Tax Analysts Blog

$1 Billion Is the New Normal in the Incentives World

Posted on Sep 24, 2014

The Tesla story drives me crazy. It should drive you crazy as well. The innovative company captured the imagination of smart people. Picture a world in which we can drive high-quality automobiles and not be dependent on oil. Less pollution, less noise, less expense (assuming the cost of electric cars comes down). Tesla also took on old economy protection rackets like laws forbidding the direct purchase of automobiles.

Of course, Tesla, like most companies, asks for and receives all kinds of tax breaks. I first wrote about its tax breaks in 2009. More recently, I called it hypocritical for fighting the auto dealerships under the banner of free markets while demanding corporate welfare in the form of tax breaks. But the Nevada Tesla deal is troubling on a level not seen since Mercedes-Benz convinced Alabama that it should not be subject to the same taxes everyone else pays.

Nevada will give Tesla $1.3 billion to build a new factory in the state. Several economic development consultants who work on these kinds of deals have told me that $1 billion will be the incentive price tag. In fact, there will be a scramble to make sure the various tax abatements add up to more than $1 billion. Of course, these same consultants are the people who tell me that almost all businesses have decided where to invest long before the bidding wars begin. The consultants' job is to ensure that the state to which their client is moving is part of the bidding process.

Nevada is giving $1.3 billion to a company that is essentially owned by a guy worth $12 billion. I don't begrudge Elon Musk his money. On the contrary, I admire his ability to create and accumulate great wealth. I just don't see the need to give him public money. Assuming you ascribe to the belief that horizontal equity requires that similarly situated taxpayers bear similar burdens, Nevada is giving away public money. That billion could conceivably be used for teachers, roads, or broad-based tax cuts for everyone. It's a shame.

We know that in March, Tesla opened the bidding, and that Nevada, New Mexico, Texas, and Arizona were supposedly in the running. Before the end of the summer, California was reportedly in the mix. The bidding war was secret, as all bidding wars are. In July, Tesla reportedly broke ground for the new plant in Nevada. In early September, Tesla announced that Nevada was the winner. The governor had to call a special session of the Legislature to pass a law giving Tesla the money. Tesla agreed to a deal that had not even been approved by the state. It really looks like Tesla was going with Nevada all along. By the way, not one member of the Nevada Legislature opposed the final deal. Not one person stood up and questioned a policy that would give away a billion dollars.

I know that the politics of incentives are impossible to overcome. And I have had numerous readers tell me to give my constant ranting a rest. But the political inevitability of tax incentives does not make them appropriate or good. As Good Jobs First Executive Director Greg LeRoy asked recently, "Was the five-state auction all just a charade to extract bigger subsidies from the state Tesla had already chosen?" That is a question worth answering.

This post is an excerpt of an article that first appeared in State Tax Notes.

Read Comments (4)

edmund dantesSep 24, 2014

" That billion could conceivably be used for teachers, roads, or broad-based
tax cuts for everyone."

That's not what happened. Had Tesla not put its plant in Nevada, that billion
would not have materialized. So it would not have been available for other
spending. The state was giving away something it did not have and would never
get but for the plant opening. That's what makes it easy to agree to. No
current spending is compromised.

You argue that they wanted Nevada all along, and that is likely true. But if
Nevada had flinched, and tried to stiff them on the tax breaks, I'm very
certain that something could have been worked out with another state to their

Nevada didn't give $1.3 billion to Elon Musk, they effectively gave it to the
workers he's going to hire in Nevada. Presumably that will be recycled back
into the economy, thereby allowing for the teachers or roads that you seem to
think are lacking Nevada at this time.

In my opinion, state and local taxes are far too high in most of the country.
We get lots of overhead cost and very little bang for the buck. Taxes on
businesses are the worst offenders. Like you, I favor broad based tax
reductions, but there is no political constituency for that, it won't happen.
Making the states compete for new businesses with tax breaks is the next best

hl mencanSep 24, 2014

Consider: You'd be happy with a new plant in Nevada or Arizona. The plant in
Nevada is more expensive to build, but the state of Nevada gives you a big
rebate that makes the Nevada plant, net, a better buy. In this case, the guys
who sell you the plant in Nevada are the beneficiaries of the state bounty.

Lower the taxes and get rid of the rebates. The discretionary individual
business incentives are just another way to corrupt state and local politicos.

AMT buffSep 25, 2014

I agree that the voters need to find a way to short-circuit this process.

charles chongoSep 26, 2014

Lies, lies and damn Economics. The opportunity cost of not having a plant in
Nevada... the spirit of transparency...let's see the real economic
benefits...all the way down to the payroll tax on the janitor. When the wall
came down, the Czech Republic was very clear...we do not provide incentives for
investment...period. The states are basically are racing to the bottom...
Iowa provided a bunch of incentives to an Eqyptian Fertilizer Plant...with no
transparency and few headcount. The provision of incentives is a stinky,
stinky business...riff with mega tendencies of corruption. It needs to end.

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