In the Race to Win Electric Vehicle Factories, States Are Handing Out Big Incentives at Lightning Speed

Michigan officials panicked last September. That’s when Ford Motor Co. announced it would spend $11.4 billion on four factories for electric vehicles and batteries, not in its home state of Michigan, but in Kentucky and Tennessee.

Suddenly, Michigan’s prospects of remaining at the center of the North American automobile industry were in question, at a time of unprecedented upheaval. Manufacturers were gearing up for a switch to electric vehicles, and they planned to build those cars, trucks and batteries in Georgia, Illinois, North Carolina and Oklahoma.

Those competitors were offering land, tax breaks and other incentives to lure new factories, including ones from startup EV manufacturers. So Michigan Gov. Gretchen Whitmer, a Democrat, worked with the state’s Republican-led legislature to pass an ambitious new set of economic development incentives to attract electric vehicle manufacturers.

It worked. In January, General Motors and battery manufacturer Ultium Cells announced that they would spend $7 billion to build electric vehicles in Michigan. It would be the largest upgrade in GM’s history. And it comes with $824 million in incentives, including grants, tax breaks and electric grid upgrades.

“When it comes to investing in Michigan, GM and I have the same philosophy: ‘Everybody in,’” Whitmer said when the plans were revealed. “Michigan’s future is bright, and I will continue working with anyone to make transformational investments in our economy, create good-paying jobs, and empower working families.”

Tax breaks to attract companies are always controversial, but they’re making a big comeback as states try to grab a piece of the action as the auto industry retools to make many more electric vehicles. This time, though, states are handing them out faster than ever, just to keep up with the rapid changes in the industry.

High Speed, High Stakes

The last year has been a dizzying one for the auto industry.

President Biden’s inauguration signaled that the federal government would push for cleaner emission vehicles, both by pushing stricter fuel-efficiency standards and by replacing the government’s fleets with electric vehicles. Most automakers responded by setting goals to phase out production of gas-powered vehicles and replace them with electric vehicles.

The sudden interest in electric vehicles has helped upstart companies gain ground both with stock traders and with customers. Tesla dominates electric vehicle sales in the United States, and its total stock is worth about 18 times that of General Motors. But even Rivian, which produced just 1,000 electric vehicles last year, has three-quarters of the stock market value as GM.

Meanwhile, the distinction between automakers and the tech industry has become blurred. A global shortage of computer chips hit the auto industry particularly hard, slowing vehicle production at a time of high customer demand. While automakers are developing technologies for autonomous and connected vehicles, they need semiconductors for current vehicle models, too. New vehicles contain dozens of chips that run everything from navigation systems to power windows.

Those factors have stoked interest among carmakers in building new vehicle factories, and specifically in the United States, said Bob Trezise, the president and CEO of the Lansing Economic Area Partnership, which pushed for the incentives that helped persuade GM to upgrade two factories and build a Ultium battery plant in the area.

“You have these companies making very fast decisions: Instead of two years, [it’s taking them] three months,” Trezise told Route Fifty.

The companies typically narrow their search quickly to a handful of states that offer big locations for the new facilities. The states offer similar advantages, so the companies look for ways to distinguish between the offers, Trezise said.

“States are realizing that they might wake up and [discover they made] a mistake in these few precious months and be left out of the future economy for the next 20 years,” Trezise said. “That’s a risk that no one can afford.”

While the size and speed of the incentives might be new, their underlying structure is familiar. “We don’t have to reinvent the wheel,” Trezise said. “What is different is the political will to approve much larger versions of what we’ve had.”

“Our competitors are not standing still,” said Josh Hundt, the executive vice president and chief business development officer of the Michigan Economic Development Corp., a public-private entity that promotes Michigan business. “States are not waiting. They are continuing to add to their toolkits.”

“While we are not going to try to win solely on incentives, we believe that strong incentives are a component, along with a strong business climate, to make sure we’re the most competitive state that we can be,” Hundt said.

To get two Ford battery plants, Kentucky offered the automaker a loan of up to $250 million, a 1,500-acre site and $36 million in workforce training programs. Tennessee went even further. It offered Ford and its partner company in the venture, South Korea-based SK Innovation, $500 million and a new nearby college campus. The Tennessee Valley Authority is also providing “hundreds of millions of dollars” in electricity discounts and infrastructure improvements.

