As Companies Seek Tax Deals, Governments Pay High Price

The auto industry and some local officials have long argued that auto companies create so many jobs and draw in so many supporting suppliers that all taxpayers benefit. Even if companies shut down years later, as Saturn did in Tennessee for a few years, the trade-off is worth it, they said.

"I do believe that if a state ever is going to create incentives," said Lamar Alexander, who was Tennessee's governor in 1985 when Saturn selected the state, "the auto industry would be by far the No. 1 target, because an auto assembly plant is a money target."

Still, Mr. Alexander, now a United States senator, said that recruiting a large factory today would be more expensive. "It has changed a lot," he said. "It's almost become a sweepstakes."

G.M. Gets Into the Act

G.M. may have initially minimized the role of local dollars, but as the company's financial problems grew, incentives became a big part of its math.

The actions of the company were described in more than two dozen in-depth interviews with former company officials, tax consultants and governors and mayors who have dealt with G.M.

The automaker's real estate division, Argonaut Realty, oversaw the hunt for the most lucrative deals. Up and down the corporate ladder, employees were encouraged to push governments for more, according to transcripts of public meetings and interviews. Even G.M. plant managers knew that the future of their facilities depended in part on their ability to send word of big discounts back to Detroit.

Union representatives were enlisted to attend local hearings, putting a human face on the jobs at stake. G.M.'s regional tax managers often showed up, armed with tax abatement wish lists and highlighting the company's gifts to local charities.

"We knew what our investment of X amount meant to the community, and we knew we needed to partner with the community to be successful," said Marilyn P. Nix, who worked as a real estate executive at G.M. for 31 years until retiring in 2005.

At the top of G.M., executives reviewed the proposals from various locations and went where the numbers added up.

"I know people like to blame the industry for taking advantage of the incentives, but you go back to what your fiduciary responsibility is to the stockholders," Ms. Nix said. "As long as you've got people that are willing to better the deals, the management owes it to their stockholders to try to get the best economic deal that they can."

For towns, it became a game of survival, even if the competition turned out to be a mirage.

Moraine, Ohio, was already home to a G.M. plant in 1997 when the company pushed hard for additional incentives. G.M. said it was looking for a place to accommodate more manufacturing.

Wayne Barfels, the city manager at the time, said a G.M. representative had told officials that Moraine was competing with Shreveport, La., and Linden, N.J. After the local school board approved property tax breaks, The Dayton Daily News reported that the other towns had not been in discussions with G.M.

The school board considered rescinding the deal, but allowed G.M. to keep it after a company official apologized. In 2008, G.M. shut the Moraine facility.

In towns where General Motors remains, local officials praised the company. "I can say they have been a great partner to us," said Virg Bernero, the mayor of Lansing, Mich. "It would do something to the psyche of this community if they were not here. I mean, I just praise God every day."

Looking to lure businesses beyond automakers, states have routinely bolstered their incentive tool kits. In 2010 alone, states created or expanded about 40 tax credits and exemptions, according to the National Conference of State Legislatures.

The nature of the credits has also changed. New ones are geared toward attracting technology and green energy companies, but it is hard to know whether 15 years down the road they will thrive or wind up stumbling like the automakers. And many modern companies, like those in digital technology, can easily pack up and leave.

"I don't see anything that suggests that Twitter and Facebook are better bets in the long run," said Laura A. Reese, the director of the Global Urban Studies Program at Michigan State University. Ms. Reese advises local governments to invest in residents through education and training rather than in companies where "it's hard to pick winners."

Yet states try to do it all the time. In 2010, Rhode Island, which has the nation's second-highest unemployment rate, recruited Curt Schilling, a former Red Sox pitcher, to move his video game company from Massachusetts. The company, 38 Studios, had never released a game and was not making money, but the governor at the time had the state guarantee $75 million in loans.

The company failed and dismissed all of its roughly 400 workers this May. Rhode Island taxpayers are now on the hook for the loans.

Officials said part of the difficulty was that communities do not get much say in a company's business strategy.

"We, as communities, stake our futures with these people who are supposed to know what they're doing, and sometimes they don't," said Arthur Walker, a businessman in Shreveport and former chairman of the city's chamber of commerce.

Mr. Walker and other officials in Shreveport know firsthand. In 2000, they were worried that G.M. would close a plant in their area and responded with a generous proposal: the city would cut the company's gas bill and provide work force training grants. In addition, G.M. would benefit by a recent increase in one of the state's income tax credits.

Eager to encourage innovation, Shreveport officials suggested ways the city could assist G.M. in building electric cars. "We wanted to be part of the future," said Mr. Walker, whose brother worked at the plant.

