In 2003, when Boeing's 787 Dreamliner was still the 7E7, the state enacted a comprehensive package of tax breaks to encourage development and production of a "superefficient" airplane within the state. Now another set of tax breaks may be considered to encourage Boeing to build the successor to its 737 in the state.

Gov. Chris Gregoire said on June 8 that a statewide coalition of business, labor, and community leaders will be organized “to ensure Washington State remains the premier center for aerospace, and the go-to region in the world to design and build commercial airplanes, including a new or re-powered 737.” In her comments to the media, the governor left the door open to an offer of tax incentives, saying that it’s too early to know, but that if “a minimal amount brings in millions of dollars and thousands of jobs, that's a good investment.”

A small incentive that yields big dividends would be a decided bargain, especially if it convinces Boeing to carry out all of its substantial production ramp-up of the 737 in Washington. It would differ from the very generous and problematic package of 787 tax breaks.

It takes some time to review the 787 tax-break legislation, which was expanded a couple of times after enactment. But studying the legislation indicates that it cut in half the company’s B & O tax rate. The legislative action also created a B & O tax credit for pre-production research and development, including for the computer systems used in design. These systems were also exempted from the sales tax. The legislation exempted from the sales tax the construction and equipping of buildings used in the manufacture of the plane. And it exempted property taxes on the construction of the manufacturing facilities. All of these breaks are in effect until 2024.

As measured in potential dollar cost out to 2024, the Boeing package is to this point the state’s largest tax break benefitting a single industry. The final cost to the state and to local governments, such as the cities of Everett and Moses Lake, will be on the order of $2.8 billion in current dollars.

The 2003 Boeing tax breaks stirred up initial controversy, which only increased as the company began to outsource major components of the radically new airplane to companies abroad. And Boeing's decision to build a second assembly line in South Carolina added fuel to that fire. Last year, some state lawmakers wanted to condition the Boeing tax breaks on jobs being created in the state. The tax breaks also became a fair-trade issue that led to a WTO ruling this year that several of the breaks were, in fact, subsidies. The ruling is currently under appeal. Whatever the final outcome, in an agreement signed by then-Gov. Gary Locke, the state promised to compensate Boeing for any loss of the tax incentives.

Obviously, very little was left out of the original package. Several items that were not addressed were added in 2006 and 2008. For example, the tax incentives were broadened to include non-manufacturing firms engaged in the development, design, and engineering of commercial airplanes or their components, and to firms that supply tooling for manufacturing.

The original legislation required the fiscal committees of the state House and Senate, in consultation with the Department of Revenue, to report by Nov. 1, 2010, on the effectiveness of the tax breaks. The committees were tasked with determining whether the breaks were keeping Washington competitive, and their “effect on job retention, net jobs created for Washington residents, company growth, diversification of the state's economy, cluster dynamics, and other factors as the committees select.” The report was also to include a discussion of principles to apply in evaluating whether the legislature should reenact any or all of the tax incentives.

For whatever reasons, this reporting requirement was repealed in June 2010, removing what might have been a source of further controversy. The evaluation of the tax incentives was turned over to the Joint Legislative Audit and Review Committee without the detailed specification of the criteria to be used. A review of the largest break, the differential B & O rate, has been scheduled for 2016. The other breaks in the package will be reviewed at various dates out to 2018. Had the review mandate in the 2003 legislation been continued with the specific criteria, the study would have informed any decision to grant a new tax break.

The Department of Revenue does publish an annual summary that provides the number of firms receiving the aerospace tax breaks, their employment numbers, and the ranges of salaries paid. In 2009, 220 firms in addition to Boeing benefited from the breaks. The companies reported total employment of 77,000, and about one-fourth of the positions were said to have been related to the tax breaks.

Given the controversies about jobs going elsewhere, it should be noted that there is nothing to prevent the non-manufacturers receiving the tax breaks from doing business with foreign aerospace manufacturers such as Airbus and Bombardier. In fact, an Everett firm provides the forms for the wings on Bombardier’s new plane designed to compete with the 737 in the single-aisle jet market. During her recent visit to the Paris Air Show and afterward as the lead member of a state trade mission, Gov. Gregoire touted the state’s many suppliers to the aerospace industry that are clustered around Boeing. During a tour of Airbus, she indicated that Washington firms can supply some of the items that company needs as it builds its new-generation plane. The irony is that this could lead to Washington’s taxpayers effectively subsidizing Airbus, as suppliers pass through production costs reduced by the tax breaks. The law of unintended and unforeseen consequences would be at work.

Washington will face tough competition for the 737’s production facility. States willing to pony up large incentives, as South Carolina did for the 787's second line, will be serious competitors. That state handed Boeing a package worth as much as $1 billion.

As states jockey and compete for what has become a highly mobile industry, and as Boeing considers its options, other kinds of incentives could be the deciders. The governor mentioned some of these during the trade mission: our state’s skilled aerospace workforce, quality of life, and business friendly environment. Boeing should ponder whether these might deliver benefits that outweigh a tax break of any size.