The bad news? Washington didn't get many new jobs from granting Boeing a huge tax break. The good news? It may not be quite so big a tax...
The bad news? Washington didn’t get many new jobs from granting Boeing a huge tax break.
The good news? It may not be quite so big a tax break as we all thought.
The controversy over that tax-incentive package, passed in 2003 to ensure that Boeing’s 787 Dreamliner was assembled here, will soon be rekindled.
Next year state lawmakers will debate expansion of the aerospace tax incentives to more companies. And within a couple of years they’ll face pressure to ensure that Boeing’s next jet after the Dreamliner is also built here.
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So, how do the 2003 tax breaks measure up to what was expected?
The incentives were projected to slash the state aerospace industry’s taxes over two decades by $3.2 billion. That estimate by the state Department of Revenue has been repeatedly cited over the past four years — it’s even become a cornerstone of Airbus’ complaints to the World Trade Organization about subsidies to Boeing.
But based on the tax breaks claimed so far, that figure appears significantly overstated. The total could be between $500 million and $900 million smaller.
On the other side of the ledger, the job impact of the Dreamliner has not matched its marketing success as the fastest-selling jet in Boeing history.
In 2003, state officials forecast that the 787 would add 3,600 supplier jobs at existing Boeing subcontractors and at new suppliers drawn to Washington.
But four years later, new suppliers have established just four modest new Dreamliner manufacturing operations employing around 200 people in Washington, half of those jobs in unskilled assembly or distribution work.
“We have failed miserably at attracting new engineering companies,” said John Monroe, a former Boeing executive who now consults for the state and Snohomish County on aerospace economic development. “We missed out on the big stuff.”
No data are available on how many 787 jobs existing state subcontractors have added. Whatever the number, many of the local aerospace jobs outside Boeing — including 787 suppliers — pay poorly, according to job and wage data compiled this year by the state’s Department of Revenue.
At Boeing itself, since the tax cut took effect in July 2005, more than 14,000 jobs have been added back in its Washington commercial and defense operations as all its airplane programs ramped up production.
But the jobs gained in that period are not much more than a quarter of those Boeing lost in the previous six-year downturn. And most of the added jobs are not for the 787. The assembly operation in Everett is expected to employ only around 1,000 people when production is in full swing.
Meanwhile, because the tax reduction covers the revenue from all its airliners, not just the 787, Boeing has sliced tens of millions of dollars off its tax bill.
The disappointing flow of Dreamliner jobs is clearest in the scant trickle of brand-new 787 jobs drawn in from out of state.
One newcomer, New Breed of North Carolina, employs fewer than 100 low-wage, nonunion workers to deliver 787 parts to Boeing’s Everett assembly line — work done on previous programs by Boeing Machinists at more than twice the pay.
Beyond that, the state has succeeded in attracting only small Dreamliner “integration” facilities: local sites close to Boeing’s production line where major partners Goodrich, Messier-Dowty and Rolls-Royce complete assembly of big pieces of the airplane that are made elsewhere.
The overall employment boost is modest. “Integrating” parts built somewhere else provides many fewer jobs than actually making the parts.
State Rep. Ross Hunter, D-Bellevue, chairman of the House Finance Committee, said the tax incentives were still a good idea.
“It’s better to have an aerospace sector rather than no aerospace sector,” said Hunter. “Should we insist on $26 an hour? I don’t think we can do that. Tax policy is not that fine-tunable. It’s more of a blunt instrument.”
The tax package was pushed through the Legislature in 2003 by then-Gov. Gary Locke under the imminent threat that Boeing would build the Dreamliner and future jets somewhere in the Southern U.S.
Locke said in a recent interview that the suppliers were included in the tax incentives primarily to give an indirect boost to Boeing.
“We viewed our competition as not just the Southern states but Airbus,” he said. “If we can reduce the tax burden on the suppliers, those benefits will be passed on to Boeing.”
Locke said he also hoped the incentives would attract new suppliers “to locate and to grow and expand here.”
The first big disappointment on that score came in 2004. Major Boeing partners Vought of Texas and Alenia of Italy chose South Carolina for two new plants, where they build and assemble nearly two-thirds of the new jet’s fuselage.