G.M. took the city's incentives but not its business advice and began building the giant Hummer there.

"We knew they needed to build green cars — I mean, who builds a Hummer for the 21st century?" Mr. Walker said. "It was a losing proposition that we found ourselves in. We couldn't win because those people weren't making the correct business decisions, in my view. When it didn't work, we're the ones left holding the bag."

The Hummer was discontinued in 2010, and the Shreveport factory closed this August, the final victim of G.M.'s bankruptcy.

Ypsilanti's Losing Battle

For much of the last 20 years, Doug Winters has been agitating for General Motors to be held accountable.

Mr. Winters, the attorney for Ypsilanti Township and several other places around Ann Arbor, has lived in Ypsilanti all his life. His grandmother labored at the local plant, Willow Run, during World War II, when it made bomber planes. People in town still proudly point out that a woman known as Rosie the Riveter worked there as well. After the war, when G.M. moved into the plant to manufacture its automatic transmission system, his father got a job.

Mr. Winters loves the history of Willow Run but hates what he views as corporate hypocrisy: G.M. asked for government help on the one hand and then appealed to free-market rationales for closing shop.

Over the years, Ypsilanti granted G.M. more than $200 million in incentives for two factories at Willow Run, Mr. Winters said. "They had put basically a stranglehold on the entire state of Michigan and other places across the country by just grabbing these tax abatements by the billions," he said. "They were doing it with a very thinly disguised threat that if you don't give us these tax abatements, then we'll have to go somewhere else."

Ypsilanti first sued G.M. in the 1990s to prevent the company from closing the factory at Willow Run that made the Chevrolet Caprice.

The town had granted the company tax incentives after the factory manager argued that G.M.'s ability to compete with other carmakers was at stake, documents in the lawsuit show. The tax break and "favorable market demand," said the plant manager, Harvey Williams, would allow the automaker to "maintain continuous employment."

Nevertheless, G.M. shut the factory. A lower court found in favor of Ypsilanti, but the ruling was reversed on appeal. The judge said that a company's job assurances "cannot be evidence of a promise."

In 2010, when the company closed the remaining factory at Willow Run, Mr. Winters sued again. This time, Ypsilanti argued that the automaker should have been forced to close overseas factories instead, especially since American taxpayers had bailed out G.M. In addition, Ypsilanti sought to recover money from G.M., saying the company had agreed to reimburse the town for some incentives if it left.

So far, Ypsilanti's claims have not been addressed. They were complicated by G.M.'s bankruptcy, which allowed the carmaker to emerge as a new company and leave some of its liabilities and contractual obligations behind.

When asked whether the new G.M. has civic responsibilities to its former factory towns, Mr. Cain, the company spokesman, said: "Our obligation to the communities where we do business is to run a successful business. And when we prosper, it allows us to do more than just turn the lights on and make cars."

He also said that since the bailout, "G.M. has invested more than $7.3 billion in its U.S. facilities, and we've created or retained almost 19,000 jobs in communities all over the country."

Matthew P. Cullen, who oversaw real estate and economic development for G.M. until he left the company in 2008, said the automaker was aware of its impact on communities. He said that what happened with G.M. was the result of an entire industry changing and that there had been no bad intentions.

"If you go forward in good faith doing everything you can and make the investment, then you're partners," Mr. Cullen said. "Sometimes partnerships in business work, and they work for 60 years. And in some cases, they don't, and it doesn't make you a bad partner."

Some towns that are still dealing with the fallout of plant closings might disagree. In Pontiac, Mich., tax revenues have fallen 40 percent since 2009 after the old G.M. knocked down buildings on its property, resulting in lower tax assessments, according to the city's emergency manager.

In Ypsilanti, an entity set up to sell off G.M. property is marketing the plant as valuable. At the same time, it has been arguing for lower property taxes on the grounds that its plant is not worth much.

Ypsilanti's supervisor, Brenda Stumbo, said the township would be stung hard by further revenue cuts. Ypsilanti has already slimmed down its Fire Department, and city workers are juggling multiple jobs. There are seven to 10 home foreclosures a week, giving the township the highest foreclosure rate in the county, Ms. Stumbo said.

"Can all of it be traced back to General Motors?" she said, listing auto suppliers that closed after G.M. did. "No, but a great deal of it can."

Nonetheless, Ms. Stumbo said that if G.M. would bring jobs back to town, she would be willing to grant the company more incentives.

But Mr. Winters is not so sure. He said he would never support more incentives without stronger protections for Ypsilanti. "They've done a lot of damage to a lot of people and a lot of communities, and they've basically been given a clean slate," he said. "It's a 'get out of jail free' card."

Lisa Schwartz and Ramsey Merritt contributed research.