Tennessee offered its richest incentive package — and perhaps the most government assistance and tax breaks ever for an American automobile plant — to lure Volkswagen to Chattanooga.
But the state’s chief business recruiter said Wednesday that the benefits from VW’s $1 billion assembly plant far will exceed what could top $500 million in government assistance and tax breaks for the project.
“The Volkswagen investment in this community is going to have a tremendous economic gain for the entire region,” said Matt Kisber, Tennessee’s commissioner for economic and community development. “I’m confident we’re going to have a very reasonable incentive package when you look at the initial costs of what is being offered compared with a much bigger long-term return.”
VW officials said Wednesday that details of their plans for Chattanooga still are taking shape. But the value of what federal, state and local governments already have done or will do over the next three decades for Volkswagen could exceed the government help offered for any previous automobile plant.
Staff Photo by Dan Henry -- Mike Beamish, executive vice president of Volkswagen Group of America’s human resources department, walks with other members of the Volkswagen Group of America, Chattanooga Area Chamber of Commerce and media during a tour of VW’s new temporary office building in the Enterprise South complex Wednesday afternoon.
Depending upon the final calculations of training assistance, site preparation work and property tax breaks, the total incentive package for VW in Chattanooga is likely to top the previous record high of $419.4 million offered in 2006 to recruit Kia to West Point, Ga.
Sujit CanagaRetna, senior fiscal analyst with the Southern Legislative Conference group and an expert on auto industry incentives in the South, said Tennessee’s incentives could set a new record for an auto plant with its offer of worker training programs, site preparations, highway, rail and utility connections and property and business tax breaks.
“But I don’t think that’s out of the stratosphere,” he said.
Mr. CanagaRetna noted that when Alabama successfully offered $253 million back in 1993 to lure a Mercedes-Benz plant to the state, it generated an “uproar” that some political analysts have said contributed to the 1994 election loss of then-Gov. Jim Folsom Jr.
Staff Photo by Dan Henry
Gregory Y. Lubar, senior vice president of Jones Lang LaSalle / Staubach, left, speaks to Mike Beamish, executive vice president of Volkswagen Group of America’s human resources department, right, during a tour of VW's new temporary office building located in the Enterprise South complex Wednesday afternoon.
But he said the Mercedes plant proved a “catalyst for bringing jobs” and resulted in a “sea change” in how the world viewed Alabama.
Chattanooga Mayor Ron Littlefield said Alabama “got the last laugh” over its critics by subsequently luring more than $5 billion of other automotive investments from Honda, Hyundai, Toyota and their suppliers.
Mr. CanagaRetna said what strikes him as different about Chattanooga and Volkswagen is the Enterprise South industrial park site.
“It’s a little unusual that the locals are so far down the road in having a site ready to go,” he said.
The city of Chattanooga and Hamilton County spent nearly two decades acquiring, cleaning up and redeveloping the former Volunteer Army Ammunition Plant into Enterprise South, where VW will build its plant.
INCENTIVES AND PAYOFFS
$600 million — Projected annual payroll from Volkswagen’s Chattanooga plant, its suppliers and spin-off business.
$81 million — Value of property being give to Volkswagen
$75-$100 million — Estimated value of worker training and site improvements and connections to VW plant
$23.2 million — Value of state job tax credits and property tax breaks for Volkswagen in first year
tax breaks questioned
Greg LeRoy, executive director of a national group known as “Good Jobs First” that looks at government incentives, questioned the effectiveness of government aid to business such as that offered in the Volkswagen deal.
“People get credit for issuing announcements and cutting ribbons,” he said. “But I’m persuaded that (incentives’) impact is very modest and usually highly exaggerated.”
The percentage of money that companies typically save from government tax breaks and incentives usually is less than 1 percent of a company’s overall cost structure, Mr. LeRoy said.
He said the system “has taken on sort of its own logic and its own momentum,” and he questioned the secrecy surrounding many incentive packages.
“The company’s decision-making process ultimately remains a black box,” he said.
Jill Bratina, director of communications for Volkswagen Group of America, said VW didn’t pick Chattanooga for its only U.S. assembly plant based strictly upon incentives. But she said the German car maker is eager to have a site ready to build upon and wants to ensure that workers hired to build the new vehicles are skilled and well trained.
“Job training and work force development are absolutely critical,” she said, referring to plans for a state-funded worker training facility at the plant.
UPPING THE ANTE
The incentives given to Volkswagen are far more than what Tennessee offered to either Nissan or General Motors’ Saturn plants in the 1980s. But since then, the next eight auto assembly plants located in neighboring states to Tennessee when the Volunteer State didn’t keep pace with incentives offered elsewhere, Mr. Kisber said.
“All we did for Nissan and Saturn was to build a road and paid to train the workers,” said U.S. Sen. Lamar Alexander, who recruited both Nissan and GM to build assembly plants while he was governor in the 1980s.
But Alexander, a Republican, praised his Democratic successor for doing “an exceptional job” in putting the package together to lure Volkswagen to Chattanooga.
Government infrastructure, training and other incentives already offered and to be provided for the Volkswagen plant and surrounding development could top $500 million over the next 30 years.
Here are preliminary estimates, subject to change, of what is being offered for the VW plant and related development:
* $81 million — Property given to Volkswagen. The city and county will provide Volkswagen about 1,350 acres of the Enterprise South industrial park. The land is listed at $60,000 an acre.
