$64 Billion Falls Through the Tax Cracks

If you happen to be in the business of buying or selling body parts in Washington, you already know it can be done without paying an arm and a leg in taxes. By law, there are no sales or usage taxes on blood, bone, tissue, organs, or human remains sold for medical use or research—saving those businesses about $2 million a year. Give me a break is the mantra for thousands of other businesses, as well. Unlike the certainty of death and its by-products, the certainty of taxes has its exemptions—a point made most dramatically by the estimated $3.2 billion, mostly through elimination of business and occupation (B&O) taxes, that Gov. Gary Locke recently handed Boeing to locate its new 7E7 Dreamliner assembly plant in Everett. In addition to that windfall, the Chicago-based aerospace company has an estimated $1 billion in existing tax "incentives," wrangled through years of heavy lobbying, campaign donations, and regular threats to pack up and move to another state—which, in the case of its headquarters, for example, Boeing did anyway.

It turns out the certainty of not paying some taxes—sales, property, business, and other levies—is legally guaranteed for an ever-growing, record number of Washington recipients, most of them businesses and corporations. It's kind of a dirty secret, a fact not heard over the caterwauling about Washington's supposedly regressive and unfair business-tax structure. Thanks to the largesse of current and past governors and lawmakers, dating back to the territorial 1850s, not to mention an arm- twisting legion of now nearly 1,000 lobbyists bearing campaign boodle, the state has granted what today are 503 tax breaks or exemptions valued at $64.7 billion per biennium budget. Theoretically, that is lost revenue, drained off before it reaches public coffers, although much of it, such as property tax exemptions for churches, would be uncollectible anyhow.

But an enticing chunk—$13 billion, mostly from suspended retail and use taxes—could be recouped if those exemptions were repealed and the revenue was dedicated to help pay public costs, according to a new state study. Repeal could be Washington's own Dreamliner: fully funded police, fire, education, and health services. Or, to dream more wildly, paying for that Alaskan Way tunnel on Seattle's waterfront and a citywide monorail, building new state highways, establishing more parks, providing more low-income housing, and creating thousands of jobs along the way. Locke could brag he performed these miracles without raising taxes—merely by using existing ones.

Instead, the reverse is happening. Tax exemptions have soared by nearly $20 billion under Locke, not counting Boeing's new breaks, just since 2000, when there were 431 exemptions worth $45.9 billion. The excess revenue, as the state calls it, has been refunded mostly to businesses to help jump-start economic recovery. At the current rate, tax giveaways in Washington—favors generally doled out to encourage job growth—could surpass $100 billion by the end of the decade. Over the same period, the state is predicting that necessary spending will far outpace revenues, leaving a $3 billion budget hole. Locke said the Boeing giveaway demonstrates that the state is "open for business in a way we have never been before." We might never know just how open, because the records are closed. The details and true cost of the Boeing deal aren't known because the governor and the company have decided to withhold the information, claiming it is exempt from disclosure under the state's Open Records Act. Page after page of public records on the agreement have been blacked out under a claim that use of the money the public is giving Boeing is not the public's business—it's proprietary information controlled by Boeing. The company also can invoke a right to keep confidential the amount of money it pockets from exemptions. Locke's 7E7 deal with Boeing also allows the company to take deductions for expenses incurred before the 7E7 was even on the drawing board—for machinery the company bought eight years ago.

Some of the tax exemptions given to Boeing might be illegal. A B&O tax credit for computer and software investment, a sales-tax exemption for construction, and a leasehold excise tax break were drawn up to help "manufacturers of commercial airplanes" or "manufacturers of super-efficient airplanes" in Washington. Of course, only Boeing and its fuel-sipping Dreamliner qualify. It is illegal for the state to extend credit to a single private entity, but Locke and his staff claim Boeing is not being singled out. "It's done on behalf of the entire aerospace industry," maintains Robin Pollard, of the state's Department of Community, Trade and Economic Development and Locke's program manager for the 7E7. (She's paid by taxpayers to be one of two full-time Boeing liaisons, so decreed by Locke.) The exemptions are not illegal, Pollard says, because "they have passed the scrutiny of the attorney general." She calls the Boeing exemptions "the model" the state now will use "in collaborating with industry." Says Russ Brubaker, assistant director of the Department of Revenue: "We think it [the incentives package] truly targets the industry and not just Boeing," although, at a meeting of the Pacific Northwest Aerospace Association in Lynnwood last week, he agreed with another speaker that only Boeing gets some of the "industry" breaks. In a talk, Rachel LeMieux, a senior certified public accountant with Moss Adams and a former state revenue analyst, called the exemptions "essentially a tax credit for Boeing" and "Boeing-related only." Why, I asked her afterward, aren't such single-recipient credits illegal? "They got around it by not specifically mentioning Boeing in the legislation. That's how they do it," she said. How would such sweetheart legislation stand up in court? I asked. LeMieux smiled and shook her head. "I'm not a lawyer," she said.

Ask to see the state documents detailing the estimated $3.2 billion in incentives for Boeing to build the 7E7 here, and this is what you'll get.