Legislative Auditor’s Conclusion:

The preference has likely resulted in new jobs and increased state tax revenues by $1.8 million to $3.3 million annually. It has had a negligible impact on Washington's aerospace manufacturing industry.

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July 2019

Sales and use tax exemption for nonresidents who modify their large private airplanes in Washington

When nonresidents bring their large private airplanes to Washington for modification work, such as customized interiors, they do not pay sales and use tax. These private planes are the size of a Boeing 737 or larger.

The preference took effect January 1, 2014, and is scheduled to expire July 1, 2021.

Estimated Biennial Beneficiary Savings

$11.6 million

Tax Type

Sales and Use Tax

RCWs 82.08.215, 82.12.215

Applicable Statutes

After preference passed, Washington businesses began performing modification work

The Legislature stated two objectives for this preference when it was enacted in 2013.

Objectives (Stated) Results
Promote economic development in Washington's aerospace cluster Partly met. After the preference passed, nonresidents started to bring their airplanes to Washington for modification work. This resulted in new jobs in Moses Lake and elsewhere in the state. However, the preference has had a negligible impact on Washington's broader aerospace manufacturing industry.
Increase tax revenues by promoting a competitive marketplace for modifying large airplanes Met. Based on economic models, the estimated range in new statewide tax revenue is between $1.8 million and $3.3 million per year.

Recommendations

Legislative Auditor's Recommendation: Continue and clarify the objective

The Legislature should continue the preference by extending the expiration date before it is scheduled to expire on July 1, 2021.

Since the preference was enacted, several large private airplanes have been modified, or are currently being modified, in Washington. This work was not conducted in Washington prior to the preference. This work has created new jobs and increased economic activity in Moses Lake and elsewhere in the state.

The preference has had a negligible impact on Washington's broader aerospace manufacturing industry. The Legislature should clarify whether the objective of growing the broader aerospace manufacturing industry is relevant.

If the preference is allowed to expire, the modification activity would likely cease.

More information is available on the Recommendations Tab.

Commissioners' Recommendation

Available October 2019.

Preliminary Report | Large Private Airplanes Owned by Nonresidents

July 2019

REVIEW Details

1. Preference is for airplane modifications

Nonresidents do not pay sales or use tax when they modify their large private airplanes in Washington

Legislative goals: grow Washington's aerospace cluster and increase tax revenues

The Legislature passed this preference in 2013 with two stated objectives:

  • Promote economic development in Washington's aerospace cluster.
  • Increase tax revenues by promoting a competitive marketplace for storing and modifying large, privately owned airplanes.

The Legislature noted that Washington was losing modification work to other states, resulting in losses of high-wage jobs and additional tax revenues. It concluded that the state's tax laws hindered aerospace manufacturing growth in Washington.

During legislative hearings, industry stakeholders and executive branch staff testified that the preference would remove competitive "barriers" and help Washington compete with other states for airplane modification work.

Nonresidents do not pay sales or use tax when they modify their airplanes in Washington

Nonresident owners of large private airplanes are exempt from sales and use tax when they pay to have their planes modified in Washington. Generally, the modifications involve complete interior renovations and technological and electronic upgrades.

This exemption applies to airplanes that meet the following criteria:

  • Are not used commercially.
  • Are not owned or leased by a government entity.
  • Weigh more than 41,000 pounds (Boeing 737 and larger airplanes).
  • Meet certain federal Federal Aviation Administration (FAA) standards.

Legislature directed JLARC staff to estimate the preference's economic impact

The Legislature specifically directed JLARC staff to:

  • Estimate the net impact of the preference on state tax revenues. This includes a comparison of the loss in state tax revenues to any gains in tax revenue generated from the direct, indirect, and induced economic impacts of the preference.
  • Estimate job growth in the aerospace manufacturing industry, to the extent practicable, resulting from the preference.

This review focused on airplane modification work in Washington

The preference was part of a larger bill intended to "remove barriers" to growth in Washington's aerospace industry. This review focused on airplane modification work because it was expected to grow Washington's aerospace industry cluster.

The larger bill included the following additional regulatory and taxation changes:

  • A sales and use tax exemption for nonresidents who buy and take possession of large private airplanes in Washington.
  • An exemption from registering large private airplanes with the Washington State Department of Transportation Aviation Division when the airplane is continuously stored in Washington for at least one year or in-state exclusively for repairs or alterations.
  • A change in taxation for commercial (not private) airplanes that are continuously stored in Washington for at least one year. The planes are taxed under aircraft excise tax instead of property tax.

