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?
5 September 24, 2014
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.”
6 September 24, 2014
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
9 September 24, 2014
Input-Output (IO) Tabulation
Computable General Equilibrium (CGE)
Econometrics
New Economic Geography (NEG)
REMI Combines Four Methodologies
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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
12 September 24, 2014
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.
September 24, 2014 13
Part III: Using REMI to Model “What If” Scenarios
Background – 2003 Aerospace Tax Incentives
September 24, 2014 15
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
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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
September 24, 2014 19
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: REMI Estimated Jobs Impacts
September 24, 2014 20
Scenario 2
Boeing sites 787 in WA / Adds jobs
Aerospace Production Costs
Aerospace Employment
State Gov’t Spending
4,600 gain
Reduced by $400 million
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
Total Net Employment
Baseline Economy
Private Non-Farm Excluding Aerospace
Aerospace
State & Local Govt
Scenario 3
Boeing sites 787 in WA / No new jobs
Aerospace Production Costs
Aerospace Employment
State Gov’t Spending
No change
Reduced by $400 million
Reduced by $400 million
Model Inputs
Scenario 3: REMI Estimated Jobs Impacts
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-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
Private Non-Farm Excluding Aerospace
State & Local Govt
Total Net Employment
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
September 24, 2014 23
-$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.
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Common Misconception #2: Tax Incentives Pay for Themselves in Increased Revenues
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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.
September 24, 2014 27
And Finally…
Any questions?
September 24, 2014 28
Eric Whitaker [email protected]
360-786-5618
Contact Information
www.jlarc.leg.wa.gov
Visit the Citizen Commission website at: www.citizentaxpref.wa.gov