Tennessee: State incentives make European firms lick chops

Lured by record high financial incentives from state and local governments, German and Italian carmakers are finding many American cities like Chattanooga to be the lowest-cost sites on the globe for making automobiles and other products, the Financial Times of London reported this week.

“The latest cheap manufacturing site for European companies is not in Asia or eastern Europe but the United States,” the Financial Times said in a story on how “Manufacturers turn to the U.S.”

The London daily newspaper quoted an unnamed senior executive of the Italian industrial conglomerate Fiat as saying, “With the amount of money U.S. states are willing to throw at you, you would be stupid to turn them down at the moment.”

For added detail, see previous incentive stories online.

Tennessee, along with the city of Chattanooga and Hamilton County governments, will provide $577.4 million in tax breaks and direct assistance, including $219.2 million in one-time expenditures, for Volkswagen AG to build an assembly plant at the Enterprise South industrial park.

costs seen less than benefits

Chattanooga legislators, happy that Volkswagen will put its $1 billion assembly plant here, said Wednesday they are glad the Volunteer State put out its richest incentive package ever as a welcome mat to recruit VW.

State Rep. Gerald McCormick, R-Ooltewah, said he is confident the economic benefits from Volkswagen will far exceed the costs of the incentives.

“I wish we lived in a world where we didn’t have to put so many incentives on the table, but in order to get projects like this we have to compete with other localities,” Rep. McCormick said. “In this case, I’m quite sure that Volkswagen and all of the businesses it will help bring to our area make this investment worthwhile.”

State Sen. Andy Berke, D-Chattanooga, and state Sen. Bo Watson, R-Chattanooga, also voiced support for the state’s incentives.

“Volkswagen clearly was a tough negotiator, but in watching these incentive packages being put together elsewhere we realized that you have to be competitive with other states,” Sen. Watson said.

“I think most people understand that we will more than get this money back in the long run,” Sen. Berke said.

costly competition

But some lawmakers and consumer groups question whether the incentives will pay off for the Scenic City.

State Rep. Nathan Vaughn, D-Kingsport, a member of the state House Finance, Ways and Means Committee, called it "a tragic situation" in which one state is pitted against another to entice business into their states with ever-higher incentives.

"It has become an extremely competitive process in which, in many instances, we are in a position of ’buying’ the investment by business into our local communities," Rep. Vaughn said. "I just think at some point in time, we are going to have to evaluate as a nation just how much of our taxpayer’s money we can give away in terms of incentives to bring industry to our communities.”

Neal Wade, director of Alabama’s Development Office, said Alabama agreed to offer more than $400 million of tax breaks and assistance to Volkswagen but "we couldn’t compete with what Tennessee offered."

Last year, Alabama gave a total of $811 million of state and local tax breaks and assistance for ThyssenKrupp to build a $3.7 billion steel plant in Mobile.

taking long-term view

Despite the record-high cost of the incentive package for an automobile assembly plant, Tennessee officials insist the Volkswagen investment will more than pay for itself over the long term.

Auto assembly plants generate more economic activity than most other businesses because they draw suppliers nearby and those suppliers, in turn, draw other suppliers who draw other support businesses.

A study by the University of Tennessee’s Center for Business and Economic Research estimates that for each of the 2,000 jobs Volkswagen will fill at it new Chattanooga assembly plant, there will be nearly five others at suppliers and other businesses generated by the plant.

vw’s 10-yeaR plant

But that multiplier assumes VW will maintain or even expand its local plant. Blain Stanziana, a former Volkswagen employee who worked at VW’s first North American assembly plant in Pennsylvania, said the company’s previous experience suggests the company could close up after the tax breaks end.

Volkswagen operated a plant in Pennsylvania from 1978 to 1988 before the money-losing plant was ultimately closed.

“They closed that plant after 10 years as soon as their tax breaks expired so I wouldn’t count on Volkswagen necessarily being around for the long term in Chattanooga,” said Mr. Stanziana, a former quality control inspector for VW who was injured at the plant just two weeks before it shut down.

Mayor Ron Littlefield insists the company and market conditions are different now and Chattanooga will help ensure the newest venture is successful.

“We are offering a lot of help, but Volkswagen itself is investing $1 billion to build their plant in our community so I’m sure they are not easily going to walk away from that kind of investment,” he said.

weak dollar amplifies effects

VW spokeswoman Jill Bratina said incentives played an important role in the automaker selecting Tennessee and Chattanooga, but she noted they have a partner in VW investing in their success.

She said the revenues expected to be returned to the state will prove the incentives to have been money well spent.

A new study concludes that benefits from the VW plant and the supply businesses it will draw to the region easily will exceed the incentives by spurring more than $11.8 billion in personal income growth.

The state and local incentives, combined with the fall in the value of the U.S dollar, combine to make manufacturing in the United States cheaper than in Europe, the Financial Times reported.

“It may sound like a joke but it can be cheaper than you imagine to manufacture there,” an unnamed German corporate executive told the newspaper.

Phil Mattera, a director for Good Jobs First, a nonprofit organization in Washington D.C. that opposes many corporate tax breaks, said Chattanooga and other U.S. cities competing for foreign investment could certainly use the new jobs.

“But state officials do not have to act like drunken sailors with taxpayer money to get them,” he said.

Staff writer Mike Pare contributed to this story.