Interstate Transportation Tax Preferences

Businesses that transport goods in Washington pay public utility tax

Businesses that engage in transportation, communications, and the supply of energy, natural gas, and water pay public utility tax (PUT) on their gross earnings. PUT is paid in lieu of the business and occupation tax. The PUT rate depends on the specific activity. For transportation businesses, the rate ranges from 0.642% (e.g., urban transportation) to 1.926% (e.g., railroads, trucking).

Four PUT preferences exempt gross earnings from the Washington portion of interstate or international transportation

Generally, transportation that takes place entirely within Washington is subject to PUT. However, the four preferences in this review exempt earnings from transportation that occurs inside Washington if the transported goods are moving across state or international lines (Exhibit 1.1). Businesses in four transportation industries — truck, rail, water, and pipeline — can benefit from the tax preferences. Income from the out-of-state portion is not subject to Washington taxation.

Exhibit 1.1: Four preferences exempt gross earnings from the portion of interstate or international transportation that occurs in Washington

Yellow lines on the maps indicate the portion exempt from PUT.

Preference	Preference Details
In-state portion of interstate transportation services RCW 82.16.050(6)	Exempts: Gross earnings from the in-state portion of interstate transportation. Example: A business ships goods between Washington and another state.
Through freight RCW 82.16.050(8)	Exempts: Gross earnings from the entire in-state portion of an interstate freight haul. A shipment may stop in Washington for storage, manufacturing, or processing before it is sent to its final destination. Requirement: Shipment must be billed under a through-freight rate. This means one business ensures the goods are delivered to the final destination, even if other carriers are involved. Example: A business ships goods to a storage or processing facility in Washington. The company later transports the goods to an out-of-state location.
Shipments to port RCW 82.16.050(9)	Exempts: Gross earnings from moving freight from a location in Washington directly to an instate port, dock, wharf, export elevator, or ship. Requirements: The origin and point of delivery must be in different cities or towns. Shipment must next be transported by vessel to a location outside the state. Example: A business moves grain by tug and barge from a location in Washington to an export terminal in a Washington port. An export vessel ships it to a foreign destination.
Shipping farm products to port RCW 82.16.050(10)	Exempts: Gross earnings from moving agricultural products from a location in Washington to an interim storage facility (e.g., grain warehouse) before they are shipped to port. Requirements: Shipment is stored before it is moved to an export elevator, wharf, dock, or ship for shipment out of state by vessel. The same business must operate the interim storage facility and the storage facility at the port. Example: A business transports grain from a Washington farm to a grain elevator on the Snake River. The grain is next moved by tug and barge to an export terminal in a Washington port. From there, it is shipped by vessel to a foreign destination.

Source: JLARC staff analysis.

Transportation industries that benefit from preferences employ more than 31,000 people

The truck, rail, water, and pipeline transportation industries included over 2,800 businesses and employed more than 31,000 people in 2021.

Exhibit 1.2: Rail, truck, water, and pipeline industries employed more than 31,000 people in Washington (2021)

Sources: JLARC staff analysis of data from (1) BLS 2021 Quarterly Census of Employment and Wages (QCEW) and WSDOT and (2) Bureau of Labor Statistics (BLS) April 2021 Occupational Employment and Wage Statistics Data (OEWS).

As part of the Legislature's direction to include racial equity analysis into its evaluations, JLARC staff compiled industry-level race and ethnicity data from the U.S. Census Bureau's Longitudinal Employer-Household Dynamics program. In the absence of specific data about beneficiaries and their employees, the following is intended to provide the Legislature with insight into the racial and ethnic characteristics of people who work in the industries that benefit from the tax preferences.

Exhibit 1.3: Census data describes race and ethnicity of transportation industry employees

Sources: JLARC staff analysis of data from U.S. Census Longitudinal Employer-Household Dynamics. The percentages shown for race and ethnicity are based on employment figures from the BLS 2021 Quarterly Census of Employment and Wages (QCEW).

The transportation sector and freight-dependent industries comprise a significant share of Washington's economy

The preferences directly reduce taxes for four transportation industries. Other businesses may benefit indirectly. For example, lower tax costs for transportation could lower costs for freight-dependent industries (i.e., those that rely heavily on the multimodal freight system to remain competitive).

The Washington State Department of Transportation (WSDOT) identifies the following as freight-dependent industries: Construction and Quarrying (excluding oil and gas); Transportation; Agriculture, Seafood, and Forestry; Energy (petroleum and coal products manufacturing); Wholesale, Warehousing, and Storage; Manufacturing; and Retail, Dining, and Waste Disposal.

The transportation sector and these freight-dependent industries contributed 34% of the state's Gross Domestic Product (GDP) in 2021. They also made up 45% of private sector jobs and 41% of private sector wages in Washington. The transportation sector includes the preferences' direct beneficiaries (e.g., truck transportation) and other industries (e.g., air transportation and support activities for transportation).

Exhibit 1.4: Transportation sector and freight-dependent industries contribute 34% of Washington GDP

Source: JLARC staff analysis of 2021 BEA, BLS-QCEW data.

Note: Exhibit 1.4 includes GDP contributions from the entire transportation sector, including the direct beneficiaries and other industries (e.g., air transportation and support activities for transportation).

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JLARC staff used federal data to estimate taxpayer savings from fiscal year 2022 through 2029 (Appendix A). The analysis:

1. Estimated how many ton-miles of freight in Washington qualify for the preference.
2. Estimated the gross earnings for moving the freight in Washington based on federal data for average revenue per ton-mile.
3. Calculated savings by multiplying gross earnings by the applicable public utility tax (PUT) rate. PUT rates for transportation services in this estimate range from 1.3696% to 1.926%.

The analysis considered transportation mode (e.g., truck, rail) and the goods being shipped.

JLARC staff estimate taxpayers that used the preference saved $87.2 million in fiscal year 2022. The savings are expected to grow each year because the federal data assumes that both the amount of freight and the cost to transport it will increase.

Exhibit 3.1: Beneficiary savings are estimated to increase to $220 million in the 2027-29 biennium

Source: JLARC staff estimates based on federal Freight Analysis Framework data.

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With preferences, Washington taxes on interstate rail and truck transportation are lower than the average of 10 comparison states

Exhibit 4.1: Analysis compared tax burden in Washington and 10 other states Source: JLARC staff summary of EY analysis.

JLARC staff hired a tax accounting consultant to compare the estimated tax burdens for rail and truck transportation in Washington and 10 other states (California, Idaho, Illinois, Louisiana, Nevada, New Jersey, Ohio, Oregon, Texas, and Virginia).

• Rail and truck transportation represent the largest share of estimated beneficiary savings (17% and 60%, respectively) compared to other modes of transportation.
• The 10 states are near Washington, have large port facilities, and/or contain freight transportation hubs.

The analysis applies each comparison state's applicable taxes and apportionment rulesAssignment of income to states for tax purposes to financial information for hypothetical rail or truck businesses. The consultant also estimated the tax reduction from any tax preferences in each state. This step affected only Washington's taxes. The result is an estimate of the tax cost in each state, expressed as a rate of dollars per thousand ton-miles. Details are in Appendix B.

Rail: With or without preferences, Washington's taxes are lower than the average of other states

The analysis assumes that the hypothetical rail company earns all of its revenue through interstate transportation. Also, 25% of revenue miles occur inside each state.

• With the preferences, Washington's taxes on interstate rail transportation are estimated to be $2.15 per thousand ton-miles. This is lower than the other 10 states.
• Without the preferences, 25% of the firm's revenue miles would become subject to PUT in Washington. This would raise the tax cost per thousand ton-miles to $2.38. It would still be the second lowest of all 11 states.
• With or without the preferences, Washington's tax cost for interstate rail transportation would remain below the average of comparison states.

Exhibit 4.2: Preferences reduce WA state tax on rail transportation to lowest among comparison states

Source: EY analysis.

Truck: With preferences, Washington's taxes are lower than the average of other states

The analysis assumes that the hypothetical truck company is headquartered in each respective state and earns all of its revenue through interstate transportation. Also, 33% of revenue miles occur inside each state.

• With the preferences, Washington's taxes on interstate truck transportation are estimated to be $2.18 per thousand ton-miles. This tax cost ranks fourth lowest among comparison states. It is below the average of the other ten states.
• Without the preferences, 33% of the firm's revenue miles would become subject to PUT in Washington. This would raise the tax cost per thousand ton-miles to $3.19. Washington's tax cost would rise to third highest.

Exhibit 4.3: Preferences reduce state tax on truck transportation to fourth lowest among comparison states

Source: EY analysis.

Without preferences, analysis shows that some imports and exports would be diverted to ports outside Washington

Stakeholders expressed concerns about the impact of repeal on port traffic. In general, the concerns can be summarized as follows:

• Repealing the preferences could increase the cost of transporting freight through Washington.
• Higher transportation costs could make Washington a relatively more expensive import and export route than competitor ports (e.g., Long Beach, California and Vancouver, British Columbia). This could result in a loss of freight volume.
• A loss of freight volume would negatively affect economic activity for the ports and for the transportation industries that handle import and export freight.

To estimate the impact of imposing the tax on port volume, JLARC staff worked with Dr. Robert Leachman, an expert in supply chains and economic analysis of freight transportation. He analyzed the potential diversion of marine imports and exports.

• Imports: The analysis is based on estimated 2019 import volumes for over 100 importers. The model optimizes supply chains for containerized freight that is shipped by water from southeast Asia to the U.S. It concludes that repealing the preferences (i.e., imposing the PUT) could divert an estimated 0.16% of containerized imports away from the ports of Seattle and Tacoma to competitor ports.
• Exports: The analysis used 2019 data to estimate the amount of freight by commodity, the origin of different bulk grains, and the ways grain might be transported. Based on these estimates, the analysis concludes that 0.5% of containerized exports and 2.7% of grain exports could be diverted to competitor ports.

The full report is in Appendix C.

Exhibit 4.4: Imposing the PUT could divert an estimated 0.16% of containerized imports and 2.7% of grain exports

Source: Leachman Consulting.

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When the preferences were reviewed in 2010, the Citizen Commission for Performance Measurement of Tax Preferences recommended an analysis of the economic impact of their repeal (see 2010 tax performance review report, page 15).

For this report, JLARC staff used REMI (Regional Economic Models, Inc. – economic modeling software) to conduct that analysis. Appendix D describes the model used. Appendix E provides details about the methodology.

Impact of repeal can be modeled by increasing production cost and government spending

If the Legislature repealed the preferences, transportation businesses would pay more public utility tax. The tax revenue would accrue to the state general fund. JLARC staff assumed the increased tax would be equal to the beneficiary savings (i.e., $87 million in fiscal year 2022). Staff used two types of inputs to model these changes:

1. An increase in production cost for affected industries (e.g., transportation, freight-dependent industries). Public testimony from 2010 and interviews with current stakeholders suggest that transportation businesses would likely raise prices to pass some of the additional tax cost to customers.
2. An increase in state government spending in proportion to how the current state budget is spent. The government spending increase is assumed to be the same for both scenarios below.

Model suggests repeal would lead to a net loss in private sector jobs and a net gain in public sector jobs

In general, the model shows:

• Increased production cost leads to a loss of jobs. These job losses occur primarily in the private sector, but public sector job losses occur as well.
• Increased government spending leads to an increase in jobs. The job increase occurs in both the public sector (925 jobs) and private sector (945 jobs).

Both the net employment change and the industries that are affected depend, in part, on the degree to which transportation businesses pass the costs to their customers. To illustrate the range of possible results, JLARC staff modeled multiple scenarios for the production cost increase and present two here.

Scenario A assumes the transportation industries do not pass the additional tax to their customers

The model applies all of the production cost increase to the transportation businesses that are direct beneficiaries of the tax preferences. In this scenario, private sector employment is estimated to decrease by a net of 785 jobs:

• The rail, truck, water, and pipeline transportation industries lose the most jobs (330). These industries bear all production cost increases.
• Other private industries lose a combined 455 jobs. The largest job losses are in construction (105), manufacturing (70), and retail trade (65).

After considering a net increase of 745 jobs in state government, the estimated net employment change statewide is a loss of 40 jobs.

Exhibit 5.1: Scenario A. If the preference beneficiaries pass none (0%) of the tax cost to customers, the private sector is estimated to lose 785 jobs.

Source: JLARC staff analysis.

Scenario B assumes the transportation industries pass all of the additional cost to their customers

The model applies all of the production cost to the Washington industries that are assumed to produce or use the transported commodities.

In this scenario, private sector employment is estimated to decrease by a net of 860 jobs.

• Transportation would have a net loss of 100 jobs.
• Other private industries lose a combined 760 jobs. The large job losses are in manufacturing (385), farming (135), forestry, fishing, and hunting (50), and retail trade (45).

After considering an increase of 760 jobs in state government, the estimated net employment change statewide is a loss of 100 jobs.

Exhibit 5.2: Scenario B. If the preference beneficiaries pass all (100%) of the tax cost to customers, the private sector is estimated to lose 860 jobs.

Source: JLARC staff analysis.

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Deductions in computing tax.

RCW 82.16.050

In computing tax there may be deducted from the gross income the following items:

1. Amounts derived by municipally owned or operated public service businesses, directly from taxes levied for the support or maintenance thereof. This subsection may not be construed to exempt service charges which are spread on the property tax rolls and collected as taxes;
2. Amounts derived from the sale of commodities to persons in the same public service business as the seller, for resale as such within this state. This deduction is allowed only with respect to water distribution, gas distribution or other public service businesses which furnish water, gas or any other commodity in the performance of public service businesses;
3. Amounts actually paid by a taxpayer to another person taxable under this chapter as the latter's portion of the consideration due for services furnished jointly by both, if the total amount has been credited to and appears in the gross income reported for tax by the former;
4. The amount of cash discount actually taken by the purchaser or customer;
5. The amount of bad debts, as that term is used in 26 U.S.C. Sec. 166, as amended or renumbered as of January 1, 2003, on which tax was previously paid under this chapter;

6. Amounts derived from business which the state is prohibited from taxing under the Constitution of this state or the Constitution or laws of the United States;

7. Amounts derived from the distribution of water through an irrigation system, for irrigation purposes other than the irrigation of cannabis as defined under RCW 69.50.101;

8. Amounts derived from the transportation of commodities from points of origin in this state to final destination outside this state, or from points of origin outside this state to final destination in this state, with respect to which the carrier grants to the shipper the privilege of stopping the shipment in transit at some point in this state for the purpose of storing, manufacturing, milling, or other processing, and thereafter forwards the same commodity, or its equivalent, in the same or converted form, under a through freight rate from point of origin to final destination;

9. Amounts derived from the transportation of commodities from points of origin in the state to an export elevator, wharf, dock or ship side on tidewater or its navigable tributaries to be forwarded, without intervening transportation, by vessel, in their original form, to interstate or foreign destinations. No deduction is allowed under this subsection when the point of origin and the point of delivery to the export elevator, wharf, dock, or ship side are located within the corporate limits of the same city or town;

10. Amounts derived from the transportation of agricultural commodities, not including manufactured substances or articles, from points of origin in the state to interim storage facilities in this state for transshipment, without intervening transportation, to an export elevator, wharf, dock, or ship side on tidewater or its navigable tributaries to be forwarded, without intervening transportation, by vessel, in their original form, to interstate or foreign destinations. If agricultural commodities are transshipped from interim storage facilities in this state to storage facilities at a port on tidewater or its navigable tributaries, the same agricultural commodity dealer must operate both the interim storage facilities and the storage facilities at the port.

    1. The deduction under this subsection is available only when the person claiming the deduction obtains a certificate from the agricultural commodity dealer operating the interim storage facilities, in a form and manner prescribed by the department, certifying that:

       1. More than ninety-six percent of all of the type of agricultural commodity delivered by the person claiming the deduction under this subsection and delivered by all other persons to the dealer's interim storage facilities during the preceding calendar year was shipped by vessel in original form to interstate or foreign destinations; and

       2. Any of the agricultural commodity that is transshipped to ports on tidewater or its navigable tributaries will be received at storage facilities operated by the same agricultural commodity dealer and will be shipped from such facilities, without intervening transportation, by vessel, in their original form, to interstate or foreign destinations.

    2. As used in this subsection, "agricultural commodity" has the same meaning as agricultural product in RCW 82.04.213;

11. Amounts derived from the production, sale, or transfer of electrical energy for resale within or outside the state or for consumption outside the state;
12. Amounts derived from the distribution of water by a nonprofit water association and used for capital improvements by that nonprofit water association;
13. Amounts paid by a sewerage collection business taxable under RCW 82.16.020(1)(a) to a person taxable under chapter 82.04 RCW for the treatment or disposal of sewage;
14. Amounts derived from fees or charges imposed on persons for transit services provided by a public transportation agency. For the purposes of this subsection, "public transportation agency" means a municipality, as defined in RCW 35.58.272, and urban public transportation systems, as defined in RCW 47.04.082. Public transportation agencies must spend an amount equal to the reduction in tax provided by this tax deduction solely to adjust routes to improve access for citizens using food banks and senior citizen services or to extend or add new routes to assist low-income citizens and seniors.

[ 2022 c 16 § 162; 2014 c 140 § 25; 2007 c 330 § 1; 2006 c 336 § 1; 2004 c 153 § 308; 2000 c 245 § 1; 1994 c 124 § 12; 1989 c 302 § 103; 1987 c 207 § 1; 1982 2nd ex.s. c 9 § 3; 1977 ex.s. c 368 § 1; 1967 ex.s. c 149 § 25; 1965 ex.s. c 173 § 22; 1961 c 15 § 82.16.050. Prior: 1959 ex.s. c 3 § 18; 1949 c 228 § 11; 1937 c 227 § 12; 1935 c 180 § 40; Rem. Supp. 1949 § 8370-40.]

Notes:

Intent—Finding—2022 c 16: See note following RCW 69.50.101.

Retroactive effective date—Effective date—2004 c 153: See note following RCW 82.08.0293.

Effective date—Application—2000 c 245 § 1: "(1) Section 1 of this act is necessary for the immediate preservation of the public peace, health, or safety, or support of the state government and its existing public institutions, and takes effect immediately [March 31, 2000]. (2) Section 1 of this act applies to all amounts due prior to and after March 31, 2000." [ 2000 c 245 § 3.]

Finding, purpose—1989 c 302: See note following RCW 82.04.120.

Effective date—1982 2nd ex.s. c 9: See note following RCW 82.16.010.

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