$64 Billion Falls Through the Tax Cracks

That $3.2 billion bribe to keep Boeing here is merely the biggest of hundreds of tax exemptions for Washington businesses.

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an enticing chunk—$13 billion, mostly from suspended retail and use taxes—could be recouped if those exemptions were repealed and the revenue was dedicated to help pay public costs, according to a new state study.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.

“Oh, I think it’s clearly illegal,” says Maria Cain, former Bellevue City Council member and now an international-trade-policy analyst. It’s like exemptions given to coal-fired power plants, she says. “There’s only one of them,” the private plant in Centralia. “Those kinds of exemptions should really be challenged. That’s taxpayer money used to run private companies.” Tax watchdog Bob Williams of the Evergreen Freedom Foundation thinks several aspects of the state’s contract with Boeing are illegal. “They appear to be direct violations of the state constitution,” he says. The foundation is fighting to get more of the contract disclosed—the sections Locke and Boeing blacked out—and this month filed a lawsuit to force open the public record. It ran newspaper ads last week telling readers, “We want Boeing to stay in our state because it’s a good place to prosper, not because the company will be taxpayer-subsidized.” Over the weekend, Locke released more documents to the foundation, posted on its Web site (www.effwa.org). But, says spokesperson Marsha Richards, “Some key documents requested by EFF and referenced in the contract have still not been provided.”

Locke, whose election campaigns were heavily bankrolled by business, says tax exemptions for Boeing and others are needed to minimize the state’s arguably oppressive business tax, which, in one study, is ranked 10th highest in the U.S. But critics note that if anyone needs a break, it might be the individual taxpayer. The Institute on Taxation and Economic Policy in D.C. says the state’s tax burden on poor and middle-class citizens is the highest in the U.S. “We’ve lost sight of the fundamental responsibility of government to serve the public and not the corporate intent,” says Cain, the trade-policy analyst. “Unfortunately, I don’t think the public has a clue about how we’re getting ripped off.”

WHILE MANY small businesses benefit from the exemptions, larger businesses shouldn’t get massive welfare in times when the average taxpayer is asked to bite the bullet, says Cain, who gives talks on the revenue lost by corporate-friendly tax rebates. The exemptions, introduced as bills, approved by legislators, and signed by the governor, are by law granted to industries rather than specific companies—the aircraft industry, the software industry, the retailing industry, and so on—but greatly benefit the cocks of those walks: Boeing, Microsoft, Amazon.com, Starbucks, Safeco, and Paccar, among others. Some think the government’s apparent role as investment bank or venture capitalist should be re-examined. In 2002, the Washington State Tax Structure Study Committee—appointed, no less, by the Legislature and headed by William H. Gates Sr.—recommended that the Legislature periodically review “all tax exemptions, grouped by purpose or function, to ensure that these exemptions continue to serve the public purposes for which they were enacted.” That systematic review remains undone. Cain adds that such tax breaks provide questionable benefits while siphoning off public revenue and reducing money for public services. “This is why people like Tim Eyman succeed with their own tax initiatives,” Cain says. “They see these big companies getting millions in giveaways. They want to know why, then, they can’t reduce their car tabs to $30.”


Much of the $64 billion in statewide exemptions, $28 billion of which is potential revenue to cities and counties, includes property taxes kept on the tax roles but which churches, government, schools, and nonprofit agencies, among others, are constitutionally not required to pay. But a 300-page state Department of Revenue report issued in January—so complicated it took 10 analysts six months to compile—identifies $13.5 billion that could be snapped up in the current biennium if as many as half, or about 250, of the exemptions were repealed. The department’s acting director, William Rice, labels these breaks “potential revenue collections,” though he gives no indication of which specific exemptions should be repealed. His study does suggest the need for review, especially of some older exemptions, such as excise-tax breaks “adopted in the 1930s when the Great Depression was adversely impacting many industries, in particular the farming community.” Altogether, more than 70 percent of the state’s exemptions were born in the 1930s.

