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Originally published Monday, December 17, 2007 at 12:00 AM

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Doing the math: Tax break will cost less than expected

When the state Department of Revenue received last year's tax filings, there was a small surprise regarding the state's aerospace-tax incentives...

Seattle Times aerospace reporter

When the state Department of Revenue received last year's tax filings, there was a small surprise regarding the state's aerospace-tax incentives.

"We were encountering pizza parlors and beauty salons" that erroneously claimed the tax break, said Mary Welsh, assistant director of the agency's research division. "We billed them."

But there's a bigger surprise: The tax-break package looks like it will be $500 million to $900 million smaller over 20 years than originally projected, according to a Seattle Times analysis.

In 2003, the Department of Revenue estimated the total value of the tax breaks at $3.2 billion.

Of that, $3 billion came from a reduction in the business and occupation (B&O) tax rate. The rest was tax credits for research and development work, mainly in the early years.

But when the state totaled the B&O tax breaks claimed by aerospace companies for 2006, the amount was about half of the original projection for that year.

More significantly, the original projections for 2008 and beyond also look far too high.

Here's the breakdown:

• For tax year 2006, when the B&O rate was cut 12.5 percent, the state projected the reduction would save the industry $21.2 million. The 2006 actual savings came in at $11.5 million.

• For tax year 2008, with the B&O rate sliced by 40 percent, the state projected the industry would save $106 million. But that figure would require 2008 total state aerospace-manufacturing revenue to hit $54 billion. That's not possible.

Boeing's Washington-based commercial-airplanes unit projects 2008 revenue of $35.5 billion. (And even if Boeing had not had the delay that has pushed 35 Dreamliner deliveries out to 2009, that would have added less than $4 billion to 2008 revenue.)

No other aerospace company in the state rakes in tens of billions in revenue.

• A more realistic estimate for the state's 2008 aerospace-manufacturing revenue, based on Boeing's expected revenue next year, would be $40 billion. That would slash the total B&O tax-incentive savings from the originally projected $106 million to around $77 million.

A Seattle Times analysis took this lower figure as a starting point, added in the full expected revenue bump from Dreamliner deliveries from 2009 forward, and then followed the revenue-growth line the state used in its original projection over 20 years. Depending on how conservative the estimates were, the B&O tax savings to the state's aerospace companies came in at between $2.1 billion and $2.5 billion.

Add the projected $200 million in R&D tax credits in the early years, and the total package is worth not $3.2 billion but between $2.3 billion and $2.7 billion.

"One factor could be Boeing's decision to outsource more of their production than originally expected," suggested Department of Revenue spokesman Mike Gowrylow.

Don Gutmann, a tax-policy specialist in the Revenue Department who was responsible for the original projection, said the agency used 2003 national forecasts for the industry's revenue. He acknowledged that the assumed total revenue for 2008 of $54 billion "is a high number ... especially looking at it in hindsight."

"We were pressured into doing this 20-year forecast," Gutmann said. "Honestly, it's pure guesswork when you try to go out 20 years on anything."

Yet he insisted the original forecast, which has never been updated, might still prove accurate. Though early revenues will clearly be less than predicted, later revenues may rise faster because of the sales success of the 787, he said.

Dominic Gates: 206-464-2963

Copyright © 2007 The Seattle Times Company

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