Rick Haglund: Michigan is betting big on electric vehicles with tax breaks. Will it pay off?

GM headquarters, Detroit | Susan J. Demas

By Rick Haglund, Michigan Advance

Critics of the federal government’s $50 billion bailout of bankrupt General Motors in 2009 disparaged the automaker as “Government Motors.”

Today, state and federal governments have become major financial backers of the entire domestic auto industry’s conversion to electric vehicle manufacturing.

Is this a critical public-private partnership needed to save the planet from greenhouse gas-spewing internal combustion engines, and reduce dependence on Chinese-made batteries and computer chips? Or is it corporate welfare gone wild?

The Inflation Reduction Act, which has been called the most important climate legislation in U.S. history, provides more than $15.5 billion in tax incentives and grants to automakers and suppliers that domestically produce electric vehicles, batteries and other clean energy components. 

Those incentives are supplemented by billions of dollars in electric vehicle-related subsidies doled out by Michigan and other states seeking to capture investments and jobs created by new mobility technologies.

In December, Gov. Gretchen Whitmer signed into law the Strategic Outreach and Attraction Reserve (SOAR) Fund, which made $1 billion in taxpayer money available for “transformational” economic development projects.

The SOAR fund contains two pots of cash: the Critical Industry Program and the Strategic Site Readiness Program.

Companies have been tapping into SOAR funding faster than college students draining a keg at a frat party.

Companies have been tapping into SOAR funding faster than college students draining a keg at a frat party.

– Rick Haglund

Within months, GM, Ford Motor Co. and Hemlock Semiconductor were awarded nearly $800 million from the fund. That led the state Legislature to replenish it last month with an additional $640 million.

The ink was barely dry on the legislative appropriation when more companies arrived in Lansing with their hands out.

On Wednesday, Chinese-owned Gotion Inc. and Novi-based startup Our Next Energy were awarded more than $950 million in tax breaks and cash by the Michigan Strategic Fund for their proposed new battery plants in the state. Included in that amount is $375 million in SOAR funding.

Combined, the two companies are expected to invest $4.1 billion and create more than 4,500 new jobs in Michigan. 

The breakneck speed at which companies are rolling out battery plants and retooling assembly plants makes it likely that the state will need to shovel more cash into the fund to capture those investments.

Federal aid for automakers building battery plants and retooling their manufacturing operations to build electric vehicles is justified. That’s because the federal government, like many others around the world, is regulating the gasoline-powered internal combustion engine out of existence to address climate change.

Meanwhile, Michigan and other states are offering historically large incentive packages in a costly battle to capture the thousands of jobs this new auto industry promises. Michigan, flush with an unprecedented $7 billion budget surplus, can afford it for now.

But will the state’s pedal-to-the-metal approach to incentives pay off?

There will no doubt be a burst of decent-paying new battery and electric vehicle jobs created with the assistance of Michigan’s lucrative business attraction incentives.

Nearly 12,000 factory jobs are promised by projects so far approved for SOAR funding. But the long-term future of those jobs is uncertain.

After announcing in February that GM would get $666.1 million in SOAR cash in exchange for creating 4,000 new electric vehicle-related jobs in Michigan, state officials renegotiated the terms. GM is now required to create 3,200 jobs for just six months to get the cash.

Auto-related factory jobs have been in decline for decades. Michigan has about 47,000 auto assembly jobs and 126,000 auto parts jobs. Both sectors employ roughly half the number of workers they did two decades ago. It’s hard to see a strong reversal in that trend.

The switch to electric cars and trucks seems assured. But how it all plays out is far less certain.

While battery-powered electric vehicles are today’s hot technology, automakers have long been working to replace them with even cleaner hydrogen-powered cars. And that day might be getting closer.

Governments are notoriously bad at picking winners and losers in the economy. I’m old enough to remember when Michigan was at various times going to become a major U.S. center for flat panel display, life sciences and nanotechnology industries.

That’s not to say the state shouldn’t be supporting its centerpiece auto industry. It’s especially true of the knowledge part of the industry, where Michigan has a competitive advantage over other states.

But Tim Bartik, senior economist at the Upjohn Institute and an expert on economic development incentives, said incentive spending should be tamed. 

Michigan should cap incentives to an amount per job related to the wages paid, Bartik told me. Plus, those incentives should focus more on infrastructure investments, site preparation and customized worker training that have a bigger impact on long-term job creation than handing out cash to corporations, he said.

Without more spending controls on the state’s auto-related incentives, “it becomes difficult to say ‘no’ to providing similar subsidies to everyone, and at some point this simply becomes unaffordable,” Bartik said.

Michigan is testing where that point is.

Michigan Advance is part of States Newsroom, a network of news bureaus supported by grants and a coalition of donors as a 501c(3) public charity. Michigan Advance maintains editorial independence. Contact Editor Susan Demas for questions: [email protected]. Follow Michigan Advance on Facebook and Twitter.

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