2016 review lacked sufficient data to evaluate impact

JLARC staff first reviewed this preference in 2016. At that time, airplane modification work was just beginning in the state and there was insufficient data to measure the preference's economic impact. The Legislative Auditor noted that JLARC would review the preference again prior to its expiration date.

Preference set to expire in 2021

The preference took effect on January 1, 2014, and is scheduled to expire July 1, 2021.

Preliminary Report | Large Private Airplanes Owned by Nonresidents

July 2019

Review Details

2. New modification activity in WA

Washington businesses began performing modification work after the preference passed

Before the Legislature passed the preference, it appears there was no modification activity performed in the state on large private airplanes owned by nonresidents.

Greenpoint Technologies, Inc. (GTI), headquartered in Kirkland, was serving as a general contractor for airplane modification contracts prior to 2014. However, GTI was subcontracting with out-of-state businesses to perform the actual modification work at locations outside of Washington.

Modification-related activities in Washington before 2014 were limited to the following:

  • GTI prepared conceptual models, designs, and project plans for airplane modifications on behalf of nonresident clients.
  • GTI or a Washington-based subcontractor performed engineering and manufacturing work prior to the actual modifications.

Modification-related activities after January 1, 2014, expanded to include the following additional activities:

  • GTI and its primary in-state subcontractor, Aviation Technical Services, Inc. (ATS), began performing airplane modification and installation activities in Moses Lake.
  • GTI began performing ground and flight testing in Moses Lake before delivering the planes to their nonresident owners.

As of January 2019, four modification projects have been completed in-state and three others were underway.

Modification work has resulted in new jobs

The airplane modification work in Moses Lake has resulted in new jobs for GTI and its subcontractors. GTI and ATS gave JLARC staff permission to report the number of jobs created and retained at their Moses Lake location since the preference passed. The job numbers reflect the total number of jobs reported each year by these two businesses. There are likely additional jobs indirectly related to the new modification activities that are not included in the numbers reported below.

Exhibit 2.1 Jobs at Moses Lake facility directly tied to airplane modification work
Year Jobs reported by GTI Jobs reported by ATS Total jobs
2014 0 58 58
2015 8 78 86
2016 16 116 132
2017 16 58 74
2018 11 47 58
Note: The numbers reported above are a point in time count that capture employees associated with the qualifying work at a given time of the year. The numbers fluctuate up and down throughout the year, based on the schedule of airplanes being modified and the specific type of work being done.
Source: JLARC staff analysis of detail provided by Greenpoint Technologies, Inc., and Aviation Technical Services, Inc., through November 2018.

Modifications involve full interior and electronic renovations

Modifications involve fully customized interiors, lighting, electrical re-wiring, and technological and electronic renovations.

Each modification project is unique, and designed and built to meet its owner's needs. The interior modifications may include customized living, sleeping, dining, and bathroom quarters and enhanced technology.

Qualifying modification projects have ranged from $60 million to $150 million, depending on the airplane's size, extent of modifications, materials used, and other factors.

Modification work can take between 24 to 36 months from project conception to completion. Timeframes vary depending on the complexity of the work and the size of the airplane.

Exhibit 2.2: Fully modified large private airplanes feature customized interiors, electronics, and technology

Interior (living room area) of fully modified large private airplane

Interior (hallway) of fully modified large private airplane

Source: Images provided by Greenpoint Technologies, Inc.

Preliminary Report | Large Private Airplanes Owned by Nonresidents

July 2019

Review Details

3. Jobs and tax revenues would likely decrease if preference expires

The estimated gains in jobs and revenues would likely go away if the preference expires

Since the preference began, at least two businesses have started to perform airplane modification work in Washington. They report that they have added jobs to their workforce. JLARC staff used these job numbers to model the economic impact of the preference.

Economic models show potential range of net employment and net revenue changes if the preference expires

JLARC staff used an economic modeling tool that predicts future impacts of a change rather than estimating current or previous impacts. As a result, the estimated changes described below are based on the assumption that the preference will expire on July 1, 2021, as it is currently scheduled to do. Appendices A and B provide additional detail about the economic modeling tool and analysis.

The model assumes that all modification activities in Washington will end once the preference expires. This reflects the state's recent experience of having no businesses performing airplane modification work before the preference began.

