Toyota plant could cost Iowa hundreds of millions in incentives

If Iowa leaders hope to land a $1.6 billion Toyota and Mazda factory, one thing is clear: It will cost them.

Recent incentive packages for new foreign-based plants in the South have topped half a billion dollars, far outpacing the incentives routinely doled out by the Iowa Economic Development Authority for companies that pledge to retain or create jobs here.

The Wall Street Journal reported last week that Toyota and Mazda were considering 11 states, including Iowa, for a new joint plant. And even more states are reportedly vying for the plant. Now a bidding war of sorts is underway as governors and economic development officials work to woo the plant to their own backyards.

“Auto assembly plants are kind of the holy grail of economic development,” said Bernard Swiecki, a senior automotive analyst at the Center for Automotive Research, an independent research group. "States will do everything they can to attract this thing."

That's because automotive plants are capital intensive and oftentimes spur multimillion dollar expansions and upgrades as car and truck models change over the years. Jobs in automotive plants pay higher than average. And the addition of one assembly plant can spur further investment and job creation as suppliers line up near a new factory.

Toyota says its new plant could employ as many as 4,000 workers ― which would go down as the state's largest jobs project in recent history, officials said. And research from the Center for Automotive Research shows that each job at an assembly plant creates another nine jobs in the wider economy, Swiecki said.

Iowa Gov. Kim Reynolds said the state is “extremely competitive” in its hunt for the Toyota plant, but wouldn’t comment on a potential incentive package.

“We are going to do everything we can ― up to a limit. You have to know where you draw a line,” Reynolds said. “But we’re competitive. This would be great for the state of Iowa. It would be phenomenal.”

But the competition ― and the ensuing bidding war for incentives ― could be complicated by Iowa's fraught budget situation. State budget analysts expect Iowa's total budget shortfall to reach about $350 million this year.

"I think it’s really a sad state of affairs that states continue to be held hostage by these large, profitable companies for taxpayer assistance," said Iowa Sen. Joe Bolkcom, D-Iowa City. "So in that context, does Iowa have the resources to compete?"

'You get these incredibly expensive deals'

Foreign-based auto plants built in recent years in Southern states have been lured with piles of taxpayer incentives.

Good Jobs First, a nonpartisan, nonprofit research group that studies economic development, has recorded the overall cost of incentives for automakers, including up-front awards and the ongoing cost of tax breaks.

The organization's research shows:

Nissan reaped more than $1.2 billion in total subsidies for its Canton, Miss., plant that produces sedans, pickups, SUVs and vans. That figure, which included ongoing tax breaks, dwarfs the $378 million awarded in cash, workforce training and infrastructure.

In Tennessee, Volkwagen's first North American plant opened in 2011 thanks to an incentive package that topped $550 million. The German automaker later received $263 million to fuel an expansion of the Chattanooga plant that makes sedans and SUVs.

Kia received $410 million to build its first U.S. plant in West Point, Ga. That $1 billion plant pledged to create 2,500 new jobs building SUVs.

Good Jobs First Executive Director Greg LeRoy says his group has tracked a recent rise of "mega deals," economic development projects that receive incentives of $50 million or more.

The pool of economic development prospects crashed several years before the Great Recession, he said. That supply hasn't fully rebounded, he said, though politicians' desire to look aggressive on jobs remains strong.

"You get overspending," LeRoy said. "You get these incredibly expensive mega deals."

The number of mega deals and their cost to taxpayers has doubled since 2008, he said.

LeRoy said he wouldn't be surprised to see Toyota land hundreds of millions of dollars in incentives for its coveted plant. But, he said, the Japanese brand often makes its moves based on business decisions, not merely incentives. For instance, according to LeRoy, the company cited Texas' nation-leading market for pickups and its rail spur access when it decided to move Tacoma truck production to San Antonio in 2003, despite being offered bigger incentive packages from other states.

"Toyota has been unusually frank about its decision-making process," LeRoy said. "I think it's foolish to throw money at them because they’re pretty honest about business basics driving their decision making."

