Are ‘incredibly conservative’ tax incentives worth it for $4.5B Fiat Chrysler deal?

By: and - March 3, 2019 1:09 pm

The new Fiat Chrysler Automobiles (FCA) Group sign is shown at the Chrysler Group headquarters May 6, 2014 in Auburn Hills, Michigan. | Bill Pugliano/Getty Images

Many leaders — including President Donald Trump and Gov. Gretchen Whitmer — have heaped praise on Fiat Chrysler Automotive’s planned hiring frenzy of roughly 6,500 people in metro Detroit.  

But some lawmakers and economic experts remain skeptical about whether public financial incentives that FCA is expected to reap actually help local economies, even though Whitmer has promised they will be “incredibly conservative.”

Defense Secretary Ash Carter, center, tours Amazon’s headquarters in Seattle, March 3, 2016. | DoD photo by Navy Petty Officer 1st Class Tim D. Godbee, Flickr

The deal comes in the aftermath of Amazon’s second headquarters sweepstakes. New York City won part of the deal, but the company pulled out after progressives campaigned against the incentives offered.

So while the $4.5 billion FCA deal is largely seen as an economic boon to a state and city desperate for jobs, it’s unclear how much the project — and public investment — will end up benefiting actual Detroiters.

The FCA deal was announced Tuesday. Speaking with reporters the next day, Whitmer was clear that won’t take the lead on pushing the company for assurances that Detroit residents will be hired for new jobs FCA plans to create in its bid to boost production. She said she’s leaving that to Detroit Mayor Mike Duggan.

“You know, obviously the mayor is working through community benefits language and the agreement that they have, and so I’m gonna leave it to the locals — to him and to FCA — to work out what that looks like, with obviously the input of the City Council and the community,” Whitmer said.

Mayor Mike Duggan and Gov. Gretchen Whitmer at FCA announcement, Feb. 26, 2019 | Ken Coleman

The planned investments are contingent on negotiating land deals and incentives with the cities of Detroit, Sterling Heights, Warren and Dundee, as well as the state of Michigan, according to FCA, whose U.S. headquarters is in Auburn Hills.

The city of Detroit has 60 days to deliver on an agreement to acquire about 200 acres of land where FCA plans to convert existing facilities into a new assembly site that would employ 3,850 people.

U.S. Rep. Rashida Tlaib (D-Detroit) supports FCA’s planned Detroit expansion. But she has said she hopes the company considers a “real community benefits agreement that addresses the need for programs for youth, increases home ownership, reduces carbon emissions, among other needed initiatives.”

Detroit’s community benefits law — known as Proposal B and adopted by voters in 2016 — mandates that large developers have discussions with residents and groups who may be impacted by the project and work to offset any negative impacts.

Proposal B was seen as a watered-down version of Proposal A, which Tlaib spearheaded, and would have made the agreements legally binding. That measure failed.

Rashida Tlaib | Ken Coleman

While details of a community benefits agreement for the FCA project remain unclear, Duggan is already making the case to residents that the proposed expansion is crucial for Detroit’s economy. The mayor said the city needs to be proactive in its own investment in the area, according to a report in the Detroit News.

“You put 5,000 good-paying jobs across the street, there’s going to be people who want to live in this area,” Duggan said during a community meeting. “Which means we need to start to address broken sidewalks, abandoned houses, dead trees, a lot of things.”

Incentive questions

While Detroit works through community benefits, both the city and state are exploring incentive packages for FCA.

Speaking with reporters on Thursday at the Detroit Regional Chamber of Commerce conference, Whitmer confirmed that the deal with FCA will contain “pieces” of both the state’s Good Jobs for Michigan law and “transformational” brownfield incentives.

Dennis Archer Jr., Detroit Regional Chamber 2019 Conference chair, and Gov. Gretchen Whitmer, Feb. 28, 2019 | Ken Coleman

The economic development programs began under former Gov. Rick Snyder’s administration and are targeted for larger projects, such as the FCA proposal. They allow the company to keep much of the sales, use and payroll taxes they would otherwise pay as a way of offsetting costs.

Whitmer has previously said that the board of the Michigan Strategic Fund — the state’s pot of money for economic development initiatives administered by the Michigan Economic Development Corp. (MEDC) — likely will take up the FCA proposal at its meeting in late March.

“You’ll have an opportunity to scrutinize what [the incentives] are, but in comparison to the kinds of economic developments that happen in this state, this [FCA project] dwarves everything else that’s been done,” Whitmer said, while declining to provide specific numbers. “My understanding of what’s on the table is incredibly conservative considering the return we’re going to get on the investment.”

Whitmer is not planning to involve the Legislature in the decision. She said the unannounced FCA deal likely will involve existing state incentives that don’t require lawmakers’ signoff.