The model estimates a range of statewide net fiscal and employment changes under two different scenarios. The fiscal and employment changes include direct, indirect, and induced changes if the preference expires. The model estimates the impact over a 10-year period, from 2022 through 2031.

The analysis includes estimates for:

  • Net job changes based on the assumption that jobs will be lost when airplane modification work ends in Moses Lake.
  • Net tax revenue changes based on the assumption that the loss in specialized modification work will lead to reduced business tax revenues related to that activity, as well as reduced taxes on indirect and induced economic activity (e.g., taxes from suppliers and employees).

Depending on the scenario modeled, the table below shows a range in job losses between 347 and 569 jobs per year. The estimated loss in state tax revenue ranges from $1.8 million to $3.3 million.

If the preference is extended, and airplane modification activities remain at current levels, Washington will likely avoid this level of estimated job and revenue losses.

Exhibit 3.1: Estimated statewide job and revenue losses if the preference ends
Scenario assumes preference expires July 1, 2021 Average statewide net job decrease between 2022 and 2031 Average statewide net tax revenue decrease between 2022 and 2031
Scenario 1 In-state modification work ceases, modeled as a reduction in qualifying sales. The two in-state businesses currently performing modification work maintain a presence in Washington and continue to perform work unrelated to the preference. 347 jobs per year $1.8 million per year
Scenario 2 In-state modification work ceases, modeled as a reduction in qualifying sales. One of the two in-state businesses currently performing most of the modification work also moves its entire business operation out of Washington. The other business maintains a presence in Washington and continues to perform work unrelated to the preference. 569 jobs per year $3.3 million per year
Source: JLARC staff analysis of jobs created by two businesses primarily doing large private airplane modifications in-state. JLARC staff estimated impact on statewide employment and tax revenue using REMI economic modeling tool.

Preference has a negligible impact on Washington's aerospace manufacturing industry

Large private airplane modification is a specialized activity. While it involves airplanes, the modification work has no direct ties to, and is minimally connected to, the broader Washington aerospace manufacturing industry.

The economic modeling tool estimated a negligible impact on Washington's airplane manufacturing industry if the tax preference for airplane modifications expires in 2021. Although some businesses that perform modifications may also be involved in the general aerospace manufacturing industry, the modeling tool and industry supplier information suggest there is not a close relationship between this specific modification activity and the broader manufacturing industry.

Preliminary Report | Large Private Airplanes Owned by Nonresidents

July 2019

Review Details

4. Nonresidents and WA businesses benefit

The preference benefits nonresident airplane owners and in-state businesses

Seven nonresident airplane owners have directly benefited

Nonresident airplane owners directly benefit from the preference because they do not pay sales or use tax on the modification work performed in Washington. According to industry representatives, these airplane owners are typically private individuals or foreign heads of state who replace their large customized airplanes every five to eight years.

As of January 2019, four airplane modifications have been completed in Moses Lake, with three more airplane modifications in progress.

Washington businesses also benefit from the preference

Although the preference provides a tax exemption to nonresidents, Washington businesses benefit from the economic activity generated by the specialized modification work performed in Moses Lake and at other locations around the state. Two businesses perform most of the qualifying modification work in Washington:

  • Greenpoint Technologies, Inc. (GTI) works with owners to develop and manage large private airplane modification projects. Headquartered in Kirkland, GTI operates shops where specially designed materials and items are created. The shops are located in Marysville and Denton, Texas. GTI also manages the airplane modification and installation work in Moses Lake.
  • Aviation Technical Services (ATS) is involved in many aerospace-related activities. Headquartered in Everett, ATS is a subcontractor of GTI and performs large airplane modifications in Moses Lake.

    ATS also provides maintenance, repair, and overhaul services for commercial and military transport jet airplanes in Everett and Kansas City, Missouri. In addition, it operates airplane component shops in Everett and Fort Worth, Texas, and performs in-house engineering in Everett.

Preliminary Report | Large Private Airplanes Owned by Nonresidents

July 2019

Review Details

5. Biennial beneficiary savings: $11.6 million

Nonresident owners will save an estimated $11.6 million in 2019-2021

JLARC staff estimate the direct beneficiary savings for nonresident owners was $7.3 million in fiscal year 2018. This is the estimated amount that nonresidents were exempt from paying in Washington sales and use tax. The estimated beneficiary savings for the 2019-2021 biennium is $11.6 million. The preference is currently set to expire on July 1, 2021.

JLARC staff used Department of Revenue tax data on qualifying modification work to estimate the beneficiary savings.