Other states have used a mixture of bonds, tax credits and cash incentives to lure auto plants. Incentive packages often include benefits for workforce training, road improvements, site work, rail upgrades and even free or reduced-priced land.

That could add up to a hefty bill for Iowa taxpayers at a time when the state continues to face unpredictable revenue, which has forced millions in budget cuts during the previous year. Iowa legislators pledged in March to "get serious" about evaluating the state's various tax credits, which have ballooned 180 percent since 2005.

Given the shape of the state budget, Sen. Tim Kraayebrink, vice chairman of the Iowa Senate Appropriations Committee, said the state should proceed with caution. A large up-front cost of incentives would be a "tough sell" for the Legislature, he said. But he said an ongoing tax abatement "doesn't bother me," because it would create new revenue.

Kraayebrink, R-Fort Dodge, said Toyota's courtship brings to the forefront the need for more comprehensive tax reform in Iowa.

"If we had a tax-friendly state that everybody wanted to come here and it made more sense for them to come here for that reason versus trying to bribe them with upfront funds, I'm more in favor of that," he said.

Rep. Chris Hall, D-Sioux City, said a jobs-rich project like an auto plant would be an ideal use of incentives. But he fears that state officials may have over-zealously spent their available ammunition on other, less-worthy projects that have resulted in far fewer jobs.

"It's a shame that the state doesn’t have the surplus in our budget that we did several years ago. It has virtually been given away," said Hall, ranking member on the House Appropriations Committee. "We obviously want to attract manufacturing jobs to the state, but we might be at a point where we can’t afford to attract them here."

'It never begins with incentives'

Debi Durham, director of the Iowa Economic Development Authority, said the state's budget problems won't handicap Iowa's hunt for an auto assembly plant.

While the bottom-line numbers on incentive packages can mount up, Durham said, those figures don't necessarily mean a state is "writing a check to these companies for cash."

Future tax abatements don't have upfront price tags. Some incentives come from local governments and other agencies can help with infrastructure or securing sites.

"A lot of that is not big state stuff," she said. "It's really the land or investments into the property."

Iowa's largest economic development project in recent years came the way of a $3 billion fertilizer plant that created 220 permanent jobs. That controversial project received $109 million in state tax benefits, plus $30 million in local tax abatement.

Durham wouldn’t comment on specific incentives Iowa might offer Toyota. She said the company asked for information on specific sites that could house a new assembly plant with room for suppliers to grow.

“I always tell people it never begins with incentives,” she said. “It always begins with site, geographic location. So that’s where we are right now.”

After submitting information to the company, Iowa officials are left to wait and see whether they make it onto a list of finalists.

"I'm convinced if Iowa gets to that point," Durham said, "Iowa fares very, very well in those kinds of competitions."

Toyota already 'knows exactly where it wants to go'

Iowa State University economist Dave Swenson said the whole discussion about incentives is likely irrelevant in Iowa.

"I'm not sure why Iowa thinks it's seriously in the running," he said.

He believes Toyota will ultimately choose a Southern state near its existing supply chains, but floated other states like Iowa to drive up bids on potential incentive packages. Like all economic development prospects, the states and the companies have an "asymmetric negotiating position," Swenson said.

"Toyota knows everything," he said. "It knows what it wants in terms of incentives. It knows exactly where it wants to go. It knows everything and all the state actors know nothing."

Peter Fisher, research director of the Iowa Policy Project in Iowa City, said auto plants are probably a better use of incentive dollars than other projects Iowa has funded in recent years. But "the state treasury is in trouble," he said, and officials need to ensure they don't worsen it.

A multi-state competition only heightens the risk that states will overextend themselves with incentives, Fisher said. He said the state should approach its bid the way people approach a public auction.

"You’ve got to be prepared to walk away. You have to know what the reasonable number is to spend on this and you’ve got to stop bidding at a point," Fisher said. "The frenzy of the auction is a real danger. And the companies know that and that’s why they’re able to successfully get these hefty incentives."