Times business reporter

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If Boeing decides to build its 7E7 jetliner here, and the state's projections for aerospace growth pan out, Washington would collect at least $3.5 billion less between now and 2024 than it otherwise would. Most of that — nearly $3.3 billion — would come from cuts in the state's business-and-occupation (B&O) tax.

Locke's office says the state needs that huge package to compete for the final assembly site for Boeing's proposed next-generation jet — a competition that could determine the future of Washington's aerospace industry.

When state planners sat down to design the incentive package, it was almost inevitable that reducing the B&O tax would be the centerpiece. Not only do businesses in general loathe the B&O, but a major study of the state's tax system last year found that it burdens aerospace more than nearly any other industry.

Sheila Martin, Locke's executive assistant for economic development, said that by slashing the B&O rate that Boeing, its suppliers and other aerospace companies pay, the state is trying to turn a perceived weakness into a strength as it competes with other states for the 7E7.

"We wanted to use the one advantage we have in this game — the fact that Boeing already has a large footprint here," Martin said. "That gives us a lot of leverage over other states."

The B&O rate cuts would apply not just to the 7E7 program but to all of Boeing's commercial-airplane operations in the state. In fact, one provision would give the company a $20 million B&O tax credit for computer equipment it bought years ago.

The B&O, which dates back to the Great Depression, exists because the state constitution prohibits all but a nominal income tax. So instead of taxing corporate profits, as 45 other states do, Washington taxes a business' gross receipts, minus any specific deductions or exemptions. There are six different rates; manufacturers pay 0.484 percent, for example, while service providers pay 1.5 percent.

Unlike the retail sales tax, the B&O does not exempt revenue from sales of raw materials or parts to other businesses. That, economists say, means the tax compounds, as each business in a supply chain passes its B&O bill along to its customers in the form of higher prices; firms that use a lot of raw materials or parts bought from other companies bear the heaviest burdens.

Last year, a state tax-study committee led by Bill Gates Sr. found that, of all industry groups studied, aerospace had the third-highest degree of compounding, behind only food processing and petroleum refining.

Boeing's increased emphasis on outsourcing could increase the degree of B&O compounding it is subject to. In part to counter that, the state incentive package cuts the B&O rate not just for Boeing, or even for all aerospace companies, but for all their suppliers as well, regardless of industry.

If the 7E7 comes to Washington, the B&O tax rate on commercial airplane makers and parts makers would be cut by 40 percent. The cut would be phased in — 12.5 percent starting in October 2005, another 27.5 percent once final assembly begins — mainly to limit its impact on the state budget, Martin added.

The Department of Revenue estimated the rate cut will cost the state $21.2 million in fiscal 2006 and $33.2 in fiscal 2007. The tab jumps to $105.6 million in fiscal 2008, the first year of the full cut, and continues to rise throughout the life of the package: In fiscal 2024, the last year before the cut expires, it would cost the state $288.8 million.

For that to happen, though, the state's aerospace industry would have to revive, surging more than 50 percent in the 2005 and 2006 fiscal years and growing by an average 6 percent a year afterward.

The incentive package also would free any new construction related to the 7E7 from property taxes, a break the Revenue Department estimates could be worth $15.1 million over 21 years if the plant is built at Boeing's existing site in Everett, or $182.8 million if a completely new plant is built in Moses Lake.

But simply exempting 7E7-related construction would hurt the towns, school districts and other local governments that rely on property taxes. Instead, Boeing would get a B&O tax credit equal to whatever it pays in 7E7-related property taxes — effectively shifting the tab to the state.

"If Boeing does go with Washington, they're basically guaranteed to not have any local property-tax disputes," Seattle tax attorney Norm Bruns said. "In the end, they won't really care what they're assessed at by the local assessor, because whatever it is they get a full B&O credit."

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com

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