European Union Considers Suit Over Washington State Tax Incentives

May 21, 2014

Washington State’s $8.7 billion tax incentive for aerospace production (primarily Boeing and its affiliated suppliers) is in the news again, with the European Union indicating the tax incentive may come up in a new round of World Trade Organization disputes. The United States and the European Union have a long history of suits and countersuits regarding various programs for Boeing (in the US) and Airbus (in the EU), which have generally resulted in both sides losing in WTO rulings.

As a matter of fact, Washington’s state tax incentives have come up before. Alongside Illinois and Kansas, Washington was identified in the EU’s previous Boeing-related suit against the US. In the ruling for that dispute, the WTO found that Washington’s tax reductions for Boeing are specific subsidies, but do not violate international law for various technical reasons (namely, they are not directly conditioned on Boeing exporting).

Washington’s new, $8.7 billion subsidy could re-open this dispute, offering the EU new ammunition to sue the United States (sub-national entities cannot be the target of disputes at the WTO). Of course, whether it’s Washington’s tax incentives for Boeing, or California’s emissions rules, US state policy has tended to hold up fairly well in international disputes. What trade experts call “sub-national entities” (like states, municipalities, or provinces) have proven to be a thorny issue in trade policy, as such entities differ widely in structure and importance across countries.

Even if the EU does sue the US and win the case, however, it wouldn’t necessarily stop Washington State from offering major tax incentives. The World Trade Organization has no way to force nations to comply: all it can do is recommend, and give other nations the legal go-ahead to retaliate (say, by the EU increasing subsidies to Airbus, or increasing tariffs on US aerospace exports).

Beyond that, the Federal government has not displayed a particular interest recently in curbing state tax incentives, so it’s not clear what the policy response for Federal policymakers would be if Washington State’s subsidies got the US in trouble internationally. Would the Federal government start nudging states toward discontinuing distortionary state tax incentives? It’s hard to say. Certainly the whole nation could stand to benefit from states focusing more on broad-based rather than incentives-focused competition, but it’s unclear how the Federal government would encourage that.

Any WTO dispute involving Washington State’s incentives would take years to resolve, so this issue won’t be disappearing soon. In the meantime, it can serve as a warning to other state policymakers: excessive incentives to internationally-competitive companies can lead to retaliation against the whole nation (and those companies) by foreign countries, partly defeating the point of the incentive.

See our prior coverage on Washington’s aerospace tax incentives here, here, and here.

Read more on Washington here.

Read more on international taxation here.

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