The Department's taxpayer confidentiality policy prohibits disclosing tax return data when there are fewer than three taxpayers. For this review, the two Washington businesses that perform airplane modification work specifically authorized JLARC staff to disclose their tax return detail for fiscal years 2016 through 2018, and to use this data to estimate future beneficiary savings.

Exhibit 5.1: Estimated beneficiary savings through 2021
Biennium Fiscal Year Estimated Value of In-State Modification Work Estimated Total Beneficiary Savings
2015-17

7/1/15-6/30/17

2016
$372,000
$33,000
2017
$46,000,000
$4,289,000
2017-2019

7/1/17 - 6/30/19

2018
$78,000,000
$7,274,000
2019
$62,000,000
$5,782,000
2019-21

7/1/19-6/30/21

2020
$62,000,000
$5,782,000
2021
$62,000,000
$5,782,000
2019-21 Biennium
$124,000,000
$11,564,000
Preference currently scheduled to expire July 1, 2021.
Source: JLARC staff analysis of Department of Revenue tax return data. Taxpayers authorized JLARC staff to disclose beneficiary savings and use the data to estimate future years' savings.

Preliminary Report | Large Private Airplanes Owned by Nonresidents

July 2019

Review Details

6. Other states also provide exemptions

Owners likely take their airplanes to locations that do not tax modification work

Industry representatives indicate that modification work on large private airplanes is only performed by a few businesses at a small number of locations worldwide. All of the U.S. locations identified below provide a sales and use tax exemption for airplane modifications, repairs, and refurbishments. While it is possible that modifications occur elsewhere, JLARC staff found no sources that could independently verify whether this work is performed in other locations.

Businesses in Texas, Indiana, and Europe are currently performing airplane modifications

According to industry representatives, Washington is one of three states where businesses are currently performing modification work on large private airplanes. The other two are Texas and Indiana. These states also provide specific sales and use tax exemptions for airplane purchases, repairs, and modifications. Like Washington, Indiana's modification exemption is limited to airplanes owned by nonresidents.

Large airplane modifications are also performed at three facilities outside the U.S.: two in Switzerland and one in Germany.

Experience shows that nonresident owners go to locations where modification work is not taxed

Washington's experience suggests that nonresident owners take their airplanes to locations where they do not pay sales tax on modification work. These owners tend to be foreign residents or heads of state.

Industry representatives testified that these nonresidents can take their airplanes to locations across the world.

Eight other states do not tax airplane modification work

In addition to Indiana and Texas, three states provide a sales and use tax exemption similar to Washington's. Modification work on large private airplanes is not currently being performed in these three states:

  • Connecticut
  • Kansas
  • Oklahoma

Another three states have exemptions that are different than Washington's:

  • New Mexico exempts modifications on commercial or military airplanes, but not on private airplanes.
  • Arizona does not consider modification of property an activity subject to sales tax.
  • California does not consider modification of property an activity subject to sales tax.

Preliminary Report | Large Private Airplanes Owned by Nonresidents

July 2019

Review Details

7. Applicable statutes

RCWs 82.08.215, 82.12.215

Sales and Use Tax

RCW 82.08.215

Exemptions - Large private airplanes. (Expires July 1, 2021.)

(1)(a) The tax levied by RCW 82.08.020 does not apply to:

(i) Sales of large private airplanes to nonresidents of this state; and

(ii) Sales of or charges made for labor and services rendered in respect to repairing, cleaning, altering, or improving large private airplanes owned by nonresidents of this state.

(b)The exemption provided by this section applies only when the large private airplane is not required to be registered with the department of transportation, or its successor, under chapter 47.68 RCW. The airplane owner or lessee claiming an exemption under this section must provide the department, upon request, a copy of the written statement required under RCW 47.68.250(5)(c)(ii) documenting the airplane's registration exemption and any additional information the department may require.

(2) Sellers making tax-exempt sales under this section must obtain an exemption certificate from the buyer in a form and manner prescribed by the department. The seller must retain a copy of the exemption certificate from the seller's files. In lieu of an exemption certificate, a seller may capture the relevant data elements as allowed under the streamlines sales and use tax agreement. For sellers who electronically file their taxes, the department must provide a separate tax reporting line for exemption amounts under this section.

(3) Upon request, the department of transportation must provide to the department of revenue information needed by the department of revenue to verify eligibility under this section.

