Last year, Washington State offered $9 billion in taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. incentives to Boeing in order to bring the aerospace manufacturer’s 777X production line to the state, thereby creating high-paying jobs that would benefit Washingtonians. But despite the state’s best efforts, Boeing has announced its third large employment reduction in the state, this time reducing the workforce by 2,000 jobs, many of whom will be relocated to Oklahoma City or St. Louis, Missouri. Previously, the company reduced its Washington-based engineering workforce by roughly 4,300 jobs. Ultimately, these relocations show the risks involved in relying on tax incentives for one firm as a mainstay for regional economic development.
Because Washington State offered $9 billion in incentives without any requirements for net employment increases, or any meaningful clawback provisions, the state now faces job losses. To add insult to injury, many of those jobs will go to Missouri, another state that bid prominently for the 777X contract. In a large company with many locations like Boeing, production processes are often mobile and fungible, meaning that tax incentives targeting specific projects will not often succeed in boosting total state employment. As long as the general cost environment is unfavorable, Boeing will just relocate other, less-incentivized projects, as any company trying to maximize its profits (and thus returns to shareholders) would do.
Washington has tried to use tax incentives to make the state’s tax code competitive but, as we have written previously, big tax incentives serve as implicit acknowledgements of structural flaws in the tax code. Washington State’s troublesome Business & Occupation (B&O) tax, a gross receipts taxA gross receipts tax is a tax applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. , continues to be a heavy economic burden. If Washington had focused on cutting taxes across the board for all firms, instead of just Boeing, the state might not be as completely dependent on one specific firm. Gross receipts taxes, as we have written, have a highly distortionary impact, taxing all business sales rather than the profits a company makes. This leads to high effective tax rates (even when a firm has low profits due to high investments or input costs, as is often the case for aerospace projects) and encourages businesses to vertically integrate or else offshore production entirely.
If Washington State wants to enjoy more robust long-term growth, the state would be well-served by a close look at its overall tax code. With so many incentives and reductions offsetting the B&O tax, that tax would be a reasonable place to start. Indeed, aside from the B&O tax, the rest of Washington State’s tax code is highly competitive, ranked at 6 in our State Business Tax Climate Index. Such a focus on sound tax policy can be highly supportive of broad-based economic growth and, especially important in Washington’s case, economic diversification. But competing through incentives only distorts business patterns within the state while failing to retain jobs or drive growth.
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