Next generation tax preferences: Sales tax on construction

The big picture of the 2016 Legislative Session spans the state budget, McCleary, body cameras, voting rights, ethics and more. In the more mundane, daily business of legislation, however, there are also hundreds of relatively modest bills that float under the radar of public attention.

House Bill 2839 effortlessly passed the House of Representatives with a strong 84-13 bipartisan vote during the rushed hum of internal deadlines. Nate Silver would likely grant a 99%-plus probability of flying through the Republican-controlled Senate.

In government language, the bill grants a new tax preference by eliminating the sales tax on the construction of a building facility for airplane maintenance and repairs. In English it’s a tax preference for one company, Clay Lacy Aviation, to construct and lease their new facility at Boeing Field in Seattle for private airplanes. The tax preference eliminates the sales tax on the construction of their new facility.

It’s a benefit we granted to Boeing as part of the broader $8.7 billion package, so the policy framework is hardly inconsistent or unreasonable from the company’s perspective. One also assumes, as an aviation firm, the company benefits from the same generous B&O rates the broader aerospace sector enjoys.

It’s also an understandable request from the firm given that Washington is one of only five states that charges sales tax on most forms of construction, with many other states providing modest variations or exemptions (such as primary residence, etc.) But we’re also only one of seven states without an income tax thus freeing any local executives and staff from personal tax liabilities, so there are tradeoffs everyday.

The immediate financial impact of the bill is relatively modest since the Legislature has quickly learned to hide the true cost of spending and tax legislation outside of the four-year budget horizon.

Yet on a serious public policy level the bill offers a teachable moment of reflection and education about tax policy and politics for the public and lawmakers alike.

While there are dozens of tax preferences reducing or eliminating the business and occupation tax for companies, industries and sectors, there are relatively few that eliminate the sales tax on construction of buildings. It is one of the few remaining categories that as a general statement the Legislature has been reluctant to aggressively institutionalize as tax exemption policy. Nine of the 10 exemptions were granted between 1996 and 2008, so the idea itself is less than 20 years old.

The reason this thoughtfully constructed bipartisan tax bill is so important to understand—and worthy of a rigorous public dialogue—is that it unfortunately represents what I see as the next generation of tax preference requests we will see in Olympia for years to come. It is time to decide whether we will respond to such proposals with intentionality or quiet acquiescence.

The sales tax accounts for 47.3% of Washington’s revenue collections in 2015, among the highest in the nation. Construction activities from both residential and business accounted for $821 million, with businesses paying 57% or $472 million and residential construction accounting for 43% or $349 million. When the Great Recession hit in 2009, sales tax on construction saw an immediate and ferocious downward spiral.

Today, of the 694 tax preferences in Washington, only 10 eliminate the sales tax on construction with a modest total fiscal impact to the budget. Other examples of the elimination of the sales tax on construction include farm worker housing, incentives for manufacturing in high unemployment areas of the state, air pollution control facilities, warehouses and grain elevators, anaerobic digesters for dairies and semiconductor materials manufacturing facilities. Boeing’s carbon fiber plant for the 777x is eligible for this benefit, and due to transparency legislation that former Sen. Rodney Tom and I passed in 2013 the Seattle Times reported the company realized sales tax savings on construction of $19.5 million in 2014. Agriculture and aerospace seem to account for the overwhelming majority of the benefits.

The bill, carefully crafted by veteran and well respected Olympia lobbyist Steve Gano, clearly meets both the letter and spirit of our transparency legislation requiring greater accountability and return on investment for taxpayers. First, the company will pay the sales tax on construction of the new building; then the state will reimburse the company once it has been certified that construction occurred with at least 100 construction jobs between January and June of 2021 with average annualized wages of $80,000; the value of the tax preference becomes public under the law and the audit committee will study the results.

Fair enough. The bill is unquestionably more analytically and financially rigorous than in years past, and the company deserves credit for the seriousness of its proposal. I offer no critique of the company, lobbyist or short-term return on investment. They are merely advocating for their own financial interests as any of us would in a similar position. They wrote a reasonable bill that would provide a substantial and impressive return on investment for their investment in legislative advocacy as is their democratic right.

A profoundly important and serious public policy problem for legislators, however, is that the central premise of the bill rests on the idea that the company will not construct the facility without this tax preference. This is inherently a subjective question. The company testified that Washington’s sales tax on construction makes us uncompetitive, and they are likely to build elsewhere without this tax preference. A ‘game theory’ argument can be made that the key customers of the private airplanes the company wishes to serve are located in the Seattle market, and better supporting those key clients requires facilities here at Boeing field regardless of state tax policy. The company operates, according to its site, “two full-service jet facilities at Los Angeles’ Van Nuys Airport and Seattle’s Boeing Field, with regional offices and aircraft operations based at 10 additional U.S. cities.”

Still, the much more important question remains whether it is the job of state tax policy to politically select winners and losers based on the political sophistication of the company?

We have a broader public obligation to ask a series of tough policy questions: Are we in the business of mitigating the negative externalities of our tax system for select companies at the promise of jobs regardless of the number, or is our job to depoliticize our tax code with fewer winners and losers contests, and let the market function with less government interference? Do we grant tax exemptions at the promise of any number of jobs under any conditions in an era when the Seattle region has an unemployment rate of 4%? What is our actual criteria for Keynesian-type public investments? What would those 100 jobs be worth in Grays Harbor County versus King County? What is the policy rationale for why would we grant this tax exemption to an aerospace firm serving private airplanes and not a multi-billion skyscraper construction project for a Fortune 100 firm in downtown Seattle?

We are a sales tax state. That is not an inconsistent secret. The market functions and companies make choices everyday whether or not to serve the Washington consumer with goods and services. Sales tax on construction is an unpleasant byproduct of our state’s broader tax structure, but it is equally unfair and annoying for residential homes, commercial skyscrapers and leasing companies for private corporate airplanes.

A more structural problem with the bill is that it inoculates us to the next generation of tax preference proposals to eliminate the sales tax on construction for businesses of all sizes, shapes and industries. As this legislation likely passes, it is assured as January rain in Seattle that we will see many, many more such requests from individual companies, industries and sectors in 2017 and beyond.

Over the years the Legislature has, in its wisdom, generously reduced or eliminated from meaningful contribution of the business and occupation (B&O) taxes key sectors industries including information technology, aerospace, agriculture, timber and more. With the B&O tax largely combed over for tax preferences by companies, legislators and lobbyists alike, we now move onto the sales tax. No thank you.

We are so much more than what we’ve become.

Your partner in service,

Reuven.