(4) For purposes of this section "large private airplane" means an airplane not used in interstate commerce, not owned or leased by a government entity, weighing more than forty-one thousand pounds, and assigned a category A, B, C, or D test flow management system aircraft weight class by the federal aviation administration's office of aviation policy and plans.

[2013 2nd sp.s. c 13 § 1103.]

RCW 82.12.215

Exemptions - Large private airplanes. (Expires July 1, 2021.)

(1)(a) The tax levied by RCW 82.12.020 does not apply to the use of:

(i) Large private airplanes owned by nonresidents of this state; and

(ii) Labor and services rendered in respect to repairing, cleaning, altering, or improving large private airplanes owned by nonresidents of this state.

(b) The exemption provided by this section applies only when the large private airplane is not required to be registered with the department of transportation, or its successor, under chapter 47.68 RCW. The airplane owner or lessee claiming an exemption under this section must provide the department, upon request, a cop of the written statement required under RCW 47.68.250(5)(c)(ii) documenting the airplane's registration exemption and any additional information the department may require.

(2) Upon request, the department of transportation must provide to the department of revenue information needed by the department of revenue to verify eligibility under this section.

(3) For purposes of this section, the conditions, limitation, and definitions in RCW 82.08.215 apply to this section.

[2013 2nd sp.s. c 13 § 1104.]

Non-codified session law, 2013 2nd sp.s. c 13 § 1101

PART XI

Large Airplanes

NEW SECTION. Sec. 1101. (1) The legislature intends to promote the economic development of our state's aerospace cluster and increase the tax revenues collected by the state through promoting a competitive marketplace for storing and modifying unfurnished, noncommercial aircraft. The legislature finds that Washington is currently losing these types of jobs to other states, resulting in the loss of high-wage jobs and new tax revenue. Further, the legislature finds that the current tax statutes are an impediment to encouraging the development of aerospace clusters in our state. Therefore, the legislature intends to modify our state's tax policy to encourage aerospace cluster development with the state and increase tax revenues.

(2) The joint legislative audit and review committee, as part of its tax preference review process, must estimate the net impact on state tax revenues by comparing the decrease in state revenues resulting from the changes made in part XI of this act to the additional tax revenues generated from the direct, indirect, and induced economic impacts from those changes. The committee must also, to the extent practicable, estimate job growth in the aerospace cluster resulting from the changes made in part XI of this act. The committee must conduct its tax preference review of part XI of this act during calendar year 2016 and report its finding and recommendations to the legislature by January 1, 2017.

Preliminary Report | Large Private Airplanes Owned by Nonresidents

July 2019

Review Details

Appendix A: REMI overview

What is REMI?

JLARC staff used Regional Economic Models, Inc.'s (REMI) Tax-PI software (version 2.2) to model the economic impacts for several tax preference reviews in 2019, including the sales and use tax exemption for large private airplanes owned by nonresidents.

Multiple state governments, private sector consulting firms, and research universities also use REMI’s dynamic economic modeling to evaluate policy impacts.

Model is tailored to Washington and includes a government sector

Tax-PI is an economic impact tool used to evaluate the fiscal and economic effects and the demographic impacts of a tax policy change. The software includes various features that make it particularly useful for analyzing the economic and fiscal impacts of tax preferences:

  • REMI staff consulted with staff from the Office of Financial Management (OFM) and customized a statewide model to reflect Washington's economy.
  • The model contains 160 industry sectors, based on the North American Industry Classification System (NAICS) codes.
  • In contrast to other modeling software, Tax-PI includes state and local government as a sector. This permits users to see the trade-offs associated with tax policy changes (e.g., effects on Washington's economy from both increased expenditures by businesses due to a tax preference, along with decreased spending by government due to the associated revenue loss).
  • For current revenue and expenditure data, users can input information to reflect their state's economic and fiscal situation. This allows JLARC staff to calibrate a state budget using up-to-date information from the Economic and Revenue Forecast Council (ERFC) and the Legislative Evaluation and Accountability Program (LEAP).
  • The model can forecast economic and revenue impacts multiple years into the future.

Model simulates the full impact of a tax policy change

The REMI model accounts for the direct, indirect, and induced effects as they spread through the state's economy, which allows users to simulate the full impact of a tax policy change over time.

  • Direct effects are industry specific and capture how a target industry responds to a particular policy change (e.g., changes in industry employment following a change in tax policy).
  • Indirect effects capture employment and spending decisions by businesses in the targeted industry's supply chain that provide goods and services.
  • Induced effects capture the in-state spending and consumption habits of employees in targeted and related industries.

