Two Washington state legislators on Wednesday introduced bills in the Senate and House that would remove the main aerospace tax break passed 16 years ago to benefit Boeing.

The dramatic shift in direction will help resolve — to Boeing’s advantage — an international trade dispute at the World Trade Organization (WTO). It also averts the potential for the European Union (EU) to impose retaliatory trade tariffs that could affect not only sales of airplanes but also the state’s agricultural products.

While the idea of eliminating the tax breaks will find ready acceptance in Olympia, the bill as presented on behalf of Boeing contains a couple of potential controversial issues related to possible later reinstatement of the tax break or an equivalent measure.

“We’re working with Boeing,” said Rep. Pat Sullivan, who introduced the companion measures with Sen. Marko Liias. “This is a bill that they suggested and asked for us to drop.”

In a statement, Boeing said “we fully support and have advocated for this action.”

The company has saved hundreds of millions of dollars per year due to the tax breaks. According to the latest annual accounting of the aerospace tax incentives filed with the state, the specific tax break that will be eliminated saved Boeing $99.5 million in 2018.

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One wrinkle is that the bills call for a process that could reinstate the tax incentives if the U.S. and EU come to an agreement that settles their trade dispute and allows some subsidies.

Gov. Jay Inslee made clear Wednesday that this possibility of restoring the tax breaks after such a trade deal is not something Boeing can take for granted.

Unions and others have sharply criticized how the aerospace tax incentives, while intended to preserve Boeing jobs in Washington, did not commit the company to any employment levels.

The terms of any restoration of the incentives will therefore be the subject of intense negotiation as these bills progress through the Legislature.

“Lawmakers and I have discussed this and we agree today’s bill is just a starting point,” Inslee said in a statement. “I will be working with the company, its machinists, engineers and others to get this done in a timely fashion.”

Another stumbling block is a clause in the original 2003 tax break agreement that requires the state to provide Boeing some other form of equivalent economic support if the tax breaks are withdrawn. The bills are unlikely to pass in Olympia unless that clause is waived.

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Tax savings for Boeing, others

The legislative reversal in Olympia is a result of two parallel, long-running WTO cases — one against European jetmaker Airbus and one against Boeing — alleging that the rival manufacturers each took illegal government subsidies.

Boeing is supporting the move in Olympia to avoid facing tariffs from Europe in the fall. That will leave Airbus, already facing U.S. tariffs, at a disadvantage.

Boeing in 2018 saved a total of $230 million from the entire package of aerospace tax incentives. The bills introduced Wednesday will eliminate the largest single element of that package, the 40% reduction granted to the aerospace industry in the Business & Occupation (B&O) tax rate.

Smaller aerospace companies in the state that also save hundreds of thousands of dollars annually will likewise lose this tax break.

In 2018, for example, aircraft interiors supplier B/E Aerospace, now part of Collins Aerospace, saved $884,000 in B&O taxes. Toray Composite Materials in Frederickson,Pierce County, saved $854,000. Exotic Metals Forming in Kent, now part of Parker Hannifin, saved $710,000.

Boeing and other aerospace companies will still be eligible for a range of state tax credits for research and development work.

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In 2018, Boeing saved $67 million from a tax credit for aerospace equipment expenditures and another $46 million from a credit for the property taxes on its manufacturing facilities. Those credits will remain on the books. Between 2013 and 2018, aerospace employers in Washington claimed an average $116.1 million in annual savings from the preferential B&O tax rate, with Boeing taking the lion’s share each year.

The board of the state’s Aerospace Futures Alliance (AFA) industry trade group, which includes Boeing, voted to support elimination of the B&O rate reduction, even though many member companies take advantage of the tax break.

Lisa Brown, executive director of the state Department of Commerce, said that if the WTO were to authorize retaliatory tariffs against the U.S., “they can be administered on any product and there is a very real threat that tariffs could be imposed on agricultural products in Washington state.”

