Bids by States to Lure Businesses Likely to Escalate : Competition: Alabama’s winning of the Mercedes-Benz plant with a $250-million incentive package is decried.

Mercedes-Benz’s decision to build an auto assembly plant in Alabama, after being lured by a record $250-million incentive package, is likely to escalate a bidding war between the states for new businesses.

The assembly plant deal, confirmed Wednesday by the German auto maker, calls for the contribution of local, state and private funds for the 1,000-acre site, a training facility for workers, a commitment to build roads, sewer and water lines, and lucrative tax abatements.

“It looks like that gave them everything but the Crimson Tide (the University of Alabama’s football team),” said George Autry, head of MDC Inc., an economic development group that worked on North Carolina’s efforts to attract the plant.

“They went crazy. This is lunatic stuff,” agreed Joel Kotkin, a Los Angeles economic analyst who has followed various competitions among states for corporate investment.

Noting Alabama’s much-criticized education system and other woes, Kotkin said: “The question is, what have you taken out of your economy in order to do this? Most studies show it doesn’t work. You’re essentially giving away three-quarters of what you’re going to gain.”

California does not permit such elaborate incentive packages for new investment, a fact that--when combined with the high cost of doing business in the state--often puts it out of the running for major projects.

The Alabama incentive package was the largest since Kentucky offered Toyota more than $150 million to build an auto plant in Georgetown in 1986, according to several economic development officials.

They also said it established a new benchmark that states will have to surpass to attract trophy businesses. Competition among states for new plants and relocating companies has intensified as job creation has slowed nationwide in recent years.

Mercedes said the plant, to be located in a rural area about 20 miles east of Tuscaloosa, will employ 1,500 workers when completed in 1997. The company, which will build a new sport utility vehicle at the facility, said another 10,000 supplier and related jobs will also be created.

Jurgen Hubbert, chief of Mercedes’ passenger car division, said in a telephone interview that the company was attracted to Alabama for its low costs, quality work force, good transportation network and quality of life.

“The incentives were not the main factor,” he said.

Alabama officials said the incentives were not excessive and were competitive with those offered by North and South Carolina, which also aggressively pursued Mercedes.

“Alabama did not give away the store,” said Neil Wade, head of Alabama Partnership, a private industry group that is providing $13 million in funding for infrastructure. “It did what it had to do.”

An economic analysis done for Alabama by Troy State University and engineering contractor Fluor Daniel said the project could attract $500 million in investment capital to the state and create 15,000 to 17,000 jobs over the next 10 years.

The incentives include $77.5 million for infrastructure improvements and $92 million for development of plant and related buildings. That will include $30 million for an educational training center for workers.

One provision allows Mercedes to use 5% of workers’ pay to pay down the debt from constructing the factory. The employees will be allowed to deduct that amount from their state income taxes.

The state has also set aside $60 million for education and training of Mercedes and suppliers’ workers.

The company will be given sales tax abatements of about $8 million for equipment and construction materials it uses. It also does not have to pay corporate taxes until the facility is paid for. Local and private sources will contribute $15 million for unidentified projects.

North Carolina and South Carolina also offered Mercedes attractive incentive programs, estimated in value at between $100 million and $150 million. Officials in both states complained about Alabama’s generous offer and warned that it could hurt that state by diverting funds from other public needs and creating tax inequities.

“Mercedes is going to Alabama for next to nothing,” said J. Mac Holladay, who prepared an economic development package for Georgia and who has also worked with South Carolina and Mississippi.

Times staff writer Donald Woutat in Sacramento contributed to this report.