WTO says Boeing offered illegal tax breaks by Washington Legislature

Washington and the European Union each claimed victory Monday in their battle over tax incentives the Legislature gave Boeing to build a new jetliner in the state.

Who will win the war might not be known for months, or even years.

In a ruling issued Monday, the World Trade Organization said all seven tax breaks the Washington legislature approved in an emergency session in 2013 were subsidies, but only the biggest one – a reduction in the business and occupation tax Boeing would pay on money from the 777X if the aerospace giant builds the plane’s high tech composite wing in Washington – amounts to an unfair trade practice.

That tax break puts foreign competitors at a disadvantage if they wanted to build the wings elsewhere and sell them to Boeing, a WTO panel ruled.

“It is too early to tell what actions the state might undertake in response to the panel report, as it is likely to be appealed,” Gov. Jay Inslee said in a statement released by his office.

Inslee was the one who called the Legislature into a special session three years ago to push through a package of tax breaks for the aerospace giant. “That was the right thing to do for our state’s economic future, and it still is,” he said.

EU Trade Commissioner Cecilia Malmstrom told the Associated Press the WTO ruled against $5.7 billion of the measures. Boeing said it was worth $50 million a year, when the company starts selling the 777X, which won’t be before 2020.

Malmstrom called Monday’s ruling “an important victory” for the EU and Airbus. “We expect the U.S. to respect the rules, uphold fair competition, and withdraw these subsidies without any delay,” she said in a statement.

That’s not likely.

The United States and the EU have been fighting in the WTO for more than 10 years over who’s giving unfair help to Boeing or Airbus.

“This case is a small fraction of the overall aerospace dispute, on which the WTO has found overwhelmingly in the United States’ favor,” said Matt McAlvanah, assistant U.S. trade representative for public and media affairs.

Washington elected officials have been in the forefront of defending a major employer for the state.

“We’ve known for years that Airbus has gotten one advantage after another, tipping the scales in its favor and putting our state’s aerospace industry … at risk,” Sen. Patty Murray, D-Wash., said in a prepared statement. The panel ruling against most of the challenges “only underscores how tilted this playing field has been toward Airbus all these years.”

The 2014 complaint about the tax breaks to the 777X is the smaller of two filed by the EU, arguing that all incentives in the package were prohibited subsidies. All seven are subsidies, the WTO panel said Monday. But only the B&O tax break on gross receipts is a prohibited subsidy, because it would disappear if the company bought wings from a foreign supplier.

The EU argued that Boeing shouldn’t get a government subsidy to use domestic parts instead of imported parts. In defending against the complaint, U.S. officials argued that the wings were not a “part” that could be considered separate from the plane; rather the wings, like the fuselage, are the plane.

The WTO panel agreed with the EU on that point, and if the decision is allowed to stand and become final in December, Inslee and the Legislature would have to come up with a way to change the law early next year to either remove the subsidy or the contingency.

But before a final ruling is issued, the EU could appeal on the six tax breaks the panel said weren’t forbidden subsidies and the United States could appeal on the one it said was.

“Someone’s going to appeal it,” said John Thornquist, of the Aerospace Office in the Washington state Department of Commerce.

An appeal would mean each side would get to submit arguments against Monday’s findings, for a decision by a WTO appeals panel. While WTO guidelines set a timeline of 90 days for the appeal of a forbidden subsidy, aerospace cases are complicated and often require extensions.