Department of Revenue Fiscal Note Bill Number: 5952 SB Title: Aerospace tax incentives Agency: 140-Department of Revenue Part I: Estimates No Fiscal Impact Estimated Cash Receipts to: FY 2014 Account FY 2015 2013-15 GF-STATE-State 01 - Taxes 01 - Retail Sales Tax Performance Audits of Government Account-State 01 - Taxes 01 - Retail Sales Tax 2015-17 2017-19 (9,004,000) (14,000) Total $ (9,018,000) Estimated Expenditures from: FY 2015 FY 2014 FTE Staff Years Account GF-STATE-State 001-1 Total $ 2017-19 2015-17 2013-15 0.7 0.4 71,900 71,900 71,900 71,900 Estimated Capital Budget Impact: NONE The cash receipts and expenditure estimates on this page represent the most likely fiscal impact. Factors impacting the precision of these estimates, and alternate ranges (if appropriate), are explained in Part II. Check applicable boxes and follow corresponding instructions: X If fiscal impact is greater than $50,000 per fiscal year in the current biennium or in subsequent biennia, complete entire fiscal note form Parts I-V. If fiscal impact is less than $50,000 per fiscal year in the current biennium or in subsequent biennia, complete this page only (Part I). Capital budget impact, complete Part IV. Requires new rule making, complete Part V. Legislative Contact: Dean Carlson Phone: (360)786-7305 Date: 11/07/2013 Agency Preparation: Steve Smith Phone: 360-534-1518 Date: 11/07/2013 Agency Approval: Don Gutmann Phone: 360-534-1510 Date: 11/07/2013 OFM Review: Kathy Cody Phone: (360) 902-9822 Date: 11/07/2013 Request # 5952-1-1 Form FN (Rev 1/00) FNS062 Department of Revenue Fiscal Note 1 Bill # 5952 SB Part II: Narrative Explanation II. A - Brief Description Of What The Measure Does That Has Fiscal Impact Briefly describe, by section number, the significant provisions of the bill, and any related workload or policy assumptions, that have revenue or expenditure impact on the responding agency. DESCRIPTION Current law provides a package of tax preferences that apply specifically to Washington’s aerospace industry. This proposal extends those incentives in two ways: 1) A fifteen year extension of the existing aerospace tax preferences, and 2) A broadening of the activities qualifying for sales and use tax exemptions on the construction of airplane manufacturing facilities. THE CURRENT TAX PREFERENCES The major aerospace tax preferences under current law include: Reduced business and occupation (B&O) tax rates of -0.2904% for manufacturers of commercial airplanes (instead of the general manufacturing rate of 0.484%), -0.2904% for Federal Aviation Regulation (FAR) certified repair facilities (FAR Part 145 facilities), and -0.9% for taxpayers with qualified aerospace product development for other entities (instead of the service and other activities rate of 1.5%). Credits against the state B&O tax for -Aerospace manufacturers’ preproduction development expenditures, and -Property taxes and leasehold excise taxes on qualified aerospace land and buildings. Sales and use tax exemptions for -The purchase of computers used in development and design, and -The construction of superefficient airplane manufacturing facilities. EXTENSION OF CURRENT TAX PREFERENCES THROUGH 2040 The current aerospace tax preferences are scheduled to expire on July 1, 2024. This bill would extend the entire package of preferences through June 30, 2040. BROADENING THE SALES AND USE TAX EXEMPTIONS FOR CONSTRUCTION This bill also expands the current aerospace tax preferences for the construction of facilities used to manufacture aircraft. The current law exemption applies only to manufacturers of superefficient airplanes and related components. This bill widens the sales and use tax exemptions to include the construction of facilities to produce commercial airplanes, their fuselages, and their wings. The exemption also applies to buildings used to store raw materials or finished product. This bill is contingent upon the siting of a significant commercial airplane manufacturing program in the state by June 30, 2017. The bill will not take effect without such a siting. If the Department of Revenue makes a determination that this siting does not