For its part, the MEDC says it’s exploring options to support FCA’s proposed expansion, but did not reveal any details.

“The MEDC is certainly looking at all the tools in its toolbox and working with local partners and FCA on how the state can best support [the] announcement,” MEDC spokesman Otie McKinley wrote in an email to the Advance.

FCA spokesman Kevin Frazier declined to comment at this time on any possible incentive deals.

But the use of the Good Jobs and brownfield incentives does have its skeptics from both sides of the aisle.

State Rep. Yousef Rabhi (D-Ann Arbor) was one of just three House Democrats in 2017 to vote against the legislation that created the new brownfield incentive.

In an interview with the Advance on Thursday, he said he believed that the legislation created a “fiefdom” for billionaire Detroit real estate developer and Quicken Loans executive Dan Gilbert, who had pushed for the bills.

Yousef Rabhi | House Democrats photo

Rabhi said he doesn’t know what the FCA incentive package may look like, but said, in general, he’s opposed to incentives for large companies.

“So I think there’s a way of doing [incentives] right, but generally speaking, I am more in favor of spending public dollars to invest in resources like roads and schools,” Rabhi said.

State Rep. Steve Johnson (R-Wayland) also voted against the 2017 brownfield bills. He said as a conservative, he’s philosophically opposed to using taxpayer dollars to help certain companies at the expense of others.

Johnson told the Advance he believes that incentive deals, in general, are “crony capitalist corporate welfare schemes” for which legislators from both parties tend to fall.

“It’s really arrogant at the end of the day to think that we’re smart enough to direct the economy. The free market is always better,” Johnson said.

Some economic experts say such incentives rarely end up helping the local economy.

Nathan Jensen, a professor of government at the University of Texas at Austin, questioned the typical argument that companies would take their investment — and new jobs — elsewhere without public dollars.

Steven Johnson

Jensen said the the majority of incentives are going to “firms that would have invested anyway” — something that can be observed across states and countries.

“There is simply no way for governments to know the right ‘price’ and only offer incentives to the firms that need it and not offer too much money in the process,” he said.

“My own work stresses that governments overuse these incentives as a way to take credit for investment that comes to their states or city,” Jensen continued. “In many cases, we observe massive incentive offers and then very, very little oversight of these programs.”

A 2018 report from the Kalamazoo-based W.E. Upjohn Institute for Employment Research reached the same basic conclusion. The study argued that incentives only tipped the scales 25 percent of the time.

“In other words, for at least 75 percent of [incentivized] firms, the firm would have made a similar decision location/expansion/retention decision without the incentive,” the report said.

‘Strong economic drivers’

The overall economic development industry and incentive programs around the country have faced mounting criticism in recent years.

Last month, e-commerce giant Amazon reversed plans to build part of its second headquarters, or “HQ2,” in New York City’s Long Island City neighborhood. Detroit and other Michigan cities had been passed over, as the company also went with Arlington, Va., outside Washington, D.C.

Amazon is one of the highest-valued corporations in the world and worth more than $800 billion. The Seattle-based company was slated to receive around $3 billion in incentives from New York City and the state of New York. However, the use of public money spurred city residents’ outrage and led Amazon to opt out of its plans for NYC.

Greg LeRoy is executive director of the Washington, D.C., economic development watchdog group Good Jobs First. He said that Amazon’s more than year-long public search for its second headquarters — seen by many as a way of bidding up incentives — revealed the “tax break industrial complex.”

LeRoy said he’s particularly critical of incentive programs like Good Jobs For Michigan — which is not related to his organization. That program has been proposed as part of FCA’s deal, because it allows companies to keep employees’ income tax payments. LeRoy calls it “paying taxes to the boss.”

Nonetheless, LeRoy acknowledged that a city like Detroit could benefit greatly from a new auto assembly plant and other investments from FCA.

“The theory is sound. Maybe you’re subsidizing an assembly plant, but you’re getting a lot of the parts [supplier] jobs and you’re getting a downstream ripple effect because the jobs pay well and people can stimulate the economy with their paychecks,” LeRoy said.

“Even though many states have subsidized them over time, they can be strong economic drivers,” he added. “We acknowledge that.”

Advance reporter Ken Coleman contributed to this report.

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Nick Manes
Nick Manes

Nick Manes is a former Michigan Advance reporter, covering West Michigan, business and labor, health care and the safety net. He previously spent six years as a reporter at MiBiz covering commercial real estate, economic development and all manner of public policy at the local and state levels.

Michael Gerstein
Michael Gerstein

Michael Gerstein is a former Advance reporter covering the Governor's office, criminal justice and the environment.