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Tax break expected to be felt statewide

By Alwyn Scott
Seattle Times business reporter

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Washington state could see about $600 million a year in savings from a pending federal tax bill, money that would be sprinkled among ordinary taxpayers, corporate giants like Boeing and Microsoft, and the state's wineries and breweries.

The bill, worth an estimated $143 billion over 10 years, is a complicated mishmash of measures designed to appeal to voters, making its impact difficult to predict. Some business-tax cuts are offset by closing loopholes, making them "revenue neutral" in government parlance.

Still, local observers were mostly upbeat about the bill. "This will increase corporate profits and could provide incentives for corporations to increase investment," said Chang Mook Sohn, the state's chief economist.

"It also will have a positive impact on the job side, which we need because jobs are improving at a very modest pace. We need all the help we can get."

The bill, headed to President Bush for signature, would reduce corporate taxes by about 9 percent on certain qualified income from manufacturing, experts said.

Starbucks, for example, could see a reduction on income from roasting beans but not on income from retailing brewed coffee, experts said. It wasn't immediately clear how the qualified income would be calculated, and Starbucks officials weren't available to comment.

The bill was initially designed to lower certain tax rates as a way to replace a tax credit on U.S. exports such as jets and software that the European Union had opposed as unfair and the World Trade Organization (WTO) ruled illegal. Many other tax cuts were attached to the bill, including a rebate for state sales tax paid by Washington residents.

Most of the tax breaks being replaced went to large companies, who now face the biggest changes. The tax breaks enabled Boeing to reduce its taxes by more than $1 billion over five years, according to a study by Jose Oyola, assistant director of the Government Accountability Office, a congressional agency that tracks government spending. The savings represented 13.2 percent of Boeing's net income. Microsoft saved $527 million, or 1.3 percent, of its profits, the study said.

Some big Washington companies applauded the changes but had little to say about its specifics or bottom-line impact.

"We're pleased that Congress has moved forward to meet its WTO obligations and change the tax system" so that U.S. exporters "maintain their global competitiveness," Boeing spokeswoman Amanda Landers said.
 
A more detailed discussion of its effect on Boeing's profit will have to wait until the jet maker releases third-quarter earnings later this month.

Microsoft was less effusive: "We are pleased that legislation will be enacted to bring the U.S. into compliance with its WTO obligations in a manner that does not disadvantage domestic production activity."

Others said the biggest effect on Microsoft might come from a provision that gives a one-year tax cut, to 5.25 percent, on profits brought back to the United States from overseas subsidiaries.

Big companies "will be more inclined to move earnings between parent and subsidiaries for business reasons," possibly prompting those that had been short of investment capital to invest some of that money domestically, said Neil Bruce, head of the economics department at the University of Washington.

But Microsoft isn't likely to use repatriated funds for investment, he added. "I doubt that Microsoft is in that position, because it is sitting on a hoard of cash as it is."

Sohn said some of the state's other manufacturers, such as food processors, sawmills or biotech companies, might use the tax breaks to hire workers or invest in new equipment. "There are many that need to upgrade facilities," he said.

Wineries and brewers got a three-year suspension from a "special occupational tax," but it is a relatively modest amount. The tax amounts to $1,000 a year for businesses with sales of more than $500,000 and $500 annually for those with sales less than that.

The tax, which dates to the Civil War, "places an unfair burden on small wineries," David Sloane, president of national trade group WineAmerica, said in a statement. Suspension offers the prospect of permanent repeal, which the organization has been working on for more than a decade, he said.

While $1,000 is pocket change for big wineries like Chateau Ste. Michelle in Woodinville, whose sales top $200 million a year, it can be serious money for small producers. "For anybody who's manufacturing and creating jobs, tax relief is appreciated," said Keith Love, spokesman for Chateau Ste. Michelle.

Alwyn Scott 206-464-3329 or ascott@seattletimes.com. Information from wire services and Seattle Times reporters Kim Peterson and David Bowermaster was included in this report.