published Sunday, May 5th, 2013

Volkswagen layoffs expose flaws: Tennessee's incentive scheme fails

Volkswagen builds vehicles in Hamilton County.
Volkswagen builds vehicles in Hamilton County.
Photo by Dan Henry /Chattanooga Times Free Press.

Later this month, at Volkswagen’s Chattanooga plant, a massive layoff will occur. As a result of slower-than-expected growth in Passat sales, about 500 Chattanooga-area workers will find themselves jobless, most not knowing how — or when — they’ll get their next paycheck.

The VW layoffs are just the latest in a long line of examples of failed corporate welfare handout schemes that have left workers without jobs and taxpayers holding the tab.

In an attempt to lure — some would use the term “bribe” — new businesses, state and local governments have increasingly relied on a cocktail of tax breaks, free land, training grants, infrastructure handouts and giveaways of cold, hard cash. With states battling against one another to land employment hubs such as business headquarters, manufacturing plants and distribution centers, a race has developed. Unfortunately, it is a race to see which state can lavish very wealthy, well-connected companies with the most incentives in exchange for jobs. Those incentives, of course, are funded with our tax dollars, and they rarely result in the promised number of jobs or the anticipated long-term economic benefits.

The VW plant that is laying off 500 employees is the same VW plant that is the recipient of $577.4 million in government giveaways, the largest incentive package for any auto plant in U.S. history. The incentives included more than $350 million in state and local tax breaks; $81 million worth of land, courtesy of city and county taxpayers; $43 million worth of federal and state-funded road improvements; $36 million in state money for worker training and a training center; and $3.5 million in rail line upgrades, financed by state and local tax dollars.

And less than five years later, what do we have to show for more than half a billion dollars in handouts? Pink slips. Five hundred of them.

Unfortunately, the VW layoffs are just the latest of a number of examples of underperforming and downright failing economic development boondoggles in Tennessee.

ACG Flat Glass in Kingsport closed its doors in 2012, leaving 66 workers without jobs only a few months after receiving a $64,800 handout from the state. Last year, Tennessee’s taxpayers shelled out $18,000 for employee training at American Esoteric Laboratories in Memphis. The medical testing company laid off 70 workers earlier this year. ThyssenKrupp, RockTenn CP and Cummins combined to slash more than 240 jobs in Tennessee within two years of receiving a total of $787,900 in state job training subsidies.

In March, Hemlock Semiconductor’s Clarksville plant laid off all of its nearly 300 employees and announced it was shuttering the facility for good. That didn’t stop the company from receiving $720,000 from Tennessee taxpayers in April, according to a report by Nashville Public Radio. Even though Hemlock now has no plant and no employees in Tennessee, the state has to make good on the final $3 million in handouts owed to the company under a $95 million deal concocted by the incentive-crazed administration of former Gov. Phil Bredesen.

Under Gov. Bill Haslam, the state’s Department of Economic and Community Development has devised “clawback language” that allows the state to recover economic incentive money from companies that fail to live up to their end of the bargain. Unfortunately, that will only apply to corporate welfare handouts going forward. Taxpayers will remain on the hook for the Hemlock calamity and a number of other bad economic development deals.

VW, Hemlock and the numerous other examples of unsuccessful or underperforming economic development handouts is just further proof that government does a poor job a picking winners and losers in the marketplace. Rather than tossing out tax dollars to entice a few hand-selected companies to come to Tennessee, state and local leaders should focus on luring businesses the right way: through low taxes and unobtrusive regulatory burdens for businesses of all sizes and types. That way, the state’s business climate will be welcoming for all businesses, not just the well-connected, chosen few.

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EaTn said...

Our state has numerous projects that unemployed folks could be hired to fill wirh a benefit all of us, but the right-wing faction has equated this to socialism that gullible voters have swallowed. So our politicians will continue to waste money on phantom jobs and corporate handouts.

May 5, 2013 at 6:34 a.m.
aae1049 said...

Reasonable people are aware of the mass of corporate welfare that is impoverishing Chattanooga. Chattanooga currently has a poverty rate of 31 percent, up from 20 percent prior to VW.

The corporate welfare or PILOT agreements and crony scams that funnel our taxpayer funds to corporate welfare, are brought to you by the greatest corporate welfare agency in Chattanooga, the "Chamber of Commerce" recipient of $1 million a year of our local tax dollars. The Chamber writes the PILOT contracts to give our hard earned tax dollars to rich corporations.