* $30 million for worker training. Tennessee will pay for recruitment, screening and training of new workers hired for the plant and will help pay for new training center to be built at Enterprise South. Comparable with retraining incentives at GM’s Saturn plant, the state would spend about $12,000 per employee. Federal, state and local governments also have pledged to build at least a $6 million technical training center on site. Training incentives could be even more over time.
* $43 million on roads, highway connections. Federal and state governments will spend more than $20 million on connector roads and a 4-lane thoroughfare through Enterprise South. A $23 million interchange on Interstate 75 at mile marker 9 was completed in 2006.
* $3.5 million in rail line upgrades. Through the Hamilton County Railroad Authority, the state, city and county have pledged to upgrade rail connections to the VW site from both the Norfolk Southern and the CSX railroads.
* $200 million — Job tax credits over 20 years. A state-offered job tax credit of $5,000 per job over 20 years is available on corporate taxes for companies investing at least $1 billion. It is valued at $100,000 over the next two decades for potentially 2,000 employees VW plans to hire.
* $150 million to $350 million — Property tax breaks over 30 years
Pending approval, the city and county will give up all but the educational component of local property taxes on the $1 billion plant for 30 years. VW will pay at least $5.5 million annually in school property taxes. But the rest of the property tax abatement initially would save at least $12 million a year on a $1 billion plant. Plant machinery is assessed at 30 percent of value and will depreciate after eight years, so the ongoing value of the personalty tax break could drop. But taxes on the land and buildings, assessed at 40 percent of value, will maintain the tax break through 2039, assuming the company meets job and investment targets.
* Other incentives. State and local governments also have pledged to help prepare the site, add utilities and fire protection, offer sales tax exemptions on industrial machinery purchases and pollution control equipment and give job tax credits to suppliers that locate immediately around the plant. TVA and EPB will offer some low-cost loans from the Valley Advantage Fund and provide several million dollars worth of growth credits for power purchases. Local utilities also will extend service to the new plant. The value of such incentives has not yet been calculated.
Sources: Tennessee Department of Economic and Community Development, Volkswagen AG, Hamilton County trustee’s office, Chattanooga mayor’s office
“I think Gov. (Phil) Bredesen and the mayors here are right to treat an assembly plant as worth a large taxpayer investment,” he said. “There’s nothing quite like the automobile industry to bring in money, raise family incomes and bring in jobs.”
Mr. Kisber said Tennessee lagged behind its neighboring states with incentives during the 1990s and early part of 21st century before the Legislature agreed to sweeten the incentives for major industry with more money for worker training and infrastructure and more tax credits for those investing more than $1 billion.
Previously, Tennessee’s richest incentives — a $197 million package of tax breaks and investments — were offered to Nissan three years ago to spur the Japanese car maker to relocate the headquarters of its North American operations from California to Williamson County, just south of Nashville.
range of incentives
Most of the direct taxpayer assistance for Volkswagen will pay to help train the 2,000 workers to be hired by VW in Chattanooga and to provide a ready-to-build concrete foundation on a 1,350-acre site with highway, rail and utility connections. The city and county will give Volkswagen the land, valued at $81 million, after the federal and state highway departments already spent $23 million to build an interstate interchange exit to the site. Another $25 million is planned in road and rail improvements to and around the property.
Mr. Kisber said the state likely will spend at least $12,000 per employee on training programs for each of the 2,000 workers, in addition to paying for construction of a technical training center. The state’s Fast Track program will pay to help level and prepare the site, while utilities are spending nearly $20 million to extend electric, gas, water and telephone service there.
State and local governments also are expected to provide more than $300 million of franchise and property tax breaks over the next 30 years. Volkswagen will qualify for Tennessee’s $5,000-a-year credit for each employee for up to 20 years because of the size of its investment. The city and county governments also have agreed to give up local property taxes, other than those used for local schools, for 30 years, Hamilton County Mayor Claude Ramsey said.
“We agreed that VW should help pay for education in our community, but we also wanted to make sure we were as competitive as we could be to help bring a major new industry to our county,” he said.
Mr. Ramsey said giving a prepared site to a major business prospect is necessary “or they won’t even look at it.”
economic benefits mount
By 2011, when Volkswagen expects to be producing at least 150,000 vehicles a year in Chattanooga, the VW assembly plant is expected to have an annual payroll of more than $100 million, and the total economic benefit from the Chattanooga plant is projected to top $600 million a year, Mr. Kisber said.
VW is projected to help create about 14,000 jobs and, if it follows the pattern of other automotive plants that have located in the South, is likely to expand its own size and employment in future years.
Mr. Kisber said the Center for Business and Economic Research at the University of Tennessee will conduct a study later this year once all the incentives are calculated to help assess the costs and benefits of the Volkswagen deal. A similar study of the $197 million in state and local incentives given Nissan to relocate its headquarters to Franklin, Tenn., concluded that the Nissan headquarters will generate $525 million a year in economic benefits, or more than two and a half times more than what the state spent to recruit Nissan.
“As a business person, I can take that business proposition any time,” Gov. Bredesen told state officials at the time.
Andy Sher is a Nashville-based staff writer covering Tennessee state government and politics for the Times Free Press. A Washington correspondent from 1999-2005 for the Times Free Press, Andy previously headed up state Capitol coverage for The Chattanooga Times, worked as a state Capitol reporter for The Nashville Banner and was a contributor to The Tennessee Journal, among other publications. Andy worked for 17 years at The Chattanooga Times covering police, health care, county government, ...