The REMI model produces year-by-year estimates of the total statewide effects of a tax policy change. Impacts are measured as the difference between a baseline economic and revenue forecast and the estimated economic and revenue effects after the policy change.

Model includes economic, demographic, and fiscal variables

The REMI model is a macroeconomic impact model that incorporates aspects of four major economic modeling approaches: input-output, general equilibrium, econometric, and new economic geography. The foundation of the model, the inter-industry matrices found in the input-output models, captures Washington's industry structure and the transactions between industries. Layered on top of this structure is a complex set of mathematical equations used to estimate how private industry, consumers, and state and local governments respond to a policy change over time.

  • The supply side of the model includes many economic variables representing labor supply, consumer prices, and capital and energy costs with elasticities for both the consumer and business sectors.
  • Regional competitiveness is modeled via imports, exports, and output.
  • Demographics are modeled using population dynamics (births, deaths, and economic and retirement migration) and includes cohorts for age, sex, race, and retirement.
  • Demographic information informs the model's estimates for economic consumption and labor supply.
  • The dynamic aspect comes from the ability to adjust variables over time as forecasted economic conditions change.

While the model is complex and forecasting involves some degree of uncertainty, Tax-PI provides a tool for practitioners to simulate how tax policy and the resulting industry changes effect Washington's economy, population, and fiscal situation.

Preliminary Report | Large Private Airplanes Owned by Nonresidents

July 2019

Review Details

Appendix B: REMI analysis

REMI analysis shows range of potential employment and tax revenue impacts of the sales and use tax exemption for large private airplanes owned by nonresidents

JLARC staff used REMI’s Tax-PI to model two scenarios that illustrate the potential statewide employment and tax revenue impacts if the sales and use tax preference for large private airplanes owned by nonresidents expires in 2021.

This technical appendix provides context and supporting information for the analysis that led to the results summarized in Tab 3.

This appendix is divided into three sections:

  • REMI methodology details how JLARC staff set up and calibrated the Tax-PI program prior to using the model to analyze possible impacts.
  • Beneficiary industries describes the primary industries and businesses currently benefiting from the sales and use tax preference for large private airplanes owned by nonresidents.
  • Scenarios modeled describes the scenarios used to estimate the range of potential effects on statewide employment and tax revenues of the sales and use tax preference.

REMI methodology

User inputs in REMI 

REMI’s Tax-PI model allows users to model policy changes and analyze the estimated impacts to the Washington economy, both in terms of economic activity and government finances (see Appendix A for an overview of the REMI model).

Prior to running modeling scenarios, users must make a series of choices about how to set up the modeling environment by building a state budget and calibrating the model accordingly. JLARC staff used the November 2018 revenue estimates produced by the Economic and Revenue Forecast Council (ERFC) and budgeted expenditures for fiscal years 2016 through 2018, as reported by the Legislative Evaluation and Accountability Program (LEAP) Committee. This data represents the budget and revenue data in the model and serves as the starting point for Tax-PI’s economic and fiscal forecasts.

In addition to establishing a budget and inputting expected revenue values, users must specify whether government expenditures are determined by demand or by revenue.

  • “By demand” imposes a level of government spending in future years that is necessary to maintain the same level of service as the final year in which budget data is entered.
  • “By revenue” ties government expenditures to estimated changes in revenue collections.

JLARC staff ran the scenarios with expenditures set to be determined by demand. This allows users to avoid making assumptions about how policymakers may alter spending priorities in the future. In addition, users essentially establish the current budget allocations as carry-forward levels for each expenditure category.

Users may also elect to impose a balanced budget restriction (also known as the balanced budget feedback loop) or leave the model unconstrained. The balanced budget restriction forces revenue and expenditures to be equivalent and thus may impose some limitations on economic activity. JLARC staff ran the scenarios with the balanced budget restriction option turned on because Washington requires a balanced budget.

Because Tax-PI is a forecasting tool, JLARC staff were unable to model the economic and employment impacts of the tax preference beginning in 2016. Rather, JLARC staff modeled the potential effects of changes in the qualifying activity assuming the current tax preference expires in 2021, its current expiration date.

Data for the REMI model

The REMI model comes with historical economic and demographic data back to 2001. The data comes from federal government agencies, such as the U.S. Census Bureau, U.S. Energy Information Administration, the Bureau of Labor Statistics, and the Bureau of Economic Analysis. As described above, current revenue and expenditure data for Washington comes from ERFC and LEAP, respectively. The data to build the modeling scenarios described below includes information provided by the two businesses performing the majority of in-state airplane modification work.