The leaders of the Association of Washington Business and the Washington Wine Institute expressed support for the legislation to avert such tariffs. Alex McGregor, president of The McGregor Company, a provider of seeds, equipment and research to agricultural growers, agreed, saying “any possibility of retaliatory tariffs would further harm an industry that’s faced significant challenges in the last several years.”

Tariffs in place against Airbus

The tariff moves follow the final stage in the labyrinthine WTO process: After a final WTO ruling against Airbus in May 2018,  in October the U.S. was authorized to impose tariffs on imported Airbus jets.

The Trump administration introduced a 10% tariff on aircraft from Europe late in 2019, along with a 25% tax on wine, cheese, pork, whiskey, olives and other agricultural products. On Friday, it announced it will increase the tariff on Airbus jets to 15% on March 18.

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Though Airbus jets assembled at its A320 jet plant in Mobile, Alabama, will not be affected, that plant cannot supply all the demand from U.S. airlines.

This week, Bloomberg Intelligence said 113 Airbus aircraft in the A320 family and eight widebody jets are scheduled for delivery to U.S. airlines in 2020; only about 72 will be built in Mobile. Bloomberg estimated that Airbus will need to absorb about $300 million in tariff costs on the 49 imported aircraft.

Airbus had been counting on achieving a standoff on this issue after a WTO final ruling due this fall on Boeing’s subsidies, which was expected to allow Europe to impose tariffs on U.S. jets.

But the Washington state tax breaks are the one remaining part of the WTO case against Boeing that are still ruled illegal in that case.

By canceling the tax breaks, Boeing said it will be in full compliance with WTO rules, and the threat of tariffs on its jet sales should melt away.

“This legislation will resolve the sole finding against the United States,” Boeing said.

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The bills introduced Wednesday will remove the 40%t B&O tax break for all aerospace companies beginning April 1. The legislation will push the tax rate up from the current .002904 of total revenue to the standard rate for all manufacturers of .00484 of total revenue.

In 2003, when Boeing first held a state-vs-state competition to find a site for assembly of what became the 787 Dreamliner, the Washington Legislature agreed to introduce the aerospace tax breaks. Those incentives, which became law in 2004 and extended out two decades through 2024, were estimated then to be worth $3.2 billion in total tax savings to aerospace companies in the state.

In 2013, the state rushed to extend the tax breaks to 2040 when Boeing again threatened to build its next airplane, the 777X, elsewhere. That extension was estimated to save the industry a massive $8.7 billion.

Of course, that also meant reducing the state’s tax revenue by $8.7 billion. But according to projections by Gov. Inslee’s office, the state would come out ahead: Keeping the Boeing production work in state was estimated to produce $21 billion in extra tax revenue for the state over the 16 years of the extension between 2024 and 2040.

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Complicating the tax incentive dance

Boeing’s proposal to eliminate the tax incentives from which it benefits won’t face opposition in Olympia. However, the bills sponsored by Liias and Sullivan, which the company essentially wrote in advance, include a clause that would restore the tax breaks in the event of a settlement of the trade dispute. That won’t go down so easily.

Boeing’s unions and politicians want to negotiate any such tax break restoration so as to get something back from Boeing in return. For example, plans for launching development of Boeing’s next new airplane have just been shelved due to the MAX crisis. Should the state automatically give Boeing its tax incentives back without a commitment as where the next Boeing jet will be built?

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“There’s a need to do something to hold off the tariffs,” said David Postman, chief of staff for Gov. Inslee. “But the details and the mechanics of how one might revert to the reduced tax rate is a big question.”

Another detail to be discussed, Postman said, is the provision in the original 2003 agreement, inserted at the company’s insistence, to protect Boeing’s financial interest in the event the tax breaks were withdrawn for any reason.

That keep-Boeing-whole clause may not survive in the upcoming negotiations. For one thing, it’s doubtful the WTO would accept eliminating the tax incentives and yet providing another way to give Boeing an equal amount of money. And while state officials thought it necessary to accede to it 17 years ago, the state today might not have to do so.

“That clause will have to be part of the discussion around this legislation,” Postman said.