Aerospace Industry Tax Preferences in Washington State · 2019. 8. 5. · Summary: REMI Estimated...

An Economic Analysis Using REMI

Aerospace Industry Tax Preferences in Washington State:

Eric Whitaker

Joint Legislative Audit & Review Committee

September 24, 2014

What Was Our Dilemma?

JLARC’s analysis of aerospace tax preferences is part of an ongoing project to evaluate all WA tax preferences.

Required to answer “what if” questions.

Not your average performance audit.

Analytic approach considered impacts on both the private and public sectors.

Our work occurred while considerable political and press attention focused on Boeing.

2 September 24, 2014

What We Will Discuss

September 24, 2014 3

Part I Why is JLARC studying aerospace tax preferences?

Part III

Part IV

Part II What is “the REMI model?”

Using REMI to model “what if” scenarios

Observations and lessons learned

Part I: Why is JLARC Studying Aerospace Tax Preferences?

JLARC Tasked with Conducting Performance Audits of Tax Preferences

Statute (Chapter 43.136 RCW):

Created the Citizen Commission for Performance Measurement of Tax Preferences.

Specified JLARC to review preferences over 10-year cycle.

Outlined specific questions for JLARC staff to answer in reviews.

Requires recommendation.

Key question: public policy objective stated? Achieved?


Citizen Commission Authorized to Group Tax Preferences for Review

Citizen Commission may group preferences by:

Type of industry

Economic sector

Policy area

For 2014, Commission selected several aerospace industry preferences for JLARC staff review.

Commission also obligated to provide a process for “effective citizen input during its deliberations.”


Aerospace Industry Tax Package

7

Commercial Airplane Manufacturing Pref. Rate (B&O Tax)

Aerospace Product Development Pref. Rate (B&O Tax)

Airplane Pre-Production Expenditures (B&O Tax)

Aircraft Pre-Production Computer Expenditures (Sales/Use Tax)

Commercial Airplane Manufacturing Credit (B&O Tax)

Superefficient Airplane Prod. Facilities (Leasehold Excise Tax)

Superefficient Airplane Prod. Facilities (Property Tax)

Airplane Facilities (Sales/Use Tax)

September 24, 2014

Part II: What is “the REMI Model?”

Regional Economic Models, Inc. (REMI)

“Our work is to develop and support the use of economic models that inform government and corporate decisions.”

www.remi.com/about-us

REMI provides various structural long-term dynamic fiscal and macroeconomic impact modeling tools.

www.remi.com/the-remi-model


http://www.remi.com/about-us



http://www.remi.com/the-remi-model





Input-Output (IO) Tabulation

Computable General Equilibrium (CGE)

Econometrics

New Economic Geography (NEG)

REMI Combines Four Methodologies


Industry-to-industry transactions and social accounting matrices

Supply chains, regional purchase concepts, and multipliers

Long-term effects after markets “clear” back to an equilibrium

Dynamic adjustments to population, fuel mixtures, market shares, etc.

Estimation of statistical parameters from historical data

Strength of responses, elasticities, preferences, and “time lags”

Endogenous productivity adjustments from industry/labor clustering

Full trade flows by industry and interregional competitiveness

The REMI Framework

11

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

2,750

Eco

no

mic

/De

mo

grap

hic

Ind

icat

or

Control Forecast

Policy A

Policy B

September 24, 2014

The REMI Model Structure


JLARC Used REMI’s TAX-PI Module

REMI built a customized WA state model

Relationships between buyers and sellers for 170 industry sectors;

WA state & local governments as a built-in sector;

Measures direct, indirect, and induced effects;

Dynamic forecasts of WA economy; and

Measures policy impacts as a positive or negative change from WA’s forecasted “baseline” economy.


Part III: Using REMI to Model “What If” Scenarios

Background – 2003 Aerospace Tax Incentives


2003 Legislature adopted tax incentives to compete for the 787 airplane assembly facility.

Incentives reduced taxes on production, new and

renovated facilities, equipment, and computers.

Manufacturers of aerospace products and providers of

aerospace services qualified.

Total package estimated at $400m per year.

Originally set to expire in 2024, but extended to 2040 in

WA’s bid for the 777X.

Background (cont.)

16

Office of Financial Management (OFM) provided 2003 Legislature with Boeing employment scenarios:

Worst case: Boeing reduces WA employment by 80% over

15-20 years, and builds new generation commercial

airplanes elsewhere.

Best case: Boeing decides to build 787 in WA and hires

4,600 workers related to the project.

Mid-way: Boeing builds the 787 in WA, but shifts

employees from other production lines.

September 24, 2014

Question #1

Question #2

Legislature Asks Two Questions for Economic Development Tax Preferences


Modeled the “worse case” scenario to answer question #1 and determined the government sector impacts for all three scenarios.

What are the economic effects on the beneficiaries and the economy if the preferences were to be terminated?

What are the economic impacts of the tax preferences compared to the economic impact of government activities funded by the tax?

