Volkswagen’s Tennessee Subsidy Deal: Are Taxpayers Being Taken for a Ride?

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Tennessee officials are still celebrating Volkswagen’s announcement last week that it will build a new assembly plant in Chattanooga, describing it as a big step toward their state becoming the nation’s number one auto producer. The state has apparently at least gained the more dubious status of providing the biggest subsidies to date for a foreign-owned carmaker–a package reportedly worth at least a half billion dollars.

According to reporting by Chattanooga Times Free Press reporters Andy Sher and Dave Flessner, the state and Chattanooga-area local governments have pledged the following to land the $1 billion investment and related 2,000 jobs:

1,350 acres of land worth $81 million.

At least $30 million for worker training improvements, and a $6 million technical training center.

$43 million in road and highway improvements, and $3.5 million for rail connections.

$200 million in job tax credits over 20 years.

Between $150 million to $350 million in property tax breaks over 30 years, depending on how well Volkswagen meets job and investment targets. However, VW will pay the education portion of property taxes, about $5.5 million yearly.

Other subsidies of unspecified value, including machinery sales tax exemptions, and low cost loans and energy credits from the federal Tennessee Valley Authority.

Michigan and Alabama were reportedly Tennessee’s main competitors for the VW plant, although the strong United Autoworkers presence in Michigan seems to have made that state a distant third.

Putting the cart before the horse, Tennessee’s economic development commissioner said the University of Tennessee would do a cost-benefit analysis of the VW deal later this year, after its costs are fully known. That this evaluation will be very critical may be doubted since a previous UT study of the Nissan headquarters deal (which cost Tennessee state and local governments $197 million) reportedly attributed to it an unlikely economic benefit of half billion dollars a year.

Tennessee Governor Phil Bredesen, a Democrat and former Nashville Mayor with a history of getting big subsidies for computer giant Dell, Nissan and a football stadium is unembarrassed by the deal’s cost:“I don’t know whether it’s fair that a Mercedes Benz costs $90,000, I just know if I want one that’s what I’ve got to pay.”

Whether a half billion dollars, or $250,000 per job, is in fact the real going rate for an auto plant is less clear, however. The exact importance of subsidies in a company’s location decision remains locked in “a black box”, but is generally limited. In fact, VW spokespeople acknowledged the attraction of the incentives but stressed the particular importance of those for worker skills and site preparation, which form a comparatively small part of the mammoth package.

Successive interstate competitions for big auto assembly plants–which began in the Midwest in the 1970s and have occurred repeatedly in the South over the past decade–have often led to overspending as states try to outbid each other, and then to a sense of fiscal hangover when the competition is over.

Although the euphoria and industrial recruitment folklore surrounding the deal—Senator Lamar Alexander serenading VW executives with a rendition of “Chattanooga Choo-Choo”– seem to have at least delayed that hangover’s onset. The euphoria has also muted concerns about whether, how and when Tennessee will recoup its “investment,” but those concerns are real.

For example, Tennessee officials promise that new auto supplier firms —which may themselves get subsidies to locate near VW– will help offset the deal’s costs. But Business Week has suggested that numerous such firms already located in Alabama and elsewhere in the South could serve the plant with existing capacity. And Alabama is already scheming to land suppliers for the new plant. Continued intense competition like this between Tennessee and other states, and between VW and its competitors, may eventually make the state’s huge subsidy deal seem more like a costly gamble.

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2 Responses to “Volkswagen’s Tennessee Subsidy Deal: Are Taxpayers Being Taken for a Ride?”

  1. Will the Stimulus Be Frittered by Job Wars Among States? « Says:

    […] complains publicly about the cost and the front-loading. (But then, the Volunteer State set a new record last year for auto assembly-plant subsidies when it awarded Volkswagen a package worth $577 million.) GM […]

  2. Blaine Stanziana Says:

    Hello,
    I hope the people of Tennessee dont put all their hopes in this new VW Production plant after what they pulled in Pennsylvania. VW opened the first foreign car assembly plant in New Stanton Pa in 1978, more than 30 years ago. They signed a 30 years term at that location, I was employed at that plant at the age of 20. We built quality cars for VW including the fact that our Rabbit GTI was Motor Trends 1985 car of the year, so the quality was there. We produced 1.2 million cars at the New Stanton Plant, but VW who got a ton of incentives from the state of Pennsylvania to open this facility, when the 10 years tax breaks ran out they ruined thousands of lives by foolishly closing the doors at this great facility. They couldn’t care less at the thousands of people who gave it their all to produce excellent cars for almost 11 years.

    I hope VW fails in their new plant and I also hope that their sales which have dropped terribly when the public learned what they pulled in pa never recover, there was no excuse for closing this plant. If the car ( The Golf ) was not working or selling, then shut the plant down for a year or so and get a car design in that plant that will work, I speak for thousands of former VW employees on what we think of their idea to open another plant in the USA. Contact me and I can tell you the whole story, here are some pictures from that great facility. Some of them are the only ones ever taken.
    Blaine A Stanziana

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