Major incentive deals always generate heated discussion, and the offer Washington state made to Boeing to keep 777X assembly and wing fabrication in the state is reportedly the largest incentive deal ever. Here we go past the headlines to break down the elements of the $8.7 billion package. I talked to Alex Pietsch, Director of the Office of Aerospace in the Governor’s Office, to understand the details and how the offer came together.
The Tax Breaks
Tax breaks account for the majority of the dollar value of the incentive package, and the two most important tax breaks are:
- A reduction in the Business and Occupation (B&O) Tax Rate for the period 2025-2040. This accounts for $4.25 billion of the total. Boeing already pays the reduced rate under a 2003 incentive agreement. This package extends the rate to 2040 and ensures that 777X activities are included in the arrangement.
The B&O Tax is a gross receipts tax with variable rates based on classification. For example, the manufacturing rate is .00484, while the services rate is .015. The special rate for manufacturing of commercial airplanes – and the rate that applies under the incentive package – is .002904. I was surprised to see this is the same rate applied to, say, aluminum smelters and higher than the rate for other categories, including “manufacturing or wholesaling of solar energy” and “manufacturers/processors for hire of semiconductor materials.”
- A tax credit against the B&O Tax for preproduction development expenditures for the period 2025-2040. This is also an extension of an existing arrangement and accounts for $3.5 billion of the estimated $8.7 billion value of the agreement.
The tax credit is equal to 1.5% of qualified preproduction development expenditures, which are essentially operating expenses (including wages, benefits, supplies and computer expenses), not capital expenses. The tax credit cannot be carried over and may not exceed the B&O taxes due.
- The remaining $1 billion in estimated incentive value is for a B&O tax credit for property taxes on land and buildings; sales and use tax exemption for computers used in development and design; B&O tax credit for aerospace product development for others; and extension of the special B&O rate for FAR 145 certified repair stations.
- The incentive package passed by the legislature expands to “all commercial airplane facilities” the sales and use tax exemption originally designed to apply to the construction of buildings to manufacture “superefficient airplanes.” The value of this element is described as “unknown.”
Workforce and Training Elements
The incentive package also includes several state investments totaling approximately $16 million to expand the aerospace workforce training system. These include:
- Funding for additional slots at community and technical colleges to provide training for high-demand aerospace occupations;
- Supplemental funds to complete the Central Sound Aerospace Training Facility in Renton designed to serve a “multi-age population,” including providing incumbent training for aerospace-related suppliers; and
- Funding for the Washington Aerospace Training & Research Center to prepare workers to fabricate the carbon fiber wings for the 777X.
Strategy and Business Climate
Ensuring that the 777X is built in Washington is one of the state’s highest economic development priorities, according to The Washington Aerospace Industry Strategy, released by the Governor’s Office of Aerospace earlier this year. The incentive package described above is one element of a larger strategy built around growing and diversifying the aerospace cluster, cultivating a deep and talented aerospace workforce, fostering a culture of aerospace innovation, and linking the aerospace “support chain” to allow the industry to prosper in Washington state.
In the latter category, key business climate issues include transportation improvements in the state and water quality regulations that could affect many manufacturing sites that are near bodies of water.
Milestones and Performance
An important issue for Smart Incentives is understanding how communities can protect the value of their “investment” when offering incentives. The incentive package that the Washington legislature passed incorporated the following safeguards and performance measures.
- No cash incentives. No money is provided to the company upfront.
- The lower rate and tax credits are taken annually on the company’s tax return, and the credits must be approved by the Department of Revenue.
- The legislature stipulated that the tax extensions only apply if 777X assembly and wing fabrication occur exclusively in the state.
- The package was crafted with the oversight of a legislative task force including participants from 4 major caucuses plus 6 non-legislative members (3 labor representatives and 3 business/industry representatives).
- A fiscal impact analysis indicated that the fiscal gain would be $21.3 billion over the incentive period, compared to the $8.7 billion foregone due to the incentives.
On the other hand, there are certainly risks: the value of the sales and use tax exemption is unknown, the total number of jobs associated with the 777X is unknown, and the fiscal costs and benefits are estimates. It is also impossible to imagine all the scenarios that might unfold between now and 2040 and how they might affect Boeing and Washington state’s budget and economy.
The key question for policy makers is always whether the likely benefits of any incentive package outweigh the costs. Washington has laid out its strategy, the expected fiscal impact and the economic case. It has offered a package of incentives that will help Boeing but is expected to benefit the state more.
What do you think?