Tax Analysts Blog

Tesla, Taxes, and Free-Market Hypocrisy

Posted on Apr 2, 2014

Tesla Motors makes electric cars -- and they must be pretty good cars because they cost $70,000. Despite selling really expensive cars, Tesla has long been the darling of the left. Nothing says "I am committed to saving the polar bears" better than driving a luxury, battery-powered car.

For several years, Tesla has been in a fight with the states. Tesla does not use dealerships. It sells its cars on its website and in showrooms. Almost every state bans or limits the sale of automobiles directly to customers, which is terrible and reflects the power of auto dealerships. The dealerships want you to buy your car from them because, well, that's how they make money. And because they are wealthy and connected, they have persuaded many states to make it hard for automakers to sell directly to people. After all, if you were buying a car directly from a manufacturer, who would sponsor the local Little League teams?

The auto dealers argue that direct sales will result in massive layoffs, disruptions in the community, and less odious car-selling techniques. