Beneficiaries created over 1,000 jobs in rural counties, but use
continues to decline. The preference's wage threshold has not been updated since 1997.
November 2023
Executive Summary
Preference provides B&O tax credit for manufacturers and other businesses that
create new jobs in rural counties or CEZs
This preference provides a business and occupation (B&O) tax credit for each new
job created in a rural county or community empowerment zone (CEZ). Qualifying jobs
must be full-time (at least 35 hours per week). Businesses must:
Conduct manufacturing, research and development, or commercial testing.
Increase their employment by 15% or more.
Maintain the new positions for one year.
Two levels of credit are available, based on a threshold of $40,000:
$2,000 for jobs with wages and benefits of $40,000 or less a year.
$4,000 for jobs with wages and benefits over $40,000 a year.
The preference does not have an expiration date.
Legislature wanted to promote or attract businesses and create family wage jobs in
distressed or rural areas
The preference was originally enacted in 1986 for counties with above average
unemployment rates (i.e., distressed counties). Amendments over the ensuing years
added eligible locations but kept the focus on distressed or rural areas. Since 1999,
the preference has applied to all rural counties and CEZs.
The 1997 Legislature stated the preference was intended to encourage new and existing
businesses to operate and expand in rural distressed counties. The Legislature also
stated its intent to provide family wage jobs in these areas.
Objectives (stated)
Results
In rural distressed counties:
Promote business operation and expansion of existing businesses.
Attract or develop new businesses.
Unclear.
36 businesses created 1,041 jobs in rural counties in fiscal years
2015-2020. Of these, 25 were existing and 11 were new.
Available data does not indicate whether the preference caused businesses
to add jobs. However, an economic model suggests that if the preference led
businesses to create 19 (2%) of the new jobs, the state would break
even.
The number of businesses using the preference fell from 51 in fiscal year
2015 to 12 in fiscal year 2022. At the same time, the amount of credit used
each year declined from $1.5 million to $291,000. The statutory annual
maximum for the credit is $7.5 million.
Provide family wage jobs in rural distressed counties.
Unclear.
54% of the jobs created in rural counties in fiscal years 2015-2020 paid
$40,000 or less a year. This is close to the five-year average rural county
wage ($42,000).
The preference's wage threshold has not been updated since 1997. For
context, $40,000 in 1997 is equivalent to $70,000 as of December 2021.
Recommendations
Legislative Auditor's Recommendation: Continue and modify
The Legislature should continue the preference because it has been used by
businesses that created jobs in eligible areas. Economic modeling suggests that the
state breaks even if the preference causes only 2% of the jobs. It is unclear why use
of the preference has declined.
The Legislature should modify the preference to promote and increase family
wage jobs in rural counties. For example, the Legislature might consider increasing
the wage threshold to reflect current economic conditions and linking future increases
to inflation or wage benchmarks.
The Legislature should modify the preference to potentially increase the
number of businesses applying for the credit. For example, the Legislature might
consider increasing the credit amounts, or extending the preference to other industry
sectors that could benefit rural counties.
Endorse Legislative Auditor recommendation with comment. The Legislature should
modify the preference to increase the number of businesses applying for the credit.
This may require a more in-depth study of why use of the preference has declined.
Committee Action to Distribute Report
On November 29, 2023 this report was approved for distribution by the Joint
Legislative Audit and Review Committee.
Action to distribute this report does not imply the Committee agrees or disagrees
with the Legislative Auditor recommendations.
23-05 Final Report: Rural County and CEZ New Jobs
November 2023
REVIEW Details
1. B&O tax credit for new jobs in rural counties or CEZs
Preference provides B&O tax credit for businesses that create
and retain new jobs in rural counties or community empowerment zones
Certain businesses that create and retain new jobs can receive B&O tax
credits
Businesses that conduct manufacturing, research and development, or commercial
testing activities can earn business and occupation (B&O) tax credits for new
jobs. Qualifying jobs must be full-time (at least 35 hours per week). The credit
amount is either $2,000 or $4,000, depending on each job's wages and benefits.
To qualify for the credit, a business must:
Apply to the Department of Revenue (DOR) for the credit.
Increase employment at a facility in a rural county or community empowerment zone
(CEZ) by at least 15%.
Maintain the employment increase for four consecutive quarters after the job is
filled.
Verify the employment increase to DOR through annual reports.
If a business does not keep the job for one year, it must pay back, with interest,
any credit already used on tax returns.
Credits can be carried forward to future tax returns until they are used in full.
However, credits will expire if the business closes or has not used any of its credits
in six years. The preference does not have an expiration date.
Preference focuses on job creation in rural counties and community empowerment
zones
The Legislature enacted the preference in 1986, targeting counties with above average
unemployment (i.e., distressed counties). Amendments in subsequent years added more
eligible locations but kept the focus on rural or distressed areas. Since 1999, the
preference has been available to businesses in CEZs and all rural counties, whether or
not they are distressed.
Exhibit 1.1: Preference is currently available in 30 rural counties and six CEZs
Rural county:
A county with population density of less than 100 people per square mile or
area under 250 square miles.
In 2022, 15 of the 30 rural counties were also distressed.
Community empowerment zone (CEZ):
Urban areas designated by the Department of Commerce based on limited
employment opportunities, low incomes, lack of affordable housing, deteriorating
infrastructure, and limited community service, job training, or education
facilities.
Source: JLARC staff analysis of Office of Financial Management designations of rural
counties as of June 2022 and Department of Revenue documentation on CEZs.
23-05 Final Report: Rural County and CEZ New Jobs
November 2023
REVIEW Details
2. Beneficiaries created 1,041 jobs in rural counties
Businesses that received credits created over 1,000 jobs in rural
counties (FY 2015-2020)
Beneficiary businesses created and filled over 1,000 new jobs in 18 rural
counties
Department of Revenue (DOR) data shows that 36 businesses applied and qualified for
the credit, creating 1,041 new jobs between July 1, 2014, and June 30, 2020. Of these
businesses, 25 were existing and 11 were new.
Statute requires a business to report employment information for only two years after
its application is accepted. As a result, the data does not show whether the
businesses maintained those jobs after the first year.
Exhibit 2.1: In fiscal years 2015 through 2020, beneficiaries created jobs in 18 of
30 rural counties. None were created in community empowerment zones.
Source: JLARC staff analysis of DOR preference application and annual report data,
fiscal years 2015-2020.
Note: Whatcom County qualified as a rural county (population less than 100
people/square mile) until 2016. Businesses that created jobs qualified for credits and
used them between fiscal years 2015-2020.
Additional businesses applied for the preference
During fiscal years 2015 through 2020, an additional 31 businesses applied to use the
preference but did not meet the 15% employment increase requirement.
In addition, 12 businesses applied for the preference between July 2020 and October
2022. As of
October
2022, these businesses had not completed the two annual reports to confirm they
maintained the 15% employment increase. Neither the businesses nor the jobs they
initially reported creating are included in this analysis.
Manufacturing businesses are the most common users of the preference
The 36 businesses that qualified in fiscal years 2015 through 2020 were primarily
manufacturers. This is a broad industry sector that includes food manufacturers,
breweries, and businesses that produce items including household goods, bioscience
products, and metal or timber products. In 15 of the 18 (83%) counties where jobs were
created, manufacturing jobs are a larger percentage of total employment than the
statewide average.
JLARC staff compiled information about race and ethnicity of workers in the
manufacturing sector
As part of the Legislature's direction to include racial equity analysis in its
evaluations, JLARC staff compiled available data on race and ethnicity characteristics
of workers in the state's manufacturing sector.
DOR does not collect information about race or ethnicity of beneficiary business
owners. Also, businesses do not report the race or ethnicity of their employees to DOR
or the Employment Security Department (ESD). In the absence of actual beneficiary
data, the following is intended to provide the Legislature with insight into the
racial and ethnic characteristics of individuals the firms may hire for these new
jobs.
Exhibit 2.2: Racial and ethnic detail is available for the manufacturing sector in
the 18 counties where jobs were created
Fourth quarter 2021
employment
Race/ethnicity of employees in manufacturing sector
Area
All sectors
Manufacturing sector (percent)
White
Black / African American
American Indian / Alaska Native
Asian
Native Hawaiian / Pacific Islander
Two or more races
Hispanic / Latino of any race
Statewide
2,471,458
236,159 (9.6%)
66.3%
3.4%
0.7%
13.0%
0.8%
2.6%
13.2%
Asotin
4,747
421 (8.9%)
91.2%
0.0%
1.0%
0.0%
0.0%
1.7%
3.3%
Clallam
12,626
836 (7%)
88.3%
1.1%
1.3%
1.1%
0.0%
2.6%
5.5%
Columbia
796
137 (17%)
89.1%
0.0%
0.0%
0.0%
0.0%
0.0%
5.8%
Cowlitz
28,569
6,106 (21%)
78.8%
1.4%
1.1%
3.4%
1.0%
2.5%
11.9%
Franklin
22,932
3,492 (15%)
35.5%
2.5%
0.4%
4.7%
0.3%
0.8%
55.7%
Grays Harbor
13,806
2,207 (16%)
78.6%
1.4%
1.3%
2.8%
0.3%
2.3%
13.4%
Jefferson
5,024
476 (9.5%)
88.4%
1.2%
1.8%
0.6%
0.6%
1.8%
5.3%
Klickitat
4,677
1,305 (28%)
78.9%
2.3%
0.9%
2.6%
0.2%
2.0%
13.0%
Lewis
17,411
2,669 (15%)
76.2%
1.3%
1.0%
4.0%
0.3%
2.1%
15.2%
Mason
7,062
738 (10%)
69.5%
1.8%
2.0%
6.0%
0.5%
2.8%
17.3%
Pacific
3,763
541 (14%)
69.7%
1.3%
1.5%
4.8%
0.0%
2.8%
19.6%
Pend Oreille
1,124
115 (10%)
91.3%
0.0%
0.0%
0.0%
0.0%
0.0%
5.2%
Skagit
31,865
5,614 (18%)
70.7%
1.4%
0.5%
6.4%
0.4%
2.4%
18.2%
Skamania
1,216
291 (24%)
79.0%
1.4%
0.0%
1.0%
0.0%
2.1%
15.1%
Stevens
6,152
1,018 (17%)
89.9%
0.5%
1.9%
0.7%
0.0%
3.3%
3.4%
Walla Walla
18,589
3,638 (20%)
51.4%
1.8%
0.4%
6.6%
0.3%
1.6%
37.9%
Whatcom
61,076
8,069 (13%)
71.9%
1.9%
1.0%
8.0%
0.6%
2.2%
14.5%
Yakima
75,693
7,363 (10%)
47.8%
1.2%
1.3%
1.7%
0.2%
1.1%
46.8%
Source: JLARC staff analysis of U.S. Census Longitudinal Employer-Household
Dynamics, LED Extraction Tool.
Notes:
Certain percentages in a county may not add to 100% due to rounding and the manner
in which the U.S. Census reports data to ensure confidentiality of small sample
sizes.
The Local Employment Dynamics (LED) integrates data from the ESD with federal
censuses, surveys, and other administrative records to create a longitudinal data
system on U.S. employment.
The county-level employee counts capture "stable employment," or those employees
who worked on both the first and last day of the calendar year quarter.
23-05 Final Report: Rural County and CEZ New Jobs
November 2023
Review Details
3. 54% of jobs created paid $40,000 or less per year
Over half of the jobs created by beneficiaries paid $40,000 or
less. The wage threshold has not changed since 1997.
The 1997 Legislature stated that the preference was intended to help businesses
create family wage jobs in rural distressed counties. However, the Legislature did not
define family wage.
Businesses reported that 54% of the jobs they created pay $40,000 or less
By law, the amount of credit a business can receive is based on whether a job's wages
and benefits are above or below $40,000 per year:
$2,000 for jobs with wages and benefits equal to or less than $40,000 per year.
$4,000 for jobs with wages and benefits greater than $40,000 per year.
In fiscal years 2015 through 2020, businesses received credits for creating 1,041
jobs. Of those, 54% paid $40,000 or less per year. Employment Security Department
(ESD) data for calendar years 2015 to 2020 shows that the $40,000 wage and benefit
threshold is:
Close to the five-year average rural county wage of $42,000.
Lower than the five-year average statewide wage of $65,000.
Exhibit 3.1: Most jobs created by beneficiaries in rural counties had annual wages
of $40,000 or less
Source: JLARC staff analysis of DOR data providing beneficiary-reported job numbers
and wage categories.
Legislature set the wage threshold in 1997. It has not been updated.
Statute does not adjust the $40,000 wage threshold for inflation. It is now below
average wages. However, even adjusted for inflation, the threshold would be lower than
the 2021 statewide average annual wage.
$40,000 in June 1997 is equivalent to $70,000 in December 2021.
When the wage threshold was set in 1997, it exceeded both that year's rural county
average wage of $23,300 and the statewide average wage of $30,800.
The threshold is now below rural and state averages. Based on Bureau of Labor
Statistics data, in 2021 the rural county average wage was $49,900 and the statewide
average wage was $82,500. This is the most current data available.
23-05 Final Report: Rural County and CEZ New Jobs
November 2023
Review Details
4. Economic model estimates state's break-even point at 19 jobs
Economic model suggests that if the preference led businesses to
create 19 of the 1,041 new jobs, the state would break even
The 1997 Legislature stated that the preference was intended to help businesses
create jobs.
Between fiscal years 2015 and 2020, 36 businesses in 18 rural counties qualified
for the tax credits.
These businesses reported creating 1,041 new jobs, with a total credit value of $3
million.
Available data, such as the reports filed with the Department of Revenue (DOR), do
not indicate how many of the new jobs were created because of the preference. In lieu
of information about the preference's impact on job creation, JLARC staff estimated
the preference's break-even point.
JLARC staff modeled the preference's break-even point
Break even means the new jobs created by beneficiary businesses fully
offset the jobs lost due to lower state spending.
In short, it's the
point where there is no net loss of jobs statewide.
Economic model estimates the value of the jobs outweighs the costs if at least 19 of
the new jobs were due to the preference
When businesses claim the tax credits, their costs go down and they may add jobs. At
the same time, there is a loss in state revenue. The model assumes that there is a
corresponding reduction in state spending.
The model estimated that if at least 19 of the 1,041 jobs (2%) were created due to
the preference, the state would break even. The model also suggested that job losses
and gains related to this preference tend to be concentrated in the rural counties.
More detail is in Appendix B.
23-05 Final Report: Rural County and CEZ New Jobs
November 2023
Review Details
5. Preference use has declined
Preference use has not reached expected levels and is
declining
Preference use declined over the eight-year study period, dropping from $1.5 million
to $291,000
In fiscal years 2015 through 2022, 89 businesses claimed credits earned from the
preference. This includes some of the 36 businesses that qualified in this time (Section
2) and some that carried the credits forward after qualifying in previous
years.
Beneficiary businesses claimed $8 million in business and occupation (B&O) tax
credits over the eight fiscal years.
Use dropped from $1.5 million in fiscal year 2015 to $291,000 in fiscal year 2022.
This is an 81% decline.
Credit use was 4% to 22% of the maximum allowed each year
The Legislature capped the amount of credit that could be claimed at $7.5 million per
fiscal year.
In fiscal years 2015 through 2022, the average total beneficiary savings was $1
million per fiscal year.
The average annual credit claimed was 13% of the maximum. It fell from 21% in
fiscal year 2015 to 4% in fiscal year 2022.
A JLARC review of this preference in 2013 also found low use. In fiscal years 2006
through 2012, the average beneficiary savings per fiscal year was $1.7 million (23%
of the maximum).
Exhibit 5.1: Beneficiary savings have declined annually and are estimated to be
$582,000 in the 2025-2027 biennium
Biennium
Fiscal Year
Estimated Beneficiary Savings
Percent of $7.5 Million Maximum Credit Used
2013-15
7/1/13 - 6/30/15
2015
$1,540,000
21%
2015-17
7/1/15 - 6/30/17
2016
$1,316,000
18%
2017
$1,667,000
22%
2017-19
7/1/17 - 6/30/19
2018
$1,065,000
14%
2019
$1,283,000
17%
2019-21
7/1/19 - 6/30/21
2020
$466,000
6%
2021
$388,000
5%
2021-23
7/1/21 - 6/30/23
2022
$291,000
4%
2023
$291,000
2023-25
7/1/23 - 6/30/25
2024
$291,000
2025
$291,000
2025-27
7/1/25 - 6/30/27
2026
$291,000
2027
$291,000
2025-2027 biennium
$582,000
Source: JLARC staff analysis of DOR tax return credit detail, July 1, 2014, to June
30, 2022.
Number of businesses claiming the preference also has decreased
Exhibit 5.2: Number of beneficiaries using credit declined 76%
Source: JLARC staff analysis of DOR tax return credit detail.
The number of businesses claiming credits fell from 51 in fiscal year 2015 to 12 in
fiscal year 2022. This is a 76% decline.
Both large and small businesses claim the credit
According to Department of Revenue (DOR) records, 75% of the 89 businesses had gross
income of $57 million or less in fiscal year 2022. The remaining 25% had gross income
greater than $57 million. The credit amounted to 0.13% of the gross income reported
for all 89 businesses in fiscal year 2022.
Respondents to JLARC staff's survey said the preference had a neutral impact on
location and hiring decisions
JLARC staff surveyed the 89 businesses that used the preference in fiscal years 2015
through 2022. Thirteen business responded.
On a scale of 1 to 5:
Respondents rated the preference a 2.6 in their decision to locate in a rural
county or CEZ.
Respondents rated the preference a 3.1 in their decision to create new jobs.
When asked if they would use the credit again:
Six said yes.
Four said no (two are now closed).
Three were unsure.
Most businesses replying to JLARC staff's survey stated that the $2,000 and $4,000
amounts of credits do not appear to be problematic. However, one respondent noted the
credit amounts are too small to affect hiring decisions.
JLARC staff also spoke with staff at the Department of Commerce. They agreed that the
credit amounts are not problematic. They stated that they regularly market the
preference to businesses considering rural locations and the reactions are "very
positive."
Unless the context clearly requires otherwise, the definitions in this section apply
throughout this chapter.
"Applicant" means a person applying for a tax credit under this chapter.
"Department" means the department of revenue.
"Eligible area" means a "rural county" as defined in RCW 82.14.370.
"Eligible business project" means manufacturing or research and development
activities which are conducted by an applicant in an eligible area at a specific
facility, provided the applicant's average qualified employment positions at the
specific facility will be at least fifteen percent greater in the four
consecutive full calendar quarters after the calendar quarter during which the
first qualified employment position is filled than the applicant's average
qualified employment positions at the same facility in the four consecutive full
calendar quarters immediately preceding the calendar quarter during which the
first qualified employment position is filled.
"Eligible business project" does not include any portion of a business project
undertaken by a light and power business as defined in RCW 82.16.010 or that
portion of a business project creating qualified full-time employment positions
outside an eligible area.
"First qualified employment position" means the first qualified employment
position filled for which a credit under this chapter is sought.
"Manufacturing" means the same as defined in RCW 82.04.120. "Manufacturing" also
includes:
Before July 1, 2010: (i) Computer programming, the production of computer
software, and other computer-related services, but only when the computer
programming, production of computer software, or other computer-related services
are performed by a manufacturer as defined in RCW 82.04.110 and contribute to
the production of a new, different, or useful substance or article of tangible
personal property for sale; and (ii) the activities performed by research and
development laboratories and commercial testing laboratories; and
Beginning July 1, 2010, the activities performed by research and development
laboratories and commercial testing laboratories.
"Person" has the meaning given in RCW 82.04.030.
(i) "Qualified employment position" means a permanent full-time employee
employed in the eligible business project during four consecutive full calendar
quarters. (ii) For seasonal employers, "qualified employment position" also
includes the equivalent of a full-time employee in work hours for four
consecutive full calendar quarters.
For purposes of this subsection, "full time" means a normal workweek of at
least thirty-five hours.
Once a permanent, full-time employee has been employed, a position does not
cease to be a qualified employment position solely due to periods in which the
position goes vacant, as long as: (i) The cumulative period of any vacancies in
that position is not more than one hundred twenty days in the four-quarter
period; and (ii) During a vacancy, the employer is training or actively
recruiting a replacement permanent, full-time employee for the position.
"Recipient" means a person receiving tax credits under this chapter.
"Research and development" means the development, refinement, testing, marketing,
and commercialization of a product, service, or process before commercial sales have
begun, but only when such activities are intended to ultimately result in the
production of a new, different, or useful substance or article of tangible personal
property for sale. As used in this subsection, "commercial sales" excludes sales of
prototypes or sales for market testing if the total gross receipts from such sales
of the product, service, or process do not exceed one million dollars.
"Seasonal employee" means an employee of a seasonal employer who works on a
seasonal basis. For the purposes of this subsection and subsection (12) of this
section, "seasonal basis" means a continuous employment period of less than twelve
consecutive months.
"Seasonal employer" means a person who regularly hires more than fifty percent of
its employees to work on a seasonal basis.
Application for tax credits under this chapter must be made within ninety consecutive
days after the first qualified employment position is filled. The application shall be
made to the department in a form and manner prescribed by the department. The
application shall contain information regarding the location of the business project,
the applicant's average employment, if any, at the facility for the four consecutive
full calendar quarters immediately preceding the earlier of the calendar quarter
during which the application required by this section is submitted to the department
or the first qualified employment position is filled, estimated or actual new
employment related to the project, estimated or actual wages of employees related to
the project, estimated or actual costs, time schedules for completion and operation,
and other information required by the department. The department shall prescribe a
method for calculating a seasonal employer's average employment levels. The department
shall rule on the application within sixty days.
A person shall be allowed a credit against the tax due under chapter 82.04 RCW
as provided in this section. The credit shall equal:
Four thousand dollars for each qualified employment position with wages
and benefits greater than forty thousand dollars annually that is directly
created in an eligible business project and
Two thousand dollars for each qualified employment position with wages and
benefits less than or equal to forty thousand dollars annually that is
directly created in an eligible business project.
For purposes of calculating the amount of credit under (a) of this
subsection with respect to qualified employment positions as defined in
RCW 82.62.010(8)(a)(ii):
In determining the number of qualified employment positions, a fractional
amount is rounded down to the nearest whole number; and
Wages and benefits for each qualified employment position shall be equal
to the quotient derived by dividing: (A) The sum of the wages and benefits
earned for the four consecutive full calendar quarter period for which a
credit under this chapter is earned by all of the person's new seasonal
employees hired during that period; by (B) the number of qualified
employment positions plus any fractional amount subject to rounding as
provided under (b)(i) of this subsection. For purposes of this chapter, a
credit is earned for the four consecutive full calendar quarters after the
calendar quarter during which the first qualified employment position is
filled.
The department shall keep a running total of all credits allowed under this chapter
during each fiscal year. The department shall not allow any credits which would
cause the total to exceed seven million five hundred thousand dollars in any fiscal
year. If all or part of an application for credit is disallowed under this
subsection, the disallowed portion shall be carried over to the next fiscal year.
However, the carryover into the next fiscal year is only permitted to the extent
that the cap for the next fiscal year is not exceeded.
No recipient may use the tax credits to decertify a union or to displace existing
jobs in any community in the state.
(a) The credit may be used against any tax due under chapter 82.04 RCW, and, except
as otherwise provided under this subsection (4), may be carried over until used.
(b) Credits earned expire the first day of January of the year that is six
years from the later of the year that:(i) The department is notified by the
recipient, or a representative of the recipient, that the recipient has ceased
engaging in business within this state as those terms are defined in
chapter 82.04 RCW;(ii) The department closes the recipient's tax reporting
account; or(iii) The recipient last claimed the credit on a return filed with the
department.
No refunds may be granted for unused credits under this section.
Tax credits for eligible business projects in designated community empowerment zones.
RCW 82.62.045
For the purposes of this section "eligible area" also means a designated community
empowerment zone approved under RCW 43.31C.020.
An eligible business project located within an eligible area as defined in this
section qualifies for a credit under this chapter for those employees who at the
time of hire are residents of the community empowerment zone in which the project is
located, if the fifteen percent threshold is met. As used in this subsection,
"resident" means the person makes his or her home in the community empowerment zone.
A mailing address alone is insufficient to establish that a person is a resident for
the purposes of this section.
All other provisions and eligibility requirements of this chapter apply to
applicants eligible under this section.
Tax credit recipients to report to department—Payment of taxes and interest by
ineligible recipients.
RCW 82.62.050
Each recipient shall submit a report to the department by the last day of the
month immediately following the end of the four consecutive full calendar quarter
period for which a credit under this chapter is earned. The report shall contain
information, as required by the department, from which the department may determine
whether the recipient is meeting the requirements of this chapter. If the recipient
fails to submit a report or submits an inadequate report, the department may declare
the amount of taxes for which a credit has been used to be immediately assessed and
payable. The recipient must keep records, such as payroll records showing the date
of hire and employment security reports, to verify eligibility under this section.
If, on the basis of a report under this section or other information, the
department finds that a business project is not eligible for tax credit under this
chapter for reasons other than failure to create the required number of qualified
employment positions, the amount of taxes for which a credit has been used for the
project shall be immediately due.
If, on the basis of a report under this section or other information, the
department finds that a business project has failed to create the specified number
of qualified employment positions, the department shall assess interest, but not
penalties, on the credited taxes for which a credit has been used for the project.
The interest shall be assessed at the rate provided for delinquent excise taxes,
shall be assessed retroactively to the date of the tax credit, and shall accrue
until the taxes for which a credit has been used are repaid.
The employment security department shall make, and certify to the department of
revenue, all determinations of employment and wages requested by the department under
this chapter.
Applications, reports, and other information subject to disclosure.
RCW 82.62.080
Applications, reports, and any other information received by the department under
this chapter, except applications not approved by the department, are not confidential
and are subject to disclosure.
Sections 15 through 20 of this act are necessary for the immediate preservation of
the public peace, health, and safety, the support of the state government and its
existing public institutions, and shall take effect April 1, 1986.
JLARC staff used Regional Economic Models, Inc.’s (REMI) 39-region (counties), 70
industry sector Tax-PI software (version 3.0) to model impacts of the B&O tax
credit for new jobs created in rural counties and community empowerment zones (CEZs).
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 estimate 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 regional model contains 70 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 changes in business expenditures
due to a tax preference and from changes in spending by government due to the
associated revenue changes).
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 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
target 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 an economic and revenue forecast after incorporating 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.
Regional competitiveness is modeled via imports, exports, and output.
Demographics are modeled using population dynamics (births, deaths, and economic
and retirement migration) and include 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 affect Washington’s economy, population, and fiscal situation.
23-05 Final Report: Rural County and CEZ New Jobs
November 2023
Review Details
Appendix B: REMI analysis
REMI analysis shows the potential employment impacts associated
with the B&O tax credit for rural and CEZ job creation
JLARC staff used Regional Economic Model, Inc.’s 39-region (counties), 70 industry
sector Tax-PI software (version 3.0) to model scenarios that illustrate potential
employment effects if the business and occupation (B&O) tax credit for new jobs
created in rural counties and community empowerment zones (CEZs) were removed. See Appendix
A for an overview of the REMI model.
This technical appendix provides context and supporting information for the analysis
summarized in Section 4
of this report.
REMI methodology
Parameters reflect current patterns of revenue and spending
Before modeling policy scenarios, JLARC staff set parameters by calibrating the model
to the state budget. JLARC staff used the November 2022 revenue estimates produced by
the Economic and Revenue Forecast Council (ERFC) and budgeted appropriations from the
2022 state operating budget, as reported by the Legislative Evaluation and
Accountability Program (LEAP) Committee. These sources provide the revenue and budget
data for the model and serve as the starting point for Tax-PI's economic and fiscal
forecasts.
Users also specify whether government expenditures are determined by demand or
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 modeled the scenarios with expenditures set to be determined by demand.
This avoids making assumptions about how policymakers might alter spending priorities
in the future. In addition, current budget allocations are carried forward for each
expenditure category.
To best isolate the effects of a hypothetical removal of the tax preference, JLARC
staff modeled the scenarios with the balanced budget restriction turned off. The
balanced budget restriction forces revenue and expenditures to be equivalent, and
doing so may impose some limitations on economic activity and obscure the effects of a
policy change.
Model data comes from state and federal sources
The REMI model includes historical and demographic data since 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 expenditures data for Washington
comes from ERFC and LEAP. The inputs for the modeled scenario described below are
based on JLARC staff estimates and on applications and annual report data submitted to
the Department of Revenue (DOR).
Model inputs based on annual reports provided by Department of Revenue
JLARC staff based the inputs used to model the repeal of the B&O tax credit on
beneficiary taxpayer detail collected by DOR. This information includes the number of
jobs created and retained over four consecutive quarters and the total amount of the
credit, as determined by the wages paid to each qualifying employee. Because some
counties had fewer than three beneficiary business, JLARC staff created eight county
clusters for the purposes of modeling the estimated impact of repealing the
preference. A total amount was calculated and used to increase the manufacturing
industry’s production costs in each county cluster. An equivalent aggregate total was
also calculated and applied as new state spending.
A total of 36 businesses in 18 rural counties qualified for the B&O credit from
fiscal year 2015 through 2020. These businesses reported creating 1,041 new jobs, with
a total credit value of $3.04 million. None of the qualifying businesses were in a
CEZ.