  • Changes in industry sales are based on JLARC staff estimates of beneficiary savings, developed from Department of Revenue (DOR) tax records and information provided by the two businesses.
  • Changes in government revenue are based on JLARC staff estimates of qualifying airplane modification work, using DOR tax records.

Beneficiary industries in REMI

The scenarios described below estimate the economic activity and tax revenue impact using the beneficiary’s primary North American Industry Classification System (NAICS) code, as reported to DOR. The scenic and sightseeing transportation and support activities for transportation grouping, as recorded by REMI, combines the 487 and 488 NAICS codes into a single broad category capturing transportation support activities in subindustries based on land, water, rail, and air. This appendix uses the term "transportation support activities industry" to describe this broad category.

The scenarios capture the inter-industry purchases by the transportation support activities industry. These interactions are unique to this industry and distinct from the other 159 industry sectors in the REMI model. JLARC staff updated relevant model inputs based on feedback from the two Washington businesses benefiting from the tax preference.

Scenarios modeled to estimate the revenue and employment impact if the tax preference expires

JLARC staff requested information from the two current beneficiaries, Greenpoint Technologies, Inc. (GTI) and Aviation Technical Services, Inc. (ATS), detailing their inter-industry supply chain purchases in Washington, current and recent annual employment, and current salary information. The taxpayers specifically authorized JLARC staff to use this information to evaluate the economic and employment effects of the sales and use tax preference for large privately owned airplanes.  

To illustrate the potential responses by the two current beneficiaries and the associated revenue and employment effects, JLARC staff assumed the Legislature did not alter or extend the current tax preference and allows it to expire in 2021. The scenarios assume different levels of response by the beneficiaries when the preference expires:

  • Scenario 1: Assumes that current beneficiaries stop performing the airplane modification work directly related to the tax preference, but maintain their presence in Washington. They continue to perform work unrelated to the tax preference. JLARC staff modeled this potential response by removing an amount of industry output equivalent to the estimated qualifying modification activity.
  • Scenario 2: Assumes one of the two current beneficiaries, GTI, moves their entire operation out of Washington while the other beneficiary, ATS, remains in Washington, but no longer performs the airplane modification work. JLARC staff modeled these potential responses by reducing the aggregate sales for the transportation support activities industry by an amount equal to GTI’s estimated statewide business activity and ATS’s estimated qualifying modification activity.

The results below focus on the two areas the Legislature identified as the primary public policy objectives for this preference: the estimated impact to economic development in Washington's aerospace cluster and state tax revenues. For this report, JLARC staff defined the aerospace cluster as the aerospace parts and products manufacturing industry (NAICS 3364), also referred to as the "aerospace manufacturing industry." The results also describe the estimated impact on statewide employment if the preference expires.

Model forecasts future impacts

The REMI model is a forecasting tool. It cannot be used to model the effects from the tax preference beginning in 2016. According to REMI, the change in economic activity and reduction in government revenues from the preference are captured in the underlying model data and the budget updates entered by JLARC staff.

The modeling approach assumes the current tax preference expires July 1, 2021. The potential responses from industries and businesses to this policy change are estimates beginning at the start of the 2021-2023 biennium.

Scenario 1: Businesses cease qualifying airplane modification work, but maintain other operations in Washington

To model this scenario, JLARC staff assume the following:

  • Changes in sales at the industry level begin the first day of fiscal year 2022 (July 1, 2021) when the current tax preference expires.
  • Both businesses maintain their presence in Washington and sales decrease by the sum of the estimate of all instate activity for both businesses.
  • The values entered into the model grow 2% per year, consistent with the REMI model's estimated average output growth by the transportation support activities industry through 2031.

JLARC staff also worked with REMI staff to correct one of the built-in revenue assumptions of the model. The model assumes that a decrease in industry sales is associated with a decrease in sales tax and a decrease in state revenues. However, airplane modification work was not taking place in Washington before the tax preference was enacted, and both businesses indicated that the work would very likely be moved out of state if the tax preference expires. To address this, JLARC staff included a positive revenue shock to offset the default assumptions of the model.

The estimated change in industry sales are shown below ($ in millions):

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Estimated change in Industry Sales ($millions) -31.1 -62.2 -63.5 -64.7 -66.0 -67.3 -68.7 -70.1 -71.5 -72.9 -74.3
Note: 2021 represents the last six months of the calendar year after the preference expires.
Source: JLARC staff analysis of DOR tax return data.

