The WTO ruled Monday that the business-tax reduction granted by Washington state to Boeing in 2013 for the forthcoming 777X jet is a prohibited subsidy. Experts on both sides say the reality on the ground is unlikely to change even if that’s upheld on appeal.
The term “prohibited” signifies the WTO’s strictest legal category, denoting a subsidy that cannot be allowed to stand. If the ruling is upheld on appeal, action to remove the subsidy would be required.
Yet even then, in a testament to the excruciating frustration of the WTO process, legal experts on both sides of the case say the outcome will almost certainly leave Boeing’s bottom line untouched — and Washington state’s tax coffers none the richer.
“You can remove a subsidy in a hundred different ways that don’t in any way impact the benefit Boeing might get,” said Bob Novick, a former general counsel to the U.S. trade representative and now an outside counsel to Boeing on the WTO dispute.
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Monday’s ruling is new. It’s a separate case from the two original WTO lawsuits: the one filed by the U.S. in 2004 over the Airbus “launch aid” and the countersuit Europe filed in 2005 over the state tax breaks to Boeing as well as research grants it got from NASA and the Department of Defense.
The European lawyer recalled that when the WTO initially ruled in 2010 that government loans to Airbus to launch its A380 superjumbo jet were prohibited subsidies, Boeing crowed about the outcome and demanded that Airbus either repay or restructure the loans.
That A380 ruling was reversed on appeal a year later. Now, Boeing’s biggest tax break is on the same chopping block.
“The tables are turned. Boeing’s been tagged,” said the European lawyer. “But nothing is actually going to change.”
Michael Luttig, Boeing’s general counsel, agrees.
“After any appeal,” Luttig said, “we fully expect Boeing to preserve every aspect of the Washington state incentives.”
And while an Airbus press release hyped the ruling as “a knockout blow to Boeing’s record-breaking subsidies” and demanded that the Washington state tax breaks “be withdrawn immediately,” Airbus chief executive Fabrice Bregier conceded that he has ” little faith in the US compliance with the WTO rulings.”
WTO pounces on one clauseThe latest ruling certainly means Boeing and Washington state will have to do something if it withstands appeal.
The problem is a clause that was inserted into the 2013 tax-break legislation to protect jobs in this state: It says the extension of the business and occupation (B&O) tax reduction out to 2040 will be terminated if the state determines “that any final assembly or wing assembly … has been sited outside the state of Washington.”
“That’s what killed them,” said the European lawyer.
The WTO interpreted that to mean the law expressly favors local production over imports — the definition of a prohibited subsidy.
For example, the 787 Dreamliner’s wing was built in Japan, yet this clause would punish Boeing if it outsourced the wing of the 777X.
Of course, that clause was inserted because of the state’s experience in providing similar tax relief to win local assembly of the 787. (There was no similar clause in the 2003 legislation that established the original aerospace tax breaks for the 787.)