Who elected the Chamber of Commerce or River City to have tax authority to exempt? Sadly, you city and county elected officials granted the Chamber of Commerce and River City this authority. That needs to stop.

I found it interesting that the city employees charged with making recommendations to the Industrial board for bond payments to VW had their adult children hired as managers at VW. Is this called conflict or interest, or cronyism, or just the normal standard in local government in East Tennessee?

May 5, 2013 at 8:28 a.m.
Hunter_Bluff said...

Please don't call Chattanooga East TN. I lived there, I know where it is, I know what it is. North til you smell it and east til you step in it.

May 5, 2013 at 9:05 a.m.
aae1049 said...

We are southeast TN, We are a linear state running west to east, our north to south pales geographically, but ok.

May 5, 2013 at 9:53 a.m.
timbo said...

Hallelujah !!!!!! Finally somebody in the media telling the truth about the stupid Volkswagen deal. I have been railing against these kinds of deals for the last 10 years in the media, letters to the Chattanoogan, letters to the TFP and on the radio. Why in the world should my business pay taxes to subsidize another business to give government handouts. Stealing money from me, and it is stealing, to do this is morally, ethically, and legally wrong. Picking the winners and losers by giving tax breaks to one business over another business is unconstitutional.

Here is the definition of socialism,

A political and economic theory of that advocates that the means of production, distribution, and exchange should be owned or regulated by the state.

The Volkswagen deal and things like it are blatant socialism.

Not only that, it was a bad deal. The rubes in Chattanooga got took. No wonder when you let these habitual government workers like Claude Ramsey and Littlefield negotiate a deal.

Thank the Lord we finally have somebody writing for a media outlet like Drew Johnson.

May 6, 2013 at 8:32 a.m.
Plato said...

As a businessman, I see this in a somewhat different way.

This isn't about someone "picking winners and losers" an overused right wing catch-all phrase to attack anything government does to assist business. Rather I see this as competition between several communities in different parts of the country in an effort to attract VW to their area. Free enterprise in effect.

The question isn't what it cost the state and locals to get VW here, the question is what is the cost vs. benefit of the deal? You must consider the effect on the economic development of the region including the jobs created directly, and indirectly; the increased sales to local businesses of all types; the location and relocation of VW suppliers to the region; the positive effect on infrastructure, and housing; savings to the state for having people employed and paying taxes rather than being unemployed and collecting government benefits.

I admit I do not know what the cost/benefit is in dollars, but I'm not sure why the temporary layoff of 500 people has resulted in this kind of stir, nor do I understand how the decision makers should have known in 2009 that Passat sales would temporarily go soft in 2013.

Personally I find no fault with the government decision makers or the Chamber for their roll in bringing VW to Chattanooga. Chattanooga is the North American Headquarters for the second largest car manufacturer in the world. It will only grow and become an even bigger factor for our region in the future.

May 6, 2013 at 9:22 a.m.
UnionizeTn said...

Sometimes the truth is just too hard to swallow so here....drink this Koolade.

May 8, 2013 at 3:12 p.m.

With all due respect, this opinion piece is utter nonsense. There is no connection between the incentive programs and the layoffs at VW (Aerotek). Nor do the VW layoffs expose a "fault" in the economic development initiatives of the State and the region. To misconstrue this just shows a lack of understanding of the economic realities at VW, in the automotive industry and of global business in general.

May 10, 2013 at 9:21 a.m.
Daeithi said...

I was an accidental insider at VW (subcontractor employee with a lot of access). I entirely agree with HoeferleConsulting. There is nothing wrong here. Fluctuating demand is part of the landscape, particularly in the automotive industry. Aerotek is used as a surrogate apprentice program, where the best "graduate" to VW (there is even a ceremony); others remain Aerotek and still others are culled for various reasons. 500 is a big hit but it reflects not a strategic error but market reality and the need for VW to refresh the Passat line in light of resurgent American and Japanese offerings and a powerful Korean industry. My suggestions to you Mr. Fischer to upgrade the 2.0T, replace the VR6 with the Audi 3.0 NA and Supercharged and adapt the 4door Passat into a 2 door coupe like the Audi S5. VW produces an excellent alternative to the Camry (the Passat) but the market wants more than that now.

May 15, 2013 at 8:28 a.m.
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