The Great Toyota Giveaway

Magazine cover reading "The Best of the Press: Southern Journalism Awards"

This article originally appeared in Southern Exposure Vol. 15 No. 3/4, "The Best of the Press: Southern Journalism Awards." Find more from that issue here.

The use of multimillion dollar tax incentives to lure giant manufacturing plants to an area has increasingly met criticism — especially when the new factories import labor or subvert union strength through nonunion subcontractors. For months, Alecia Swasy of the Lexington Herald-Leader followed the controversy over Kentucky's $125 million incentive package to attract a Toyota auto plant, and she filed this report on January 18, 1987. 


Georgetown — Doubts about the huge incentives and tax breaks being offered to automakers are being raised in many quarters as people take a second look at Toyota's coming to Kentucky. 

Critics in Ralph Nader's consumer advocacy group in Washington and Georgetown's City Hall, say that the bidding wars for plants, such as the $800 million Toyota Motor Manufacturing U.S.A., Inc. plant in Scott County, have become outrageous. They also say that planned federal tax breaks and the state's generosity with incentives, ultimately will bring trouble to local government. 

"It's time to take the bloom off the rose in Kentucky," said Jim Musselman, one of Nader's attorneys. Incentive packages are "merely corporate freeloading on the backs of taxpayers." 

Musselman has spent the past two years studying places like Flat Rock, Mich., where Mazda Motor Manufacturing Corp. is building a $450 million plant and promising to employ 3,500. Flat Rock, which is still suffering from the tough economic times of the early 1980s, was elated by the news and thanked the automaker by exempting it from local taxes for 12 years. Town leaders also agreed to provide improvements in utilities and water services. 

Since the November 1984 announcement, however, Flat Rock officials have begun to realize that the plant will bring some expensive problems to the town of 7,000. Flat Rock's mayor recently asked the state for $200,000 to help pay the town's bills. 

"Michigan's state government offered Mazda a 100 percent tax break on local taxes," Treasurer Carolyn Beck said. 'The city was a little reluctant to go along with it, but you're kind of stuck. You don't want to be the one to say no." Local officials have found it hard to reject the prospect of thousands of jobs and increased revenue, but "sooner or later, somebody will have to pay for it," Musselman said. 

Lately, Musselman has been studying Kentucky's incentive package for Toyota. What he has found is not encouraging, especially for Georgetown. The state's incentive package for land, road improvements and other projects does not include assistance for Georgetown as it grows to meet the plant's needs, he says. 

The problem became clear when states began to compete viciously for General Motors' Saturn plant, which eventually was put in Spring Hill, Tennessee. "All the governors were clamoring around, trying to outbid each other," Musselman said. 

Some Kentucky officials agree that Kentucky got caught up in the post-Saturn struggle. "My impression is that governors are like baseball owners," said Rep. Joe Clarke (D-Danville), chairman of the House Appropriations and Revenue Committee. "Everyone is bidding blindly, and they keep upping the ante." 


Whether the state's plans are feasible for local governments is another question. Even Sam Pollock, former mayor of Georgetown, agrees that there are some unanswered questions on how the plant will affect his town. "Toyota is going to impact us heavily," He said. "When and how the money comes to meet our needs isn't straight yet." 

Gov. Martha Layne Collins and other state officials have assured Pollock that they would lend personnel to help in some areas, such as technical assistance, but "they've never offered us any financial assistance," Pollock said. 

"I would suspect they feel they have brought this multimillion dollar industry in at a considerable expense, so the spinoff in jobs and taxes should be sufficient for us," he said. "But we still have concerns about what will happen between construction and the time when we get money from taxes." 

Some financial problems could be solved if Georgetown annexed the Toyota site for the purpose of collecting a one percent occupational license tax and a one percent net profits tax. The city has the right to annex, "but we don't want to take a stance of disrupting Toyota to the point that they want to pick up and leave," Pollock said. 

Automakers often offer payments to cities to avoid taxes. Mazda, for example, pays Flat Rock $100,000 a year for each year of the local tax exemption. In Smyrna, Tennessee the Nissan plant had been a good corporate citizen mainly because the town decided to annex it before the automaker moved in, Pollock said. 

