Ask Harold Rathman the value of the manufacturing sales and use tax exemption. He’ll tell you how much it means to his business without missing a beat. 

Rathman’s Proctor Products is a Kirkland-based company that builds tooling for Boeing commercial and defense airplanes, creating everything from stairs and mezzanines for the production lines to wing transport dollies and assembly jigs for rockets. In business since 1954, Proctor is just one of more than 650 companies statewide tied directly to the state’s aerospace industry. And while the thought of losing the manufacturing sales and use tax exemption would hurt Rathman’s business, it’s the bigger picture that worries him.

“From our perspective, if Boeing were to leave the state or begin moving operations elsewhere it would have a large impact on the future of our business. The greatest fear is that Boeing may locate some of existing or future lines elsewhere, which would be devastating to us.”  

Quantifying Expectations
When lawmakers began looking for ways to shore up the sliding state deficit this past winter, eliminating the exemption on the purchases of manufacturing equipment, replacement and repair costs and research and development bubbled to the surface. AWB was a leading proponent of the exemption when it first came to light in 1995. The association led the effort to secure the incentive, which effectively reduced the purchase price of machinery and equipment by anywhere from 8.2 to 9 percent and provided a stimulus for investment. In 1996, the initial exemption was expanded to include purchases of machinery and equipment by a manufacturer for research and development, as well as for repair and replacement parts.

The expectation was that the incentive would stimulate investment, expand the economy, create new jobs and increase tax revenue to local and state governments. Studies commissioned by AWB in 1995 and 2000 revealed that the exemption outperformed all expectations. In the first 10 years, the exemption added $81.5 billion to state coffers, generated more than $16.5 billion in income and created just shy of 285,000 new jobs.  Local governments saw net revenue surpluses two years earlier than expected; state government, a year earlier than projected.

Last October, AWB updated its analysis of the exemption for a third time, again tapping nationally recognized economist John Urbanchuk as the primary researcher. As in the past findings, Urbanchuk found opportunity for continued growth and expansion of the state’s manufacturing sector and overall economy with the M&E exemption in place (see sidebar). Urbanchuk’s findings indicate another 54,100 jobs will be created in Washington between now and 2016 as a result of the exemption. 

“Creating jobs and generating investments in our state is essential to our economic recovery in Washington state,” said AWB President Don Brunell. “This exemption has already significantly outperformed the original expectations lawmakers had when they first adopted it in 1995 and it is projected to generate even more jobs and revenue in the years ahead.

“This incentive is as much about attracting new business as it is helping existing manufacturers. Our members see the M&E exemption as something that has helped them grow and prosper.” For Mark Sonderen of Sonderen Packaging in Spokane, the exemption did just that. In 1998, the company had a catastrophic fire, causing them to lose all of their machinery. Since the fire, Sonderen invested $15 million in equipment and the exemption saved him $1.29 million. “This was enough for me to purchase additional machinery and keep my company healthy enough to increase from 45 to 111 employees,” said Sonderen. “The sales tax exemption gives us a good incentive to stay in Washington.”

Beyond Boeing
With all eyes on the budget this session, AWB sought to further quantify the impact of this crucial incentive on small- to medium-sized manufacturers in the state. A confidential survey conducted this January with 190 of AWB’s small and mid-sized manufacturing members found that two-thirds of their M&E investments were for new machinery and equipment (roughly $3.705 billion). Those same members spent $1.437 billion for repair and replacement parts and $10.9 million on investments for research and development.

“From a long-term perspective, we’d like to see more money invested in R&D, but the good news for our state is that this is working. This exemption is creating jobs and it needs to remain intact,” added Brunell. “Keep in mind these figures reflect purchases among the small and medium sized companies. The Boeings and the PACCARs weren’t asked to participate in this study. Once you start to factor those figures in, you get a greater sense of the impact this incentive has on our manufacturing sector in particular, and on the state’s economy as a whole.” 

Like Proctor Products in Kirkland, All American Spacer in Grand Coulee supplies equipment for both the commercial and defense aerospace industry. Though miles away from the big plane production lines, they feel a direct tie to aerospace and the impact of the M&E exemption.  “We see the future as very bright and would like to grow to meet the demands of our customer base,” said All American Spacer Co-owner Mary Jo Monteith. “The M&E exemption does this by helping us buy new machines and product. If we had to pay tax on all products, this would put us at a competitive disadvantage.”  

Looking “beyond Boeing,” the impact of the exemption on the manufacturing world outside of aerospace has been equally impressive. Camillo and Sarah Cheng operate Golden Pheasant Foods, a manufacturer and food distributor in Kent. In the last five years, they’ve added about $1 million of equipment and increased their small workforce by 20 percent. When they bought the company in 1999, the equipment and facility were in need of improvements. For several years, every dime they had was reinvested to replace aging equipment and improve the facility. Once those improvements were made, they became more competitive and the business began to grow, allowing them to add new employees and seek new business with their added manufacturing capacity.

“For a small company, having an additional cost of nearly 9 percent is a significant expense,” said Camillo Cheng. “We are in competition with near-by states, and as Scott Carson of Boeing has well stated, ‘Location is a choice.’”


At A Glance
In the first 10 years, the state’s M&E exemption added $81.5 billion to state coffers, generated more than $16.5 billion in income and created nearly 285,000 new jobs.

Economists believe keeping the exemption in place will generate an additional 54,100 jobs in our state between now and 2016.

A January 2009 survey of the state’s small manufacturers found that two-thirds of their M&E investments were for new machinery and equipment. 

In a tough economy, competition with neighboring states like Idaho and Oregon means more businesses are re-evaluating the cost of doing business in Washington state.

AWB advocated for the Legislature to retain the M&E exemption this year to increase Washington state’s competitiveness.