The curious case of a big company (Boeing) that wants to give up a tax break

The Boeing Company is bringing an unusual request to state lawmakers in Olympia: please take away our airplane manufacturing tax break.

The Washington Legislature seems likely to oblige, but possibly will add some strings to the deal.

On Tuesday, a Boeing executive appeared before a legislative panel to publicly ask lawmakers to repeal the preferential tax rate Boeing and its suppliers got years ago to incentivize airplane assembly in Washington state. Bill McSherry, Boeing Commercial Airplanes' vice president for government operations, told the state House Finance Committee that even though the plane maker's costs would rise, the bigger reward could be to head off threatened tariffs from the European Union.

"Tariffs would impact not just Boeing and our state's robust aerospace industry, but many other industries in Washington and the United States," McSherry testified. "Targeted industries include fish and shellfish, technology products, numerous agricultural products and many others. No one here wants to see that happen."

The proffered tax break giveback represents a new twist in a long-running trans-Atlantic trade dispute involving allegations of illegal government support to Boeing and its archrival Airbus. World Trade Organization rulings in 2016 and 2017 found the Washington state Business and Occupation Tax (B&O) reduction for aerospace manufacturing to be a prohibited, trade-distorting government subsidy. The rulings gave the European Union the legal right to impose retaliatory tariffs. The Trump administration last year placed tariffs on sales of Airbus planes in the U.S.

As now drafted, the tax break elimination under consideration in Olympia includes a so-called "snap back" provision. This would reinstate the valuable aerospace tax break if the U.S. and European Union reach a trade dispute settlement that allows it.

However, Boeing's labor unions and some Democrats now want to condition such a snap back on accountability measures to preserve local Boeing jobs and future airplane assembly lines.

"We should not support snap back of those tax incentives unless there is a commitment to site the next airplane program here in Washington state," said Jon Holden, president of the aerospace machinists union, IAM Local 751.

Democratic Washington Gov. Jay Inslee in recent days has made the same point about wanting a commitment to have Boeing's next airplane model built in the state.

The prospective elimination of what is now a roughly 40% reduction for commercial airplane production from the regular manufacturing business tax rate would generate more than $100 million per year in unanticipated revenue to Washington state's treasury, according to a fiscal note prepared for the legislature.

It is unclear at this juncture whether the windfall might be banked or spent right away. Last week, state Sen. Curtis King (R-Yakima) proposed to spend the proceeds on fixing undersized road culverts that block fish migration. Washington state is under federal court order to pick up the pace of the expensive fish passage upgrades.

"It's good for the environment," King said. "It's good for the fish. It's good for the orcas. It's good for all the things you want to talk about."

On Monday, state Rep. Jake Fey (D-Tacoma) said it was more likely that the money would flow into the general operating fund that pays for schools, prisons, social services and other related things.

"Anything can happen, but I don't see the nexus between the Boeing money and the culvert problem," Fey said during a budget briefing for reporters in Olympia.

The proposed repeal of the Boeing tax break affects dozens of other smaller aerospace companies and suppliers in Washington who benefit from the same tax reduction. Leaders from several of those firms came to Tuesday's hurriedly arranged public hearing in front of the state House Finance Committee to support the tax break giveback.

"You know, we never want to see taxes go up as a business owner," said Mike Brown, the CEO of aircraft parts maker Aero-Plastics in Renton. "But in this case, the tradeoff between tariffs and this tax increase is just a no-brainer. Tariffs would be detrimental to our company."

The aerospace tax break elimination is scheduled for its first state Senate committee hearing on Wednesday and the first House vote could come on Thursday. There are less than three weeks left in the 2020 session of the Washington Legislature, which is scheduled to adjourn on March 12.