In a move designed to preempt tariffs by the European Union, Boeing Co. is backing legislation that would eliminate a key tax break it receives from Washington state.
The tactic seeks to nullify the WTO’s main finding against Boeing and the United States in a larger trade dispute by giving up a preferential state gross receipts tax rate that the company has paid since the early 2000s in return for manufacturing planes in Washington.
H.B. 2945 and companion bill S.B. 6690 would repeal the favorable 0.2904 percent business and occupation (B&O) tax rate paid by Boeing and other aircraft manufacturing companies and impose the standard 0.484 percent manufacturing rate beginning April 1. The proposal is the latest development in a lengthy trade case between the United States and the EU in which the WTO determined that both jurisdictions have given their respective aircraft manufacturers — Boeing and Airbus — improper subsidies.
The United States imposed retaliatory tariffs on the EU in October 2019, and in February it announced that an increase to the tariffs on EU aircraft would go into effect in March. Meanwhile, the United States and Boeing want to avoid EU tariffs in response to the company's incentives. The vulnerability on the U.S. side is Washington’s reduced B&O tax rate for Boeing.
The legislation would “resolve the sole [WTO] 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 in a February 19 release.
“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,” said the company, which argued that the EU’s subsidies, “which the WTO has repeatedly found to violate global trade rules, stand unresolved.”
Kriss Sjoblom of the Washington Research Council said Boeing's move is shrewd: By eliminating the preferential B&O tax rate, Boeing’s goal is to “cure” the WTO issue regarding its incentives, eviscerating the EU’s complaints.
The idea “is something that came from Boeing and the Feds,” Sjoblom said.
H.B. 2945 and S.B. 6690 were introduced by House Majority Leader Pat Sullivan (D) and Sen. Marko Liias (D), respectively. Liias, who is a member of the Senate Ways and Means Committee, said in an emailed statement that the bills are intended to shield the United States from EU retaliatory tariffs.
“We share Boeing’s concern that retaliatory tariffs will hurt not only our state’s aircraft industry, but other Washington-based exporters and family-wage jobs here in Washington,” Liias said. “Our goal is to craft sound legislation to appropriately mitigate this international trade dispute.”
Sullivan similarly argued that the State Legislature “cannot allow regulatory tariffs to damage Washington’s economy.”
The loss to Boeing of the preferential B&O rate would be mitigated by the fact that it’s only one of the company's main Washington tax incentives. Worth around $100 million annually ($99.5 million in 2018, according to the Department of Revenue), the lower rate was approved in 2003 as part of an incentives package to Boeing in return for the company siting its 787 Dreamliner production in the state. In 2013 those tax breaks were extended from 2024 to 2040 in return for the company pledging to produce its 777x airliner in Washington — a deal worth an additional $8.7 billion. Sjoblom said other incentives provided to the company include a B&O tax credit for aircraft preproduction costs and another B&O credit for property taxes, together worth roughly $113 million annually.
“In [the] aggregate . . . the value of those other two B&O breaks [alone] are about equal or maybe slightly bigger than the rate reduction” that Boeing would lose, Sjoblom said.
The legislation includes a caveat that the preferential rate would be reinstated if “the United States and the European Union reach an agreement resolving their World Trade Organization disputes regarding large civil airplanes that expressly allows” the lower rate.
“Boeing is hopeful [that] ultimately there’ll be a deal that allows the preferential rate,” Sjoblom said.
However, it’s not clear whether the provision reinstating the preferential rate, if allowed by a final U.S./EU agreement, would be approved by state lawmakers. And if it is, lawmakers may seek to impose new conditions for the incentive. Boeing's tax breaks have generated controversy following the company’s decision to lay off thousands of workers in Washington after the approval of the 2013 extension, which didn’t have an in-state employment requirement. Labor unions and some lawmakers have previously supported unsuccessful clawback legislation in response to the layoffs, and in an early 2019 interview with The Daily Show host Trevor Noah, Gov. Jay Inslee (D) even compared the overall incentives deal to being "mugged."
In a February statement Inslee indicated general support for the legislation but said the bill "is just a starting point,” indicating that it will likely be amended. Another issue that may have to be addressed is a provision under the Boeing incentive deal that requires the state to effectively make up the value to Boeing of any tax incentive it rescinds.
It’s also not guaranteed that repealing the preferential rate will fully resolve the trade issue, according to David Pritchard, associate professor and aerospace researcher at the State University of New York Empire State College. He said Boeing has already benefited for years from the preferential rate.
Boeing “received the money, and they’re saying, ‘we’re going to pause [the preferential rate] and now we’re in compliance,’” but the WTO may also look to the value of the incentive already claimed by Boeing, according to Pritchard.