With state revenues shrinking, some are clamoring to repeal the manufacturing sales tax exemption.This measure, designed to stimulate jobs, exempts manufacturing machinery, equipment, research and development, and repair and replacement parts.

Eliminating this tax incentive would be a huge mistake – one akin to killing the goose that lays the golden eggs.

Unfortunately, the Legislature has made that mistake before.

In 1981, the state faced a crisis similar to the one we face today.Meeting in one special session after another, lawmakers raised taxes and slashed programs to balance the budget.(Unlike the “other Washington,” the state budget must balance).

Supposedly, “to save money” one of the things they killed was the Economic Assistance Authority (EAA), a program that gave sales tax exemptions, deferrals, and business and occupation tax credits to manufacturers who installed pollution control equipment and developed projects that created jobs.

Legislators’ Action Backfired

It backfired.Manufacturers built elsewhere and soon after the Legislature revoked it, they looked for ways to restore it.

I worked for Crown Zellerbach at the time, and we had decided to spend $400 million to upgrade an outdated pulp and paper mill at Camas – an investment that “penciled out” largely because of the EAA.

But when the Legislature repealed the EAA, it added millions of dollars to the cost of the Camas upgrade – and sent a strong message to other companies across the nation.The message was, “Don’t invest in Washington, they give with one hand and take away with the other.”

It took two years and special legislation for Crown Zellerbach just to get what the state initially promised.If the EAA had been eliminated before the project started, the Camas mill would have disappeared.Had that $400 million modernization not happened, more than 2,000 workers would have lost their jobs.

Credits Restored in 1995

After the 1981 debacle, it took years to restore investor confidence in Washington.Finally, in 1995, the Association of Washington Business (AWB) convinced the Legislature and Governor Mike Lowry to reinstate the sales tax exemptions for manufacturers.Because it was so successful, the Legislature expanded the exemption in 1997 and 1998.

As a follow-up to our initial research, AWB commissioned an independent study by the San Francisco-based AUS Consultants in 2000 to gauge how the exemption was working.It showed that manufacturers invested a whopping $1.8 billion in new equipment over just the first three years of the exemption.Between 1995 and 1999, the tax exemption also helped companies create 58,100 new manufacturing jobs.

The savings and new jobs didn’t all go to large companies.For example, a 1997 survey by the Association of Washington Business found that 141 small manufacturers bought more than $250 million in modern machinery during 1996—the first full year of the exemption.

Increased Revenue to State and Locals

While the tax exemption did slightly reduce tax revenues in 1995 and 1996, by 1998 that trend had completely reversed.In fact, between 2000 and 2005 net tax revenues to the state will grow by $2.4 billion -- and local tax revenues will grow by $600 million.

The manufacturers’ sales tax exemption has clearly worked – so why even consider killing it?

When times get tough, legislators should keep the programs that work and discard the ones that don’t.The manufacturing sales tax exemption is saving existing jobs and creating new ones.Why not look for ways to enhance it so it stimulates more jobs and investments?

Cutting it would be penny wise and pound-foolish.