Scenario 1 Scenario 2 Scenario 3

Tax Incentives Enacted

18

Assumptions for Scenarios 2 and 3: • Aerospace uses tax incentives to reduce

in-state production costs • State government reduces spending by amount of tax incentives

Boeing sites 787 in WA and adds new 787 jobs

Boeing sites 787 in WA and does not add new 787 jobs

Boeing sites 787 elsewhere and gradually moves commercial airplane production out of state over 15 years

Scenarios

September 24, 2014

No Tax Incentives

Scenario 1: REMI Estimated Jobs Impacts


Scenario 1

Boeing sites 787 elsewhere

Aerospace Production Costs

Aerospace Employment

State Gov’t Spending

48,000 loss over 15 yrs

No change

No change

Model Inputs

-200,000

-180,000

-160,000

-140,000

-120,000

-100,000

-80,000

-60,000

-40,000

-20,000

0

20,000

Year

0

Year

1

Year

2

Year

3

Year

4

Year

5

Year

6

Year

7

Year

8

Year

9

Year

10

Year

11

Year

12

Year

13

Year

14

Year

15

Year

16

Year

17

Year

18

Year

19

Year

20

Ch

ange

in N

um

be

r o

f Jo

bs -23,139

-47,977

-119,674

-190,790

Baseline Economy

State & Local Govt

Aerospace

Private Non-Farm Excluding Aerospace

Total Net Employment



Scenario 2

Boeing sites 787 in WA / Adds jobs




4,600 gain

Reduced by $400 million


Model Inputs

-4,000

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000 Ye

ar 0

Year

1

Year

2

Year

3

Year

4

Year

5

Year

6

Year

7

Year

8

Year

9

Year

10

Year

11

Year

12

Year

13

Year

14

Year

15

Year

16

Year

17

Year

18

Year

19

Year

20

Ch

ange

in N

um

be

r o

f Jo

bs

-1,264

+5,203

+10,664

+14,603


Baseline Economy


Aerospace

State & Local Govt

Scenario 3

Boeing sites 787 in WA / No new jobs




No change



Model Inputs



-7,000

-6,000

-5,000

-4,000

-3,000

-2,000

-1,000

0

1,000 Ye

ar 0

Year

1

Year

2

Year

3

Year

4

Year

5

Year

6

Year

7

Year

8

Year

9

Year

10

Year

11

Year

12

Year

13

Year

14

Year

15

Year

16

Year

17

Year

18

Year

19

Year

20

Ch

ange

in N

um

be

r o

f Jo

bs

+572

-1,600

-3,613

-4,641

Baseline Economy

Aerospace


State & Local Govt


Summary: REMI Estimated Jobs Impacts After 20 Years

22

Source: JLARC staff analysis using REMI. -200,000

0

20,000

-47,977

-119,674

-23,139

=-190,790 jobs

Boeing sites projects elsewhere

Scenario 1

Aerospace Other private sector Government sector

= +14,603 jobs = -4,641 jobs

-1,600

+572

Boeing stays, adds new 787 jobs

Boeing stays, does not add new 787 jobs

+5,203 +10,664

-1,264

Scenario 2

Scenario 3

-3,613

September 24, 2014

Private Non-Farm Sector

WA State & Local Govt Sector

Total Change in State GDP

Scenario 1 Scenario 2 Scenario 3

REMI Estimated GDP Impacts


-$1.4 billion

Year 1 Year 20 Year 1 Year 20 Year 1 Year 20

-$42.9 billion

-$112 million

-$3.3 billion

-$1.5 billion

-$46.2 billion

+$1.8 billion

+$4.3 billion

-$90 million

-$178 million

+$1.7 billion

+$4.1 billion

-$168 million

+$15 million

-$252 million

-$509 million

-$420 million

-$494 million

Part IV: Observations & Lessons Learned

Common Misconception #1: Government Spending has No Impact on the Economy

Spending in labor-intensive sectors such as government results in greater job changes than in capital-intensive sectors.

Government tends to purchase goods and services in the local economy resulting in WA jobs.

Private sector jobs are also created when publically-funded employees spend wages.


Common Misconception #2: Tax Incentives Pay for Themselves in Increased Revenues


Scenario 1

Boeing sites 787 elsewhere

Net Revenue Loss

Direct Tax Loss Due to Incentive

Tax Change Due to Economic Impact

Scenario 2

Boeing sites 787 in WA / Adds jobs

Scenario 3

Boeing sites 787 in WA / No new jobs

$0.0

-$1,663.7

-$1,663.7

-$464.3

$145.9

-$318.4

-$464.3

-$25.4

-$489.7

Year 20 ($ in Millions)

Should REMI be Used to Study Any Tax Preference?

Enacted for economic development purposes.

E.g., create/maintain jobs; maintain/improve competitive position.

Large enough to have an impact on the economy.

Preference dollar threshold.

Beneficiaries are represented by a REMI sector.

Beneficiary category is a REMI sector & gross income or employment is a reasonable percentage of the sector.


And Finally…

Any questions?


Eric Whitaker [email protected]

360-786-5618

Contact Information

www.jlarc.leg.wa.gov

Visit the Citizen Commission website at: www.citizentaxpref.wa.gov

mailto:[email protected]

mailto:[email protected]

http://www.jlarc.leg.wa.gov/

http://www.citizentaxpref.wa.gov/

Aerospace Industry Tax Preferences in Washington State · 2019. 8. 5. · Summary: REMI Estimated...

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