Tennessee Reviews Clawbacks for VW Tax Incentives After Cheating

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Amy LaLonde, a metal finishing body technician, inspects a 2012 Volkswagen Passat in the body shop at Volkswagen AG's factory in Chattanooga, Tennessee, on June 1, 2011.

Photographer: Mark Elias/Bloomberg

Tennessee lawmakers will review the state’s investment of hundreds of millions in incentives for Volkswagen AG’s Chattanooga plant and provisions for recouping money if the company’s emissions-cheating scandal threatens jobs.

A Senate panel is scheduling a hearing in coming weeks on the affair’s impact on the 2,400-worker factory, which builds Passats, and an expansion for a new sport-utility vehicle. Lawmakers will review clawback provisions and the method for determining whether companies meet job-creation promises, said Senator Bo Watson, a Republican who chairs the subcommittee.

The incentives that Tennessee provided to lure the Volkswagen plant were among several large deals that Southern states have offered in recent years to land factories from Nissan Motor Co., Toyota Motor Corp. and other automakers. The VW scandal shows the vulnerability of states that offer so much for development, and highlights the need for accountability, Watson said.

“Because Volkswagen has been dishonest about their emissions-system technology, I think it’s fair to ask,” said Watson.

Volkswagen in 2008 selected Tennessee over Alabama and other states for a new $1 billion assembly plant to build the gasoline- and diesel-powered Passat sedan. To lure the plant, the state, Chattanooga and surrounding Hamilton County offered $485.5 million in cash and tax incentives, state and local officials said.

SUV Expansion

Last year, the automaker chose the factory for a $600 million expansion to build a mid-size sport-utility vehicle starting in 2016. For the expansion and its promise of 2,000 additional jobs, the state approved a $165.8 million grant plus as much as $12 million in training costs last year, and the local governments offered $52.5 million for infrastructure.

While Volkswagen has already met its commitments for the first incentive package, there are protections and clawback provisions if the automaker fails to keep its expansion promises, said Randy Boyd, the state development commissioner.

Tennessee disburses grants only after the company incurs an expense and seeks reimbursement, and VW must repay a proportional share if it doesn’t maintain job commitments through July 2022, he said.

Still, Tennessee’s initial incentive package was one of the largest of its kind, and the scandal shows the risks for states, said Greg LeRoy of Washington-based Good Jobs First, which tracks and criticizes such development deals.

The automaker admitted last month that it installed software in diesel vehicles so that emissions that met pollution standards in lab tests were many times higher under actual driving conditions.

On Track

In anticipation of fines, recalls and a drop in U.S. sales, Volkswagen slowed production at one of its biggest engine factories in Germany and froze hiring at its unit there that makes car loans, company said Thursday.

Volkswagen has made assurances that the Chattanooga expansion remains on track, and a recent plant visit shows that the work is well under way, with half the capital investment spent or committed, Boyd said.

Volkswagen spokesman Scott Wilson declined to comment on the company’s expansion or the legislative hearing.

Tennessee Governor Bill Haslam told reporters in Nashville last week that he approves of the legislature holding hearings. His biggest concern is that the scandal may hinder Volkswagen’s ability to sell cars, he said.

“We’re urging them to get everything out in front of everybody as quickly as possible so that existing customers can understand what the solution’s going to be and that Volkswagen can have a clear path forward,” said Haslam, a Republican.

The stakes are high. The plant created 12,400 full-time jobs, $643.1 million in annual income, counting supplier activity, and $53.5 million in taxes each year, according to a 2013 study by the University of Tennessee in Knoxville.

A review of the expansion projected that it would generate $372.6 million annually with 9,799 positions when fully operational.

Watson, the senator, said the new sport-utility vehicle that VW plans to build in Chattanooga could be the automaker’s “saving grace” after the scandal.

“They have a great opportunity to make a product that’s attractive and to restore some of their public confidence, some of their industry credibility, and do it right here,” he said.

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