The B&O tax credit is available to businesses creating jobs in manufacturing,
research and development, or commercial testing. However, NAICS code detail provided
by DOR indicates that 83% of the qualifying businesses in the study period are
manufacturers. JLARC staff modeled the employment impacts of the preference by
removing jobs from the manufacturing industry in the counties where the qualifying
businesses are located.
Modeled scenarios estimate the employment impact if the B&O tax credit were
removed
The B&O tax credit for new jobs created in rural counties and CEZs has existed
since the late 1980s. As such, the 1,041 new jobs reported from fiscal year 2015
through 2020 (see Section
2) are included in REMI’s historical and baseline data. Because Tax-PI is a
forecasting tool, JLARC staff could not model the employment impacts of this credit
beginning in 2015.
Instead, JLARC staff modeled the potential impacts of the preference by developing
scenarios that illustrate the repeal of the credit. The scenarios include three main
policy changes, modeled against REMI’s baseline forecast of the Washington economy.
Repealing the preference:
Would increase production costs for the manufacturing industry in counties where
beneficiary businesses are located.
Would result in increased tax revenue, which the state would spend on its
operating budget.
May result in the loss of some of the qualifying jobs.
It is difficult to objectively determine how many of the new jobs were created as a
direct result of the preference (i.e., how many of these new jobs would not exist but
for the preference). Likewise, it is unknown how many of these jobs would be lost if
the preference were repealed.
However, it is possible to estimate a range of net employment changes based on
different assumptions about how the preference may impact manufacturing employment in
rural counties. Therefore, the primary way the scenarios differ is in the assumptions
about how many jobs might be lost if the preference is repealed.
Economic model estimates statewide employment breaks even if 19 direct jobs were
lost due to the removal of the preference
The analyses of net employment changes are based on potential job losses at
qualifying facilities plus potential statewide job gains due to increased state
spending. The numbers below reflect the total job impacts (direct, indirect, and
induced) of repeal, as well as the assumed increased production costs for beneficiary
businesses and an equivalent increase in government spending.
In the two scenarios below, when the B&O tax credit is repealed, the model shows
a decrease in jobs at the businesses that used the credit. There is also an increase
in state revenue and a corresponding increase in state spending.
The first scenario uses the midpoint, assuming that 50% of the jobs associated
with the preference would be lost.
If 520 (50%) of the 1,041 jobs created during the study period were
eliminated, the state would see a total job loss of 1,351 jobs. 1,114 of those
jobs (82%) would be lost in the 18 rural counties where beneficiaries are
located.
The second scenario focuses on the break-even point for statewide employment. This
is the amount of lost economic activity that would negate the employment gains
associated with increased state spending.
If 19 (1.8%) of the 1,041 jobs created during the study period were
eliminated, statewide employment would break even. That is, there would be no
net job loss statewide.
However, the rural counties where these businesses are located would still see
42 jobs lost.
23-05 Final Report: Rural County and CEZ New Jobs
November 2023
Recommendations & Responses
Legislative Auditor's Recommendation
Legislative Auditor's Recommendation: Continue and modify
The Legislature should continue the preference because it has been used by
businesses that created jobs in rural counties and community empowerment zones.
Economic modeling suggests that the state would break even if the preference caused
only 2% of the jobs. It is unclear why use of the preference has declined.
The Legislature should modify the preference to promote and increase family
wage jobs in rural counties. For example, the Legislature might consider increasing
the wage threshold to reflect current economic conditions and linking future increases
to inflation or wage benchmarks.
The Legislature should modify the preference to potentially increase
the number of businesses applying for the credit. For example, the Legislature might
considers increasing the credit amounts, tying future increases to inflation, or
extending the preference to other industry sectors that could benefit rural
counties.
Legislation Required: Yes
Fiscal Impact: Depends on legislative action
23-05 Final Report: Rural County and CEZ New Jobs
November 2023
Recommendations & Responses
Letter from Commission Chair
23-05 Final Report: Rural County and CEZ New Jobs
November 2023
Recommendations & Responses
Commissioners' Recommendation
The Commission endorses the Legislative Auditor's recommendation with comment. The
Legislature should modify the preference to increase the number of businesses applying
for the credit. This may require a more in-depth study of why use of the preference
has declined.
23-05 Final Report: Rural County and CEZ New Jobs
November 2023
Recommendations & Responses
DOR & OFM Response
23-05 Final Report: Rural County and CEZ New Jobs
November 2023
More about this review
Study questions
Click image to view PDF of proposed study questions