Maria Cain, a former Bellevue City Council member, is a trade-policy analyst who has studied Washington tax breaks for businesses. (Annie Marie Musselman)

That potential $13 billion in revenue is equivalent to more than half the state’s biennial budget, currently forecast at $23 billion. The state study also determined that other repeals could “possibly” produce another $652 million. You’d think Olympia’s heart would beat madly at the thought of what even a few tax-break repeals or adjustments could do to augment public funding and offset slashed services. Just two weeks ago, Locke proposed a hike of 1 cent in the sales tax to pay for a new $1 billion education trust fund—something he had proposed earlier in his State of the State message, asking, perhaps mostly of himself: “How can anyone consider giving tax breaks to businesses to create more jobs without also giving our students a chance to land those jobs?” But as everyone but Locke seemed to know, the education fund tax hike was dead on arrival this election year and now will likely wind up as a public initiative, on the ballot in November. Meanwhile, the lame-duck governor made no mention of the billions his Revenue Department was quietly saying could be tapped through repeals. Such a proposal would conflict with the credo of the governor’s business-promotional unit, the Washington Competitive Council, whose top stated goals include a push to “avoid general tax increases and protect existing exemptions.” (The council’s co-chair is Boeing Commercial Airplanes President and CEO Alan Mulally.)

DON’T HOLD your breath waiting for a tax-exemption rollback by the Legislature, either, where repeals are seen as tax hikes. As even nonpartisan Department of Revenue officials say, it will take a rare display of political will to reverse the business-tax immunity of major corporations who spend thousands lobbying for such breaks. That includes touchy exemptions that are never re-examined, even when they no longer seem to qualify. Newspapers, for example, were exempted from sales tax in 1935 because a copy cost less than 5 cents, and collecting a tax was difficult. Today, subscribers are billed by computer, making such collections easier. If the newspaper exemption were adjusted or repealed, it could raise up to $15 million for use by state and local governments. (No one, however, expects anytime soon to see rousing newspaper editorials headlined “We Should Pay Our Fair Share.”)

State revenue analyst Don Taylor, who directed the new exemptions study with Mary Welsh, says, “We’re not taking a position on this exemption or that—we’re not recommending repeal of any specific one to the Legislature. And we’re not saying this is the panacea to solve all of government’s problems. But there is some real money here if they choose to tap it.” Yet instead of reversing some of the special-interest breaks, or even holding steady as she goes, Locke and legislators are piling on new ones. Not including Boeing’s $3.2 billion break, which is spread out over several decades, the state approved a stunning 38 new or renewed exemptions in 2003, valued at $89.8 million. That’s the second-highest exemption total on record. (Forty-one tax breaks were approved in 1935.)


Since Locke became governor in 1996, the state has granted or sustained $1.6 billion in tax exemptions (this excludes Boeing’s projected total) to a variety of 138 recipients, such as makers of custom computer software (who now escape $26.6 million in retail sales tax annually), dietary supplement sales ($2.8 million in forgiven sales tax), and royalty income for authors and musicians ($18.5 million in partially forgiven B&O tax), to name just a few. Legislators had another $100 million in breaks planned last year but never got around to passing them. They were busy, however, passing budget cuts sought by Locke that included $23 million in health care setbacks, causing tens of thousands of children and the working poor to lose state-backed medical insurance and services.

They’re back at it this year. Last week, it was the beef industry, given tentative legislative approval to suspend paying taxes on some profits in the wake of the mad-cow scare—effectively benefiting only two companies: Washington Beef, which processes almost 300,000 cattle a year, and a plant owned by Tyson Foods, a corporation with $24.5 billion in annual sales. Also, three weeks ago, the state House of Representatives voted 86-12 and the Senate voted 35-13 to approve legislation requested by Locke renewing almost $60 million in tax breaks for technology and biotech companies this biennium and $190 million more in the following two years. Originally an innocuous tax-deferral bill passed in 1994, the repayment requirement has since been unceremoniously waived and the law turned into an outright exemption. As with almost all such legislation, lawmakers think tax breaks allow businesses to flourish, reinvest, and hire more workers, helping grow the economy. “The best social program is a job,” Rep. Jim McIntire, D-Seattle, told The Seattle Times after the tech tax-break vote on Jan. 31. “The reality is, the bulk of the incentives were very effective at creating jobs.”

