Gov. Chris Gregoire and Democrats controlling the Legislature face a daunting task finding $6 billion to balance the state’s budget for the next two years.

Gregoire says she plans to stand by her campaign pledge not to raise taxes. However, legislative staffers in Olympia are pouring over more than 500 so-called “tax loopholes” that some believe will lessen the impact of budget cuts.

One of those incentives is the 1995 sales tax exemption on purchases of manufacturing equipment, parts and repairs, as well as costs associated with research and development.

This M&E exemption is being targeted by some, even though it makes a clear “profit” for state and local governments, bringing in far more than it “costs.”

In its first 10 years, the exemption added $81.5 billion to state coffers, generated more than $16.5 billion in income and created almost 285,000 new jobs. Still, some lawmakers, in a near panic to take action, may try to eliminate the exemption.

As history has shown, that would be a big mistake.

The situation Democrats face today is similar to that Gov. John Spellman and his Republican colleagues experienced in 1981 when a faltering national economy blew a 20 percent hole in Washington’s state budget.

In a scramble to find cash, Republicans scrubbed the list of tax incentives and started repealing them indiscriminately. In the process they wiped out a series of tax incentives to encourage manufacturers to locate in Washington or modernize their existing facilities here.

Manufacturing investments virtually stopped.

At the time, Crown Zellerbach was in the middle of a $425 million modernization of its antiquated Camas pulp and paper mill where 2,500 people worked.

It was the only major construction project underway in the Northwest during a time of high interest rates, skyrocketing unemployment, and plummeting factory orders.

The tax incentives had been the key factor in the company’s decision to update its Camas mill, and when the legislators wiped them out, it jeopardized the entire project.

Crown Zellerbach had been assured that the incentives would be there before the project began. Eliminating them just two years later added millions of dollars in costs as the company was struggling to finance the project at interest rates of 12 to 15 percent.

The incentives were ultimately restored, and the modernization of the mill was completed. But that was the last major construction project Crown Zellerbach ever did in Washington.

Oppponents believe a sales tax exemption is not significant, that manufacturers will still make the investments. They are wrong.

California is learning that lesson right now. It is one of only three states that do not provide a credit or exemption for purchase of manufacturing equipment.

According to California Manufacturers and Technology Association President Jack Stewart, out-of-state companies are avoiding California, and in-state companies are shifting workers or facilities to states that do not burden capital investments with excess taxation.

California has lost more than 440,000 manufacturing jobs paying an average of $60,000 a year.

In addition, they have lost countless related jobs because manufacturers have the highest multiplier of any industry, supporting networks of suppliers whose economic vitality has a direct and positive impact on the state’s revenue.

In contrast, Washington’s M&E tax exemption has paid significant dividends and will continue to do so if continued beyond 2009.

Research by John Urbanchuk, the nation’s foremost expert on tax incentives, projects that, between now and 2016, the M&E exemption will create 54,100 new jobs in Washington, expand our state’s economy by $49.3 billion, put $22 billion in the pockets of Washington families, increase tax revenues for state and local governments by $2 billion, prompt $4.4 billion in new investment, and spark $1.3 billion in construction spending and equipment purchases.

Boeing Commerical Airplane Co. President Scott Carson said it best: Location is a choice. Investment dollars are mobile and companies locate where they can afford to compete. In other words, if we add nearly 10 percent to the cost of new equipment and machinery, repairs and replacement parts, and research and development, we will see our manufacturing jobs disappear, just as they have in California.

Don Brunell is president of the Association of Washington Business.