Washington Considers More Incentives Against High Business Taxes

January 27, 2014

Washington State is considering extending the same tax incentives it gave to fixed-wing airplane manufacturers (most notably Boeing) to helicopter producers and servicers (or rotorcraft, in the industry jargon). The incentive bill, HB 2203, will only cost the state (according to the Fiscal Note) about $200,000 a year, and so, on its own, would hardly seem to merit discussion. If helicopter manufacturers do relocate to Washington State after receiving this tax preference (or, perhaps more likely, if existing firms like Boeing expand such production), then this tax preference would carry a much larger “price tag” when it came up for review in 2022.

However, the larger context of Washington’s tax regime, and the state’s recent history with incentives, matters. The primary tax preference being provided is a lower tax rate on the Business & Occupation Tax, or B&O. This is an example of what is known as a gross receipts tax, or a tax levied on the total revenues (or close to total revenues) of a firm instead of just its net income or profits. These taxes create tax pyramiding and excessive tax complexity, with very high tax burdens from deceptively low-appearing rates.

Extending incentives to helicopter production is very cheap for the state to do primarily because the state has relatively little helicopter production. I was unable to find any large helicopter manufacturing facilities in Washington State (though nearby Oregon has some). This struck me as strange because helicopter manufacturing is similar in many regards to Washington State’s signature industry of aircraft manufacturing. It involves similar forms of technical expertise, skilled labor, materials, and infrastructure requirements. Indeed, Boeing is one of the nation’s leading helicopter producers, though its helicopters (largely for the military) are manufactured mostly in Arizona and Pennsylvania.

Washington’s attempt to, according to HB 2203’s description, “encourage the migration of good wage jobs” into the state illustrates several key issues in tax policy. First, once a state begins offering incentives to attract special industries, those incentives tend to expand: from passenger aircraft to helicopters, in this case. Second, taxes matter: Washington’s damaging B&O tax is a hindrance to the state’s economic growth, and creates repetitious calls for incentives and special treatment. Because Washington State charges numerous different rates on different industries, the B&O tax creates systematically unequal treatment across industry categories, even very similar industries like fixed-wing and rotorcraft aviation.

If Washington State wants to truly make itself more competitive for big investments in the future, rather than large incentives and last-minute skin-of-the-teeth union votes to cut retirement pensions, policymakers might consider broad-based tax reform that treats industries equally, maybe even finding a replacement for the damaging B&O tax.

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