Aerospace Tax Incentives.

In 2003, the Legislature adopted tax incentives for aerospace manufacturers.  The incentives included:

• a 40 percent reduction in the business and occupation (B&O) tax rate;
• a B&O tax credit for aerospace product development expenditures;
• a B&O tax credit for property taxes paid on property used in the manufacture of commercial airplanes and airplane components;
• a leasehold tax exemption for port district facilities available to manufacturers of superefficient airplanes that are not using the B&O tax credit for property taxes;
• sales and use tax (SUT) exemptions for computer equipment and software, and its installation, used primarily in the development of commercial airplanes and airplane components.

The incentives were scheduled to expire in 2024. 

In 2006, the Legislature extended the SUT exemption for computer equipment and software to nonmanufacturing firms engaged in the development, design, and engineering of commercial airplanes and components of commercial airplanes.  The B&O tax credit for preproduction development expenditures related to commercial aircraft was also extended to nonmanufacturing firms.

In 2008, the Legislature extended aerospace tax programs to other manufacturers, Federal Aviation Regulation (FAR) repair stations, and design/engineering services.  Sales and use tax exemptions were provided for computer equipment and software, and its installation, which are used primarily in aerospace products or for providing aerospace services.

In 2013, the expiration date was extended from 2024 to 2040 for the following aerospace tax preferences:

• the preferential B&O tax rate for the manufacturing, wholesaling, and retailing of commercial airplanes and airplane components;
• the preferential B&O tax rate for the manufacturing, wholesaling, and retailing of tooling used in the manufacturing of commercial airplanes and airplane components;
• the preferential B&O tax rate for retail sales by a FAR Part 145 certificated repair station;
• the preferential B&O tax rate for businesses performing aerospace product development for others;
• the B&O tax credit for aerospace product expenditures;
• the B&O tax credit for property taxes and leasehold taxes on property used exclusively in manufacturing commercial airplanes or components of airplanes;
• the SUT exemptions for computer hardware, computer peripherals, and software used primarily in the development, design, and engineering of aerospace products; and
• the leasehold excise tax exemption for lessees of port facilities used exclusively in manufacturing commercial airplanes.

In 2020, the preferential B&O tax rate for the manufacturing, wholesaling, and retailing of commercial airplanes and airplane components was eliminated following a World Trade Organization ruling.

Tax Preference Performance Statement.

Tax preferences confer reduced tax liability upon a designated class of taxpayers.  These include tax exclusions, deductions, exemptions, preferential tax rates, deferrals, and credits.  There are over 700 tax preferences.  Legislation that establishes or expands a tax preference must include a tax preference performance statement (TPPS) that identifies the public policy objective of the preference, as well as specific metrics that the Joint Legislative Audit and Review Committee (JLARC) can use to evaluate the effectiveness of the preference.  All new tax preferences automatically expire after 10 years unless an alternative expiration date is provided.

Aerospace Tax Incentive Reviews.

The 2013 legislation extending the expiration date of the aerospace tax incentives required the JLARC to review the aerospace tax preferences every five years.  The Legislature's stated public policy objective was to maintain and grow Washington's aerospace industry, and the JLARC was directed, as part of its tax preference reviews, to assess changes in aerospace industry employment in Washington in comparison with other states and internationally.  The JLARC reviewed the incentives in 2014, 2019, and 2024.

Beginning with its review of the aerospace tax incentives due by December 1, 2029, the JLARC must specifically assess the share of aerospace industry employment in Washington in comparison with other states based on a rolling five-year average. 

To the best of its ability, the JLARC must consider and report on whether Washington's share of aerospace industry employment was significantly impacted by changes in noncommercial aerospace sectors.  The JLARC must also consider large changes in employment for different types of jobs across different aerospace sectors and any changing economic conditions. 

The Legislature intends to extend the expiration dates of the aerospace tax incentives if a review finds that the share of aerospace industry employment in Washington stays the same or grows relative to other states.