Incentives Watch: Will State Tax Incentives Survive an Adverse International Ruling?

The effectiveness of tax credits given by states to various businesses in order to attract them to their particular jurisdiction has been an ongoing issue of debate.  It is important to remember, however, that state tax incentive programs are part of the international stage as well.

The legal validity of state tax incentives in an international context was explored in Michelle DiPuma’s article, entitled “Why the Recent ‘Boeing Case’ Will Not Ultimately Limit a State’s Ability to Provide Incentives to Attract Business,” which was published in The Tax Lawyer.

Even though the World Trade Organization ruled that certain state tax incentives given to the Boeing company violated international accords, the incentives are likely to remain in place because the U.S. government will probably not seek their repeal, the article concludes.

The article discusses the rivalry between Boeing and Airbus and the various tax incentives offered to them by the United States and the European Union, respectively, in order to remain competitive.  These companies, the article notes, depend on tax incentives to be able to lower the sales price of their planes.

These incentives, however, were found to violate the WTO treaty, according to the article.

In 2004, the U.S. filed a case with the WTO alleging that the EU’s subsidies to Airbus violated the SCM Agreement (i.e., the Agreement on Subsidies and Countervailing Measures).  Then, the EU filed its own complaint alleging the United States’ subsidies, including tax incentives offered by Washington, Kansas and Illinois, to Boeing violated the SCM Agreement.  Both the subsidies provided by the U.S. and the EU were found to violate the SCM Agreement, notes the article.

The article argues that the WTO’s Dispute Settlement Body (DSB) was correct in its finding that the state tax incentives laws violate the SCM Agreement.  However, despite the DSB’s finding, the article argues that “the United States is unlikely to force state compliance with the DSB decision.” 

In other words, the U.S. is unlikely to seek the repeal of these state tax incentive laws that were found to violate the General Agreement on Tariffs and Trade (GATT) because doing so would go against the United States’ political and economic interests, according to the article.

Since Boeing, and the LCA industry in general, employ so many people and are such a huge part of the U.S. economy, the U.S. does not want to repeal those state tax incentives that help ensure the industry remains viable, the article explains.

In addition to economic reasons, the U.S. is unlikely to enforce the DSB decision because there are no incentives for enforcing the decision or punishment for not enforcing the decision, the article notes. 

As a result, the U.S. and the EU “are likely to simply ignore their respective DSB decisions,” as both companies, Boeing and Airbus, are still receiving government subsidies, the article concludes. 

For more information about state tax credits and incentives, check out Bloomberg BNA’s Credits and Incentives Portfolios.

Poll Question:  If countries aren’t inclined to enforce DSB decisions regarding SCM Agreement violations, then how effective is the SCM Agreement overall?

In other developments . . .

Missouri recently issued emergency regulations implementing the Amateur Sporting Contribution Tax Credit Program, according to a Bloomberg BNA Weekly State Tax Reportarticle.

By: Kathleen Caggiano

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