Georgia enticed Rivian to build a $5 billion plant with an incentive package that is expected to be the largest in the state’s history. That includes a “mega tax credit” to Rivian of $5,250 per job for five years worth about $200 million, plus workforce training and a new highway interchange near the project. Gov. Brian Kemp helped convince Rivian executives to choose a site the state had helped to prepare east of Atlanta.

“We’ve got jobs tax credits in the statutes, other tools at our disposal. But what I focused on was speed to market and the workforce that we could help train. Those were the biggest selling points,” Kemp told The Atlanta Journal-Constitution.

Oklahoma officials convinced startup Canoo to build an electric vehicle factory that could create 2,000 jobs with performance incentives, 400 acres of land and infrastructure improvements. The cost of those incentives could top $300 million.

In North Carolina, the state secured a $1.3 billion Toyota battery factory in December, in part because of a tax credit lawmakers passed in November. The size of the incentives depends on how many jobs Toyota creates. The initial payout could be as much as $79 million in the next 20 years, but it could grow to as much as $315 million over 39 years, according to the governor’s office.

Illinois, which is home to Rivian’s first factory, wants to further solidify its place in the emerging industry. Lawmakers passed a new round of incentives for both new facilities and for existing facilities that convert to production of electric vehicles. The state is also reportedly in the hunt for a new battery plant, which would be eligible for the tax breaks, too.

And the Kansas Department of Commerce wants lawmakers to approve a sweeping incentives package that could cost $800 million or more to attract a $4 billion factory. The catch? The department won’t say what company the incentives are for or provide details about what kind of facility is under consideration.

Are Incentives the Right Approach?

Despite the potential benefits of electric vehicles, critics are wary of the dizzying array of financial incentives states are offering to get into the electric vehicle game. It has many of the hallmarks of smokestack chasing contests of decades past.

“I wouldn’t say there’s anything new about it or revolutionary about it,” said Ulrik Boesen, an analyst with the right-leaning Tax Foundation. “It’s the same old issue that states, instead of improving their overall competitiveness through their tax code, pick certain industries that they want to attract and then give those particular industries beneficial tax treatment.”

States have used similar strategies to lure film and TV productions, secure a new headquarters for Amazon, host the Tesla Gigafactory or spur offshore wind developments. That has led in many cases to what critics call a “race to the bottom,” in which states give away so much in incentives that they reap few of the promised rewards for landing a deal. That’s on top of the risk that ballyhooed developments go belly up, even after receiving generous subsidies.

But Boesen said the incentive packages can make states less competitive for industries that don’t get targeted help. “It’s a self-enforcing issue: The more incentives you put in place, the fewer taxpayers you have, the higher rates you need [for the remaining taxpayers], the more incentives you need,” he said.

Short-term tax breaks also discourage companies from upgrading their facilities or making other improvements, until they can get longer-term tax relief, Boesen added.

Greg LeRoy, the executive director of Good Jobs First, a group that has been critical of corporate subsidies, said states’ rush to prop up electric vehicle sites is puzzling considering the economic climate. It might be time for states and cities to “turn off the spigots,” he said.

“We’ve had record numbers of people quitting jobs, especially lower-wage jobs, because they can get better jobs. The job market is great right now,” he said. “That’s economic development. That’s what you want.”

If states did want to target industries to bolster their economies in the longer term, LeRoy said, they could help attract new workers to occupations that will be hit hard as baby boomers retire, such as plumbers and machinists. “That’s where you can get a really big bang for your buck,” he said.

The transition to electric vehicles could also undermine some of the assumptions that economic development officials have long made about auto factories, LeRoy added. One of the rationales for trying to land big plants is that they will attract suppliers, who will furnish the automakers with hundreds of parts that go into a new vehicle. But electric engines have fewer parts than gas-powered engines, which means that the demand for components could be lower.

Trezise, the Lansing economic development director, acknowledged the possibility that fewer suppliers could be needed. But if big automakers want to switch quickly to electric vehicles, auto suppliers might be next in line asking for economic assistance, he said.

“They are going to have to dramatically retool their plants, and that is very expensive,” Trezise said. “We’re already hearing from numerous suppliers that this is a major issue. They are hoping there’s going to be some kind of assistance helping them retool at a massive level and with the speed that they’re being required to work.”

While states like Michigan are paying high prices to hold onto auto factory jobs, Trezise said the battery plants could lead to net job growth. The batteries are new components, and battery factories help attract auto assembly plants nearby.

“I never thought I would say this,” Trezise said, “but I think the battery plants are now more important and are actually the [economic] driver behind the assembly plants.”