Nevada is Biggest Loser of Tesla Auction
On September 4, Nevada Governor Brian Sandoval announced that electric car-maker Tesla had chosen Nevada for the location of its much sought-after Gigafactory. Contrary to its claim that it wanted $500 million, Tesla in fact wanted speed plus the highest bidder. As I analyzed last month, a $500 million subsidy would have been relatively low as measured by the benchmarks of cost per job and aid intensity (subsidy divided by investment).
Instead, Nevada gave Tesla subsides worth $1.25 billion over 20 years. This is not a good deal, as I will detail below.
First, of course the cost was far higher than Tesla had hinted; it clearly was just trying to squeeze extra incentives out of the “winner” by conducting a five-state auction. Using a discount rate of 2.5% (the 10-year Treasury bond yield on Sept. 4 was 2.45%) the $1.25 billion in nominal value has a present value of about $1.1 billion, by my calculations. In fact, it is probably quite close to the full $1.25 billion because the sales tax breaks based on the actual investment in plant and equipment will be heavily front-loaded, not spread evenly over the 20-year period.
According to the Reno Gazette-Journal article linked above, the incentives break down as follows:
$725 million in sales tax abatements over 20 years
$332 million in property tax abatements over 10 years
$120 million in investment tax credits
$75 million in job creation tax credits for up to 6000 (note: not 6500) jobs
$27 million in a 10-year business tax abatement
$8 million in discounted electricity rates for 8 years
Note by the way that we should, in this instance, count the sales tax breaks as a subsidy. Because Nevada does not have either personal or corporate income tax, sales tax becomes more important to the state, though of course not as much as for a state lacking Nevada’s taxes on gambling revenue. More specifically, though, this is for sales of plant and equipment to be used in the factory, so it is directly tied to the investment.
Second as pointed out to me by Richard Florida in a draft article for CityLab, while these jobs pay $25 per hour, the facility will be relatively self-contained, and will not create spinoff jobs on the scale that, for example, an automobile assembly facility does. Tesla’s research and development will still be conducted at its headquarters in Palo Alto, California, not at the Gigafactory. One way we can tell: Tesla is giving a whopping $1 million to the University of Nevada-Las Vegas for research on batteries. (I’ll be linking to Professor Florida’s article when it appears.)
In terms of our usual metrics, a $1.1 billion subsidy for a $5 billion investment is 22% aid intensity, certainly not Boeing territory but higher than would be allowed in the European Union. It is lower than the typical U.S. auto assembly plant aid intensity of about 33%. However, the cost per job is $183,333, about 20% higher than an auto plant typically receives in the United States, for a project that is not as good as an auto plant. Thus, while it is hardly the worst deal we’ve seen, the incentive package is far too high for what the state is getting.
Moreover, this is quite a risky deal, too. As the Reno Gazette-Journal points out, this incentive package is 13 times larger than Nevada’s previous biggest incentive, a mere $89 million for Apple. Talk about putting all your eggs in one basket!
Finally, we should note that if the Tesla project is successful, it will mean that we will see job losses at competing facilities (mainly engine plants) elsewhere in the country, so that national net job creation will be less than 6500. This will raise the true cost per job of the project.
Thus, we see yet another bad incentive deal, but at a much larger scale than usual. The package does need legislative approval, so it’s not quite a done deal. But assuming it passes, Nevada taxpayers will take on a tremendous burden to lighten CEO Elon Musk’s load.
Cross-posted from Middle Class Political Economist.
Couple things. On an NPR news report regarding the Calif governors debate, the republican Kashkari used this deal (not the specifics just that it was lost to Nevada) as an example of bad dealings with business of Gov Brown. Brown’s response was that it was not a good deal and would have ladened the citizens with too much. Good to have heard his response.
With out a state income tax, how does Nevada expect to pay for this deal? They think the workers will gamble all their income away?
Lets hope the Nevada state legislature has enough people that can see beyond the shinny watch. The states really have to stop thinking that getting business this way is the way to achieve their their goals of creating jobs. All they have to do is see what the south did to the north east with the mills. And now look where those mills are.
I’m curious to know if such “deals” have ever been analyzed not for the effect on jobs for low and middle income workers, but for the ancillary spending that a business has to do when developing such a project. Granted that Nevada will be kicking in a healthy percentage of Tesla’s costs. Who will be receiving the benefits of that spending? Who will sell or rent the land? Who will be the agent for the insurance placements that are a part of business development and production? Are the beneficiaries in this regard involved in any way with the decision makers in such a deal?
Curious minds want to know. It’s obvious that a state can’t buy business development at any reasonable cost. They might as well send checks to the potential new employees directly. Who is getting the gild at the edges of the deal?
Jack, the thing is you would have those beneficiaries wherever in the country the factory went. For the country as a whole, there is no particular benefit to having the factory in Nevada rather than California or anywhere else. That’s a slight exaggeration: it would be better for it to be located in an area of high unemployment or low income, but wide-open bidding wars aren’t going to put them there. It’s just rent-seeking behavior by the firm.
The European Union has shown it is technically feasible to spend way less on incentives than we do: Give each region a subsidy limit (% of investment) and take rich areas out of the bidding entirely. We would need federal legislation to get there, but it is a long way off before it could ever happen.