Although Toyota officials have said they want to pay their fair share, they do not like to discuss possible annexation by Georgetown and collection of the occupational tax. Jeff Smith, Toyota's U.S. liaison manager, declined to comment on annexation. But he said "any change in the tax structure, at any level," would affect the company's original estimates of costs and profits. 

Another option that could relieve the financial strain that Georgetown is likely to encounter would be the formation of an urban-county government with Scott County, Pollock said. Such an arrangement would allow the city and the county to share the revenue collected from the Toyota plant and to save money on some services, he said. 

Toyota and state officials are preparing more detailed estimates of how much local tax money would be generated by the Toyota plant, Smith said. "We think that the results will show that the tax benefit of the plant to the community will be significant," he said. 

Georgetown's share will not be hard to spend. Pollock can name about a dozen areas — from storm sewers to fire and ambulance services — that will need improvement. 

Pollock is not alone in questioning the state's deal with Toyota. Critics have ranged from Don Wiggins, president of the Concerned Citizens and Businessmen of Central Kentucky, to Wallace Wilkinson, Lexington businessman and 1987 gubernatorial candidate. 

To Wiggins, the state's incentive package is a step toward socialism. Wilkinson simply believes that the state did not negotiate a good deal. 

Another critic is Jerry Hammond, executive secretary-treasurer of the Kentucky State Building and Construction Trades Council. He has intervened in a lawsuit testing the constitutionality of the state's incentive package. According to estimates by Hammond's attorneys, the state already has committed itself to spending at least $132.5 million, or $7.5 million more than what the General Assembly appropriated. 

Those figures are based on the state's own estimates, outlined in internal memos, written to state Budget Director Larry Hayes, said Bob Metry, one of Hammond's attorneys. 

Those overruns do not include any estimate of the cost of debt service on any bonds or for various other state-supported Toyota plans, he said. "Toyota has been given a credit card with an unlimited line of credit." 

Critics also point to the planned federal tax breaks as "the grand giveaway to automakers." Under the tax plan now awaiting approval in Congress, Toyota would receive a $32 million tax break for the plant, while estimates show that GM could get a $60 million break for the Saturn plant. 

The tax breaks, part of a package of "transition rules," are designed to give a one-time investment tax credit on the plants. Toyota got caught midstream in putting its new facility in the United States," said Jim Shanahan, senior tax manager for Price-Waterhouse in Washington, Toyota's accountant. 

Plans for the Scott County plant were based on existing investment tax credit and depreciation laws, so Toyota "didn't do anything to beat the wire of tax reform." If Toyota gets the benefit of the tax break, it could take a 10 percent investment tax credit on machinery and equipment when those are in service in 1988. 

But the AFL-CIO has been lobbying against the tax breaks, arguing that the company is taking unfair advantage of the tax laws. The union estimates that the tax savings from the transition rule could amount to $100 million, despite congressional estimates of only $32 million. "We're being played for suckers," said Joe Maloney, secretary-treasurer of the Building and Construction Trades Department of the AFL-CIO. The union argues that Toyota does not qualify legally for the tax break and should not get it because of disputes over the construction of the plant. 

Local and national labor leaders have been protesting the merit-shop construction site, which is planned by Ohbayashi Corporation, Toyota's contract manager. The labor leaders have threatened a nationwide campaign against the automaker. 

While lobbying continues, no one is sure whether the transition rule will survive the conference committee or a final vote by Congress. 

Toyota representatives met recently with Senators Mitch McConnell and Wendell Ford and Rep. Larry Hopkins, all of Kentucky, because of concern over the union's lobbying efforts, Shanahan said. "We wanted to impress upon them how important the transition rule is to Toyota and the state of Kentucky," he said. 

State officials defend their incentive package as well as the federal tax break. "I don't know of any state that has gone broke creating jobs for its people," Hayes said. 

He conceded that there would be changes for Georgetown, but said that the changes could be viewed as problems or opportunities. "I see them as opportunities."