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South Carolina may be tax trendsetter

On the list of Washington’s favorite states and territories, the other Washington – as in the District of Columbia – would have to rank first. That is, after all, where the money is.

Dead last, supplanting even the loathed California, is South Carolina, for having the audacity to recruit and land Boeing’s second 787 assembly line. Recently, South Carolina did something that might raise every other state’s estimation of it, including Washington’s, even though it involved the dissing of a Seattle-based company. South Carolina said no to an economic-development giveaway.

Legislators in South Carolina voted down a sales-tax exemption that Amazon wanted for a distribution center in that state. With that vote, Amazon has canceled plans for a facility it says would have employed 1,250. That facility was to be one of about 10 that Amazon is adding this year; as The News Tribune’s John Gillie reported last week, another on that list is a distribution center it is opening in Sumner.

We’re not talking about a proposed distribution warehouse either, but one under construction, and we’re not talking about a vaguely formed proposal but a component of an incentives package offered to Amazon by the state’s former governor. The deal was undone, news accounts suggest, by a mass of opposition from local merchants unhappy about the competitive advantage held by online retailers who don’t charge sales tax on purchases made by customers; conservatives and liberals who have both decried tax incentives and subsidies to some businesses; and a new governor who didn’t share her predecessor’s enthusiasm for the tax break offered to Amazon, which was in addition to other goodies.

The controversy should be of considerable interest in Washington state, and not just because Amazon is based here and seems to find itself increasingly embroiled in sales-tax fights.

While on the subject, here is a bit of wild conjecture: If Amazon were to start charging sales tax on purchases made by customers in all states, not just the ones in which it has a physical presence, how much competitive advantage would it lose? Answer: Probably very little. Amazon’s value proposition is reliability of service, convenience of ordering from and getting delivery to one’s home and vastness of selection. It also would continue to maintain a price advantage because of economies of scale and the lack of cost-generating bricks-and-mortar outlets.

This state’s Legislature has debated whether it can close a huge budget deficit by ending various tax breaks. The philosophical and practical implications of the debate, on both coasts, are huge. Do you “lose” tax revenue by offering incentives to activities that otherwise don’t exist or would go elsewhere? Do you lose in real terms from the spinoff and multiplier effects of that lost activity? Do tax breaks merely shift costs to other, smaller, less politically connected businesses, property owners and consumers? Why give tax breaks to certain economic activities, such as a 787 final assembly line, but not to a distribution warehouse? You can make an argument that one represents bigger long-term economic development returns than the other.

There are reasons – think hypocrisy and opportunism – why the South Carolina-Amazon saga could portend nothing at all. Remember how bitterly Washington decried the subsidies offered to Airbus and for the 787 in South Carolina, while demonstrating its own willingness to throw goodies at Boeing for the first 787 line, for the second, for the 767-derived tanker ... .

Then there are the states that will be more than eager to toss packages to those companies snubbed by their neighbors.

What South Carolina did is big news, and not just for the numbers or the company involved. What will be even bigger news is whether other states are emboldened to follow its lead.

Bill Virgin is editor and publisher of Washington Manufacturing Alert and Pacific Northwest Rail News. Reach him at bill.virgin@yahoo.com.

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