Blog Posts > One More Look at Gestamp Deal
May 6, 2012

One More Look at Gestamp Deal

George Hohmann does a great job breaking down the Gestamp deal in his Sunday column. (see here and here for background info).  Hohmann makes the following observations:

* It can be argued that without incentives, Gestamp would not be coming to South Charleston and the stamping plant would remain idle.

* The $25 million in loans the state has agreed to extend to Gestamp presumably will be paid back over time, so they are not a gift.

* Although O’Leary estimates the incentives will save Gestamp $12.5 million in property taxes, the company and the Kanawha County Commission will likely come to terms on a payment in lieu of taxes, or PILOT, whereby the company would agree to make payments to the county to help fund essential services like schools.

* If Gestamp agrees to pay the county about 70 percent of what it would normally owe in property taxes, to cover schools, the value of the incentive package would be reduced by about $8.7 million.

* Gestamp has agreed to invest a minimum of $100 million. Burdette has said this investment will be in equipment and could go as high as $150 million.

These are all excellent observations.  I would just like to add a few other points.

While we will never know for sure that the state’s tax incentives “sealed the deal,” the state could have had Gestamp certify that they would not have located without the incentives. As a recent Pew study showed, the state of Minnesota requires a written statement from businesses before they receive tax breaks from the Job Opportunity Building Zone Program. This is a reform that is worthy of adoption.

Regarding the $25 million in loans from the EDA to Gestamp, it is important to keep in mind that these are low-interest subsidized loans. Presumably, this means Gestamp will save thousands in interest payments getting a loan from the EDA instead of a private bank. It is also important to point out that Gestamp is a multibillion-dollar company. It probably does not need help from the state to secure a loan, while there are plenty of small and medium size companies that do not have access to capital.

If there is going to be a PILOT negotiated between Kanawha County and Gestamp and a large portion of the diverted revenue goes to schools that would certainly ensure that Gestamp has skin in the game. The problem is that we do not know how this is going to be worked out. It would have been better to know a head of time if Gestamp was going to agree to a PILOT, but it is unclear when and if they will. What incentive does Gestamp have to sign a PILOT agreement?

The big question regarding the $100 million investment in equipment is whether it will be purchased in West Virginia or out of state. If the equipment is purchased out of state then sold to the state (so Gestamp can avoid paying personal property taxes) and leased back to Gestamp, it would seem that they are not making an actual investment. If the state holds title to the $100 million in equipment, is Gestamp under any obligation to purchase back the equipment from the state? From reading the MOU, it appears not.

This all being said, we hope Gastamp honors the deal and that the stamping plant employees hundreds of local workers. It would be a great boon to the state’s economy and Kanawha County. However, it is imperative that state and local government authorities enact some type of recapture or claw back rule that ensures that they will be able to recoup some of their losses if Gestamp fails to meet the job creation and investment obligations.  The state should not be subsidizing companies if they fail to produce.

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