take effect by the specified date, then written notice must be provided to the affected parties, the Legislature, and other appropriate parties. Request # 5952-1-1 Form FN (Rev 1/00) FNS062 Department of Revenue Fiscal Note 2 Bill # 5952 SB II. B - Cash receipts Impact Briefly describe and quantify the cash receipts impact of the legislation on the responding agency, identifying the cash receipts provisions by section number and when appropriate the detail of the revenue sources. Briefly describe the factual basis of the assumptions and the method by which the cash receipts impact is derived. Explain how workload assumptions translate into estimates. Distinguish between one time and ongoing functions. BACKGROUND The legislature created the aerospace tax preference package in 2003 and has expanded it in the years since. The industry is estimated to have saved an average of $168 million a year in taxes over the past three fiscal years, Fiscal Years 2011 - 2013, as detailed below. -Reductions in the B&O tax rate; $84.5 million -Credits taken against the B&O; $78.7 million -Sales and use tax exemptions; $4.7 million DATA SOURCES Department of Revenue and industry sources. ASSUMPTIONS A building ranging in size from 350,000 to 1.5 million square feet building will be built during Fiscal Year 2016 at a cost ranging from $100 to $200 per square foot. -All of these expenditures are assumed to occur entirely within Fiscal Year 2016 with taxes due in that same year. -It is assumed that a facility for manufacturing fuselages or wings would not apply under the current program. -This proposal is assumed to be effective on July 1, 2014. -It is assumed that affected taxpayers will be aware of these changes. RANGE OF THE ESTIMATE Due to uncertainty in the ultimate size and cost of the facility the total impacts are expected to fall within the following ranges: STATE IMPACT - Low End; $2.3 million - High End; $19.5 million LOCAL IMPACT - Low End; $0.9 million - High End; $8.1 million REVENUE ESTIMATES Due to the uncertainty and possible range of impacts, we are using the mid-point as the estimated revenue impact. The general fund will be reduced by $9 million and the performance audit account $14,000 in Fiscal Year 2016. Local jurisdictions will lose an estimated $3.7 million in the same year. TOTAL REVENUE IMPACT: State Government (cash basis, $000): FY 2014 $ 0 FY 2015 $ 0 FY 2016 - ($ 9,018) Request # 5952-1-1 Form FN (Rev 1/00) FNS062 Department of Revenue Fiscal Note 3 Bill # 5952 SB FY 2017 FY 2018 FY 2019 - $ $ $ 0 0 0 Local Government, if applicable (cash basis, $000): FY 2014 $ 0 FY 2015 $ 0 FY 2016 - ($ 3,746) FY 2017 $ 0 FY 2018 $ 0 FY 2019 $ 0 II. C - Expenditures Briefly describe the agency expenditures necessary to implement this legislation (or savings resulting from this legislation), identifying by section number the provisions of the legislation that result in the expenditures (or savings). Briefly describe the factual basis of the assumptions and the method by which the expenditure impact is derived. Explain how workload assumptions translate into cost estimates. Distinguish between one time and ongoing ASSUMPTIONS Expenditures assume a small number of taxpayers will be affected by this proposal. FIRST YEAR COSTS: The Department will incur total costs of $71,900 in Fiscal Year 2014. These costs include: Labor Costs – Time and effort equates to 0.72 FTEs. - Adding new deduction codes for Retail Sales Tax. - Updating the Buyer's Sales and Use Tax Preference Addendum. - Assist in incentive survey testing. ONGOING COSTS: There will be no ongoing costs associated with this proposed legislation. Part III: Expenditure Detail III. A - Expenditures by Object Or Purpose FY 2014 FTE Staff Years A-Salaries and Wages B-Employee Benefits E-Goods and Other Services J-Capital Outlays FY 2015 2013-15 0.7 Total $ 2015-17 43,400 0.4 43,400 13,000 13,000 10,800 10,800 4,700 $71,900 $71,900 2017-19 4,700 III. B - Detail: List FTEs by classification and corresponding annual compensation. Totals need to agree with total FTEs in Part I and Part IIIA Job Classification FY 2014 Salary EXCISE TAX EX 4 IT SPEC 3 IT