That’s debatable, and labor leaders, among others, take issue, claiming the savings business owners make through tax breaks don’t necessarily translate into more faces on the factory floor. And some of those new jobs may be located elsewhere—a tech worker alliance, WashTech, last week reported that local tech workers increasingly are training workers in foreign countries and then losing their own jobs to them. Legislators appear to be in no hurry to determine the facts. They asked the Department of Revenue to study the job-producing effects of the tech tax breaks, for example, and then report right back—in 2009. Many government studies linking exemptions to job growth are provided by the industries and come with questionable projections. Locke’s office was claiming 77,000 in indirect jobs alone would be lost if Boeing wasn’t given its tax break. Lesser attention is paid to studies conflicting with such dire claims. Just two months ago, before the big technology exemption was renewed, the Revenue Department reported that “evidence of job creation in the high tech industry is mixed . . . the state’s share of high tech jobs has remained about the same over the last decade,” despite the millions in tax breaks.


Nevertheless, since Locke gave the farm to Boeing, others want a spread of their own. The 10,000-member Building Industry Association of Washington (BIAW), which last year successfully campaigned along with Boeing to kill costly ergonomics regulations and cut employer contributions to the state’s unemployment program, has now joined Boeing in seeking some of those big, new exemptions. As BIAW President Gary Cronce asked recently, “So where are our special concessions?” He might already be getting an answer: Locke has proposed tax- increment financing legislation that would provide developer subsidies from new tax dollars generated in designated economic-development areas. That could help small-time developers as well as billionaires such as Paul Allen, who could tap public financing for his South Lake Union development in Seattle. More than 100 bills are in the Olympia hopper so far that seek relief for a variety of taxpayers, including flaxseed-oil manufacturers, boarding-home operators, self-service laundries, and car dealers, plus additional breaks for high-tech companies and aircraft manufacturing. Former Senate Ways and Means chair and now Republican gubernatorial candidate Dino Rossi is a religious believer in such breaks. “An exemption is merely an incentive to do business here,” says Rossi, who is convinced of an economic snowball effect that produces related jobs. In a policy paper last year, the Washington Research Council agreed, saying that even just a review of exemptions “has the potential to create a great deal of mischief. . . . The end result will be a higher tax burden on businesses and a weaker state business climate.”

Since Gov. Gary Locke was first elected, the state has granted or sustained $1.6 billion in tax exemptions. (Mark Wilson / Getty Images)

GRANTED, NOBODY likes taxes unless the other guy’s paying them, and there seems to be a tax for every occasion: Among the myriad state and local taxes collected by the state that bring in more than $19 billion annually, there’s the telephone tax, the brokered natural gas use tax, boxing and wrestling tax, oil spill tax, litter tax, and, of course, the wood-stove fee. Companies complain most of all about the state’s business-and-occupation tax structure, which hits startups and low-margin businesses hardest. But how much is too much? While the Revenue Department’s Taylor says some exemptions have sunset clauses and “now and then do expire,” Locke and legislators renew them regularly and aren’t exactly campaigning to get any off the books. Cain, the tax analyst, says Olympia’s heart just isn’t in the repeal of tax breaks as a budget booster. “I was on a conference call with legislators,” says Cain, who studied the state’s exemption system as part of a Rockefeller Foundation grant. “And I ran down a list of exemptions that could be repealed. On the phone, I could hear them saying, ‘Yes, that’s a good one. . . . Great, we can repeal that one. . . . ‘ And they did make an effort to repeal some—but they all got shot down. Other legislators accused them of trying to hike taxes.”

Cain worries that Olympia’s exemption fever will turn epidemic. “These aren’t loopholes,” she says. “These are statutory tax exemptions created for certain special people. Even in this time of a growing budget crisis, the state is saying to these people, ‘You aren’t required to share the pain.'” Many exemptions, she says, have been granted without meaningful legislative review or economic analysis. “No one says there has to be a revolt,” Cain says. “The Legislature should just systematically review each and every exemption, but this time put the public’s interest, rather than the corporation’s, first.”