TRAC Lets Boeing Keep Tax Breaks

July 27, 2010

Investigative Reports

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The NerveSouth Carolinians would pay sales tax on groceries, prescription drugs and a slew of other now-exempt items if a state commission’s preliminary recommendations become law, but the legislatively created panel would let the Boeing Co. keep generous tax breaks on its new aircraft assembly plant.

Despite recommending the repeal of many sales tax exemptions in the state’s tax code, the S.C. Tax Realignment Commission – called TRAC for short – in a highly anticipated meeting last week didn’t touch the special sales tax breaks given by the Legislature for Boeing’s 787 Dreamliner assembly plant under construction in North Charleston.

In fact, several of Boeing’s tax breaks aren’t listed in the 36-page June 28 TRAC subcommittee draft report on sales and use taxes, a review by The Nerve found.

According the commission’s website (www.scstatehouse.gov/citizensinterestpage/TRAC/TRAC.html), changes in the state’s tax code “must be designed” to ensure that the tax structure is “balanced” for an “adequate, equitable and efficient” system.

Some might question whether the Chicago-based aerospace giant is getting preferential treatment, especially given that the TRAC chairman is Burnie Maybank, who was a key player in crafting the Boeing incentives deal passed by the General Assembly in a special session last October.

Maybank, a former two-time director of the S.C. Department of Revenue, also co-authored a huge sales tax break package – which died in the Legislature this year – for a proposed shopping mall, known as Okatie Crossings, in the Lowcountry.

Maybank denied he had any conflict of interest as the TRAC chairman or that Boeing was getting special treatment when contacted by The Nerve on Thursday, the day after TRAC unanimously gave initial approval to its sales tax recommendations.

“What would have been a conflict of interest is if I had created (in the TRAC preliminary report) a sales tax exemption for Boeing, or repealed every manufacturing sales tax exemption but Boeing’s,” he said. “That wouldn’t have looked good.”

Maybank was appointed to TRAC by state Sen. Hugh Leatherman, R-Florence and the Senate Finance Committee chairman. Leatherman was instrumental in quickly pushing the Boeing incentives bill – without public input – through the Senate during the special October session, which initially was called for an unrelated reason.

Leatherman didn’t respond to written questions last week from The Nerve seeking comment on the TRAC report and Boeing’s tax breaks. He returned a phone message on Thursday, but when he was informed he was speaking to a Nerve reporter, the call suddenly was lost, and efforts to reach him again were unsuccessful.

Maybank, an attorney with the go-to economic development law firm of Nexsen Pruet in Columbia, told The Nerve that the 11-member Tax Realignment Commission, charged with the overhauling the state’s tax code, “really didn’t tinker” with existing sales tax exemptions for two groups: farmers and manufacturers, including Boeing.

“Historically, farming has always enjoyed a special status,” he said. “We (TRAC) just made the decision early on not to tinker with farmers.”

And what about manufacturers such as Boeing?

“Manufacturers are mostly wholesalers,” Maybank said, explaining that their finished products typically are taxed at the retail level. “We have the highest property taxes in the nation on manufacturers, and with a sales tax, that would be the final blow.”

Boeing, which posted about $68.3 billion in revenue and $2.1 billion in earnings in 2009, is enjoying a host of corporate income, sales and property tax breaks with its 787 Dreamliner assembly plant in North Charleston.

In return for the incentive goodies – previously estimated by The Nerve to be at least a half-billion dollars – Boeing, which owns two other existing assembly plants at the site, has promised to hire a minimum of 3,800 workers and invest at least $750 million.

Most of the cost of the incentives stem from $270 million in bond sales – to be paid back with at least $90 million in interest by state taxpayers – authorized in the bill and by the S.C. Budget and Control Board. The bill, which passed both the House and Senate unanimously on Oct. 28, also gave Boeing the following sales tax exemptions for:

  • Fuel sold for test flights;
  • Fuel sold for transporting assembled aircraft from one Boeing facility to another;
  • Computer equipment purchased for the site; and
  • Construction materials for the site.

The tax breaks for fuel were not included in the June 28 TRAC draft report that the commission approved last week, The Nerve’s review found.The cost of the sales tax exemptions for Boeing is unknown, though it likely will run in the millions given the minimum $750 million committed investment in the project. The S.C. Department of Revenue earlier informed The Nerve that certain tax breaks, including sales tax exemptions, are considered private records under state law.

The Tax Realignment Commission at its meeting last week gave preliminary approval to create a 2.5 percent sales tax on groceries, prescription drugs (excluding purchases made by Medicaid and Medicare recipients), and water and electric bills.

It also recommended incrementally raising the sales tax cap on motor vehicles from $300 to $1,200 until 2014, and dropping the cap entirely afterward; charging sales tax for digital Internet purchases; and eliminating sales tax exemptions on a variety of items, such as newspapers, sweetgrass baskets and hearing aids.

The commission also recommended lowering the state’s overall sales tax rate from 6 percent to 4.96 percent.

Whether the commission’s recommendations would bring more or fewer dollars to the state’s coffers is unclear.

The commission in documents estimated revenue generated by the repealed or amended exemptions – excluding exemptions “to be determined” – at $688.8 million, though the documents also noted that any official projections would be left to the S.C. Board of Economic Advisors, a division of the Budget and Control Board.

The state was expected to collect about $2 billion in sales tax revenue for the fiscal year that ended June 30, according to the BEA’s latest projection released this month.

A public hearing on the preliminary TRAC report will be held Aug. 13. Maybank told The Nerve that he expects a final commission vote on the report in September, with other recommendations on income and property tax issues to follow by November. Any recommendations would have to be approved by the General Assembly to be enacted.

No legislators are on the commission, which was created last year, though eight of the 11 members were appointed by Leatherman; Senate President Pro Tempore Glenn McConnell, R-Charleston; Senate Majority Leader Harvey Peeler, R-Cherokee; Senate Minority Leader John Land, D-Calhoun; House Speaker Bobby Harrell, R-Charleston (two appointees); and Rep. Dan Cooper, R-Anderson, the House Ways and Means Committee chairman (two appointees).

Gov. Mark Sanford appointed two other members, while the Department of Revenue director serves on the commission by virtue of his office.

As with Leatherman, McConnell and Harrell played prominent roles in the Boeing incentives deal.

 

Reach Brundrett at (803) 254-4411 or rick@scpolicycouncil.com.