Results: No change in aerospace manufacturing industry jobs. Tax revenues expected to decrease by an average of $1.8 million per year and employment by an average of 347 jobs per year between 2022-2031.

No change in aerospace industry jobs. The estimates for this scenario indicate that employment in the aerospace parts and products manufacturing industry (NAICS 3364) is not significantly impacted by the possible loss of business activity related to the tax preference. Specifically, REMI estimates that the employment change in the aerospace manufacturing industry will be flat, with no additional jobs lost between 2022 and 2031.

Statewide tax revenues decrease by $1.8 million per year on average. Under the assumptions of this scenario, aggregate statewide tax revenues are expected to decrease by $1.8 million, on average, between 2022 and 2031, relative to the baseline estimate. The revenue estimate captures the tax impact associated with decreases in all induced and indirect economic activity.

Statewide employment decreases by 347 jobs per year on average. Statewide employment is estimated to decrease by 347 jobs, on average, between 2022 and 2031. Losses peak at 404 jobs in 2023 followed by small rebounds in employment in subsequent years.

Scenario 2: Qualifying airplane modification work ceases and one business relocates out of Washington

To model this scenario, JLARC staff made the same assumptions described under scenario 1 except for estimated sales. Under this scenario, the assumption is that sales decrease by the sum of the estimated value of all instate activity for one business and the estimated value of the qualifying airplane modification activity for the other business. The former captures the possible relocation of the business outside of Washington.

The estimated change in industry sales are shown below ($ in millions):

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Estimated change in Industry Sales ($millions) -42.7 -87.1 -88.8 -90.6 -92.4 -94.2 -96.1 -98.1 -100 -101 -104
Note: 2021 represents the last six months of the calendar year after the preference expires.
Source: JLARC staff analysis of DOR tax return data.

Results: No change in aerospace manufacturing industry jobs. Tax revenues expected to decrease by an average of $3.3 million per year and employment by an average of 569 jobs per year between 2022-2031.

No change in aerospace industry jobs. The estimates for this scenario indicate that employment in the aerospace parts and products manufacturing sector (NAICS 3364) is not significantly impacted by the possible loss of business activity related to the tax preference. Specifically, REMI estimates that the employment change in the aerospace manufacturing industry will be flat, with no additional jobs lost between 2022 and 2031.

Statewide tax revenues decrease by $3.3 million per year on average. Under the assumptions of this scenario, aggregate statewide tax revenues are expected to decrease by $3.3 million, on average, between 2022 and 2031, relative to the baseline estimate. The revenue estimate captures the impact of lost indirect and induced economic activity related to the likely loss of qualifying large airplane modification work.

Statewide employment decreases by 569 jobs per year on average. Statewide employment is estimated to decrease by 569 jobs, on average, between 2022 and 2031. Losses peak at 665 jobs in 2023 followed by modest employment rebounds in subsequent years.

Preliminary Report | Large Private Airplanes Owned by Nonresidents

July 2019

Recommendations & Responses

Legislative Auditor's Recommendation

Legislative Auditor's Recommendation: Continue and clarify the objective

The Legislature should continue this preference by extending the expiration date before the preference expires on July 1, 2021.

Since the preference was enacted, Washington businesses have received several modification projects for large private airplanes. This has created new jobs and economic activity in Moses Lake and other areas in Washington where modification-related activities are performed. Economic models estimate that state tax revenues have increased between $1.8 million to $3.3 million per year due to the preference.

The preference has had a negligible impact on Washington's broader aerospace manufacturing industry. The Legislature should clarify whether the objective of growing the broader aerospace manufacturing industry is relevant.

If the preference is allowed to expire, in-state modification activity would likely cease. This would result in job losses and a decrease in tax revenues.

Legislation Required: Yes.

Fiscal Impact: Depends on legislative action.

Preliminary Report | Large Private Airplanes Owned by Nonresidents

July 2019

Recommendations & Responses

Letter from Commission Chair

Preliminary Report | Large Private Airplanes Owned by Nonresidents

July 2019

Recommendations & Responses

Commissioners' Recommendation

Preliminary Report | Large Private Airplanes Owned by Nonresidents

July 2019

Recommendations & Responses

Agency Response

If applicable, available December 2019.

Preliminary Report | Large Private Airplanes Owned by Nonresidents

July 2019

More about this review

Study questions