Business Column: Those pesky tax incentives

Darned if you do, or darned if you don’t!

That’s the dilemma elected officials face in determining whether to offer tax incentives for companies to locate in their city, county or state. That conflict played out recently with Amazon’s decision to cancel its second headquarters (HQ2) in New York City.

On the surface, it seems like a no-brainer. The city and state would extend $3 billion in tax relief to Amazon in exchange for $27 billion in new taxes and 25,000 good-paying jobs. However, the incentives generated heated opposition.

While government officials salivate over billion-dollar investments and can justify their investment returns, opponents believe the companies should pony up the start-up money on their own. Unfortunately, it doesn’t always work that way.

For example, when Boeing announced it would build a mammoth new plant to make its innovative 777X carbon-fiber wings, the upfront construction and outfitting costs were more than $1 billion. The Aerospace Futures Alliance estimated it would add 60,000 jobs and $21 billion in new economic activity.

Japan, Texas, South Carolina and Missouri were among the bidders. In 2013, Missouri Gov. Jay Nixon even called a special legislative session to approve a $150 million annual tax break to attract the project.

In response, Washington’s Legislature extended nearly $9 billion in incentives through 2040. That sealed the deal and today the new Everett plant is complete and Boeing workers are assembling planes. Boeing has nearly 350 orders. The first 777x delivery is scheduled for 2020.

In the late 1970s, Crown Zellerbach was faced with either closing or modernizing its pulp and paper mill at Camas. The mill opened before Washington became a state in 1889.

Crown either had to move production down river to its newer Wauna mill in Oregon, or spend $400 million (equivalent to $2 billion in 2019) to construct a new pulping system and install a large state-of-the art-business paper machine.

The company decided to modernize Camas even though the project would increase its property taxes four-fold and Oregon had no sales tax. Camas, because of its excellent workforce, existing air and water pollution abatement systems, and Washington state tax incentives, was selected. That investment extended the mill’s life by 40 years.

At the time of construction, the Camas modernization was the only major construction project in the northwest. The economy was lousy with double-digit unemployment, inflation and interest rates.

The state awarded Crown a sales tax exemption on new pollution control equipment and a sales tax deferral on the rest of the project. However, when the legislature ran into financial difficulties, it revoked the incentives. It sent the wrong political signal, and even though a subsequent legislature restored them, it soured the company on investing in large projects in Washington.

Tax breaks are pesky and a pain in the neck for politicians. While it would be nirvana if all elected officials worldwide would get together and take a “No Tax Break” pledge and live by it, that is not the real world we live in.

Foreign companies, many with strong government financial backing, are constantly looking to lure new plants and jobs. Other U.S. states want Washington companies and are willing to provide lucrative tax breaks.

Whether we like it or not, companies look for ways to offset their enormous start-up costs. In Boeing’s case, bringing the 777X online costs billions spread over a decade. At Crown, it was over five years start to finish before a roll of paper came off its new machine.

Without tax incentives, some projects just wouldn’t happen—or happen in Washington. Costs matter today even it means government incentives are part of the package.