SPEC 4 IT SPEC 5 Total FTE's FY 2015 2013-15 2015-17 55,839 0.3 0.2 57,234 0.1 0.1 63,195 0.2 0.1 69,756 0.1 0.1 246,024 0.7 0.4 2017-19 Part IV: Capital Budget Impact Request # 5952-1-1 Form FN (Rev 1/00) FNS062 Department of Revenue Fiscal Note 4 Bill # 5952 SB Identify acquisition and construction costs not reflected elsewhere on the fiscal note and dexcribe potential financing methods NONE None. Part V: New Rule Making Required Identify provisions of the measure that require the agency to adopt new administrative rules or repeal/revise existing rules. No rule-making required. Request # 5952-1-1 Form FN (Rev 1/00) FNS062 Department of Revenue Fiscal Note 5 Bill # 5952 SB HB 2089; FN 2089-1 Estimated State & Local Impact ($ millions) Major Aerospace Incentives* B&O Aerospace Tax Rate Reduction, rate of 0.2904% FAR 145 Certified Repair Stations, rate of 0.2904% Aerospace Product Development (for others,) rate of 0.9% B&O Tax Credit for Aerospace Manufacturers' Preproduction Development Expenditures B&O Tax Credit for Property Taxes on Land/Buildings Sales & Use Tax Exemption for Computers Used in Development & Design Sales & Use Tax Exemption for Superefficient Airplane Facilities, as extended November 7, 2013 State & Local Revenue Impact FY 2016 FY 2025-2040 RCW 82.04.260(11)(a)(b) 82.04.250(3) 82.04.290(3) 82.04.4461 82.04.4463 82.08.975 and 82.12.975 82.08.980 and 82.12.980 $12.7 $4,248.5 $23.4 $116.5 $3,524.9 $562.6 $242.0 Minimal $12.7 $8,717.9 *There are some other incentives that are not used. Total Estimated State & Local Revenue Impact for Aerospace Industry Tax Incentives (Fiscal Years, $ millions) Actual 2006-13 Total Incentive Program 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 Projected 2014-2024 Total Projected Years 2025 to 2040 Total NPV B&O Aerospace Tax Rate Reduction $445.3 FAR 145 Certified Repair Stations 2.6 0.5 0.6 0.6 0.7 0.7 0.8 0.8 0.9 0.9 0.9 0.9 1.0 1.0 1.1 1.2 1.2 1.3 1.3 1.4 1.5 1.6 1.6 1.7 1.8 1.8 1.9 1.9 8.3 23.4 17.5 Aerospace Product Development 8.1 2.4 2.8 3.1 3.4 3.7 3.9 4.1 4.3 4.4 4.6 4.7 5.0 5.2 5.5 5.8 6.1 6.4 6.7 7.0 7.4 7.8 8.1 8.5 8.9 9.2 9.4 9.7 41.4 116.5 87.0 508.8 73.7 84.1 94.4 103.5 111.5 118.2 123.6 128.6 133.2 137.8 143.1 149.8 158.0 166.4 174.8 183.4 192.5 202.3 212.8 223.7 235.1 246.4 257.3 268.0 276.9 284.9 292.9 1,251.6 3,524.9 2,632.5 B&O Tax Credit for Property Taxes On Land/Buildings 45.6 11.8 13.4 15.1 16.5 17.8 18.9 19.7 20.5 21.3 22.0 22.8 23.9 25.2 26.6 27.9 29.3 30.7 32.3 34.0 35.7 37.5 39.3 41.1 42.8 44.2 45.5 46.7 199.8 562.6 420.2 Sales & Use Tax Exemption for Computers Used In Development & Design 35.7 5.1 5.8 6.5 7.1 7.7 8.1 8.5 8.8 9.1 9.5 9.8 10.3 10.9 11.4 12.0 12.6 13.2 13.9 14.6 15.4 16.1 16.9 17.7 18.4 19.0 19.6 20.1 85.9 242.0 180.8 Sales & Use Tax Exemption for Superefficient Airplane Facilities, Extended to all Commercial Airplane Facilities 0.0 - - - - - - - - - - - - - - - - - - - - - - - - - - 12.7 - - B&O Tax Credit for Aerospace Manufacturers for Preproduction Development Expenditures $88.9 $101.3 $113.8 $124.7 $134.3 $142.5 $148.9 $155.0 $160.5 $166.1 $172.5 $180.5 $190.5 $200.5 $210.7 $221.1 $232.0 $243.8 $256.4 $269.6 $283.3 $297.0 $310.1 $323.0 $333.7 $343.4 $353.0 12.7 Grand Total $1,046.0 $182.4 $207.9 $246.2 $255.9 $275.7 $292.4 $305.6 $318.1 $329.3 $340.8 $353.9 $370.5 $390.9 $411.4 $432.3 $453.6 $476.0 $500.3 $526.2 $553.2 $581.4 $609.5 $636.3 $662.8 $684.8 $704.6 $724.3 Notes: Estimated impacts from current incentives Estimated impacts from proposed extensions Figures for 2006 through 2013 B&O incentives are actual amounts based on activity reported on the combined excise tax return. The 2006 through 2013 sales and use tax program figures are estimates. Impacts from the current sales and use tax exemption for superefficient airplane facilities have been minimal and are expected to remain so. All 2014 through 2040 figures are forecasts and make use of Global Insight's long term (30 year) forecast for U.S. aerospace production. The Net Present Value assumes a 3.25% interest rate which is based on the WSJ prime rate as of October 15, 2013. $1,508.5 $3,108.2 $4,248.5 $3,172.9 $8,717.9 6,510.9