“You are not going to get all of them,” Locke said.
So far, though, Washington’s list of successes is short. The most valuable prize lured by the state is Goodrich’s new plant to assemble the 787 engine pods.
State Rep. Fred Jarrett, D-Mercer Island, who is a Boeing project manager, said Boeing’s new Dreamliner supply-chain concept — with the jet constructed in large chunks at factories in Italy, Japan, Kansas and South Carolina — meant much of the work that on earlier programs was done by suppliers here would almost inevitably be lost for the 787.
If Vought in Charleston or Mitsubishi in Japan needs a subcontractor, an Everett company would have no location advantage. So the Legislature did what it could to help the suppliers, said Jarrett, who was active in the campaign to pass the 2003 aerospace-business-tax legislation.
“The perception was that a lot of that work was going to go because of the way Boeing was designing the supply chain,” Jarrett said. “That was the impetus to get those additional companies” eligible for the tax incentives.
Boeing spokesman Peter Conte said in a written response to questions that “Boeing’s best interest is to have a strong and vibrant aerospace industry in total across the state,” and that the 2003 “legislation was intended to strengthen that industry overall.”
If the jobs haven’t materialized, neither has the state’s expected cost — that $3.2 billion figure.
The first tax-filing information from companies that claimed the aerospace-tax incentives — Boeing and parts suppliers — is now public. In the 2006 tax year, 161 aerospace companies took a tax reduction and filed the requisite job and wage data.
The actual business-tax savings in 2006 were about half that originally projected. Further, the projections for next year and beyond also look seriously unrealistic.
A Seattle Times analysis using the current data and more reasonable expectations ahead slashes the value of the total package to the state’s aerospace industry to between $2.3 billion and $2.7 billion.
No giant sucking sound
On Nov. 29, Gov. Christine Gregoire and more than 300 industry executives attended an “aerospace summit” at the Hyatt in Bellevue.
Just a month earlier, Boeing Vice President Mike Bair had raised the stakes in competing for the company’s next jet.
For that plane, he said, Boeing may locate major supplier factories close to its final assembly plant, instead of scattered around the globe as with the Dreamliner. And Bair made clear that location won’t necessarily be in Washington.
So one hot topic at the summit was a proposal for the next legislative session to broaden the state’s tax incentives so that they apply to more aerospace companies.
Only manufacturers of airplane parts and aircraft-maintenance shops currently qualify for a business-tax-rate cut. That leaves out vital and thriving companies such as Electroimpact of Everett and Janicki Industries of Sedro-Woolley, both of which make tooling fixtures — the equipment that holds airplane pieces in place during production.
(Janicki did take a tax credit in 2006, however, for some pre-production development work it did for Boeing.)
The current law also excludes engineering and design firms, such as Teague of Seattle, which designs the 787 interiors.
That’s the kind of high-end engineering and creative-design work that Linda Lanham wants to encourage to stay. A former lobbyist in Olympia for the Machinists union, she now heads the Aerospace Futures Alliance, a lobbying group for the state’s aviation businesses.
“Do I want these companies to go to South Carolina or Alabama or Tennessee?” she asks, echoing a constant business-lobby refrain. “No, I don’t.”
Veteran industry analyst Richard Aboulafia said the threat to established airplane-manufacturing centers such as the Puget Sound region is real.
As aerospace-manufacturing work fragments and disperses through the global supply chain, he sees local tax breaks as a stopgap protective measure to prevent an outflow of jobs to cheaper parts of the nation.
“Don’t kid yourselves, this is a defensive effort,” said Aboulafia. “It’s very tough to resist the draw of the right-to-work, low-labor-cost states to the south.”
Some may look at the jobs data the state has compiled and wish that the non-Boeing aerospace sector in Washington paid better wages and created more jobs. But Aboulafia sees a glass half-full.
In his view, Washington state officials have done well just to hold onto jobs. “They’ve retained something. There wasn’t a giant sucking sound to Alabama,” he said. “You’ve got an aerospace cluster. It’s about keeping what you’ve got.”
Dominic Gates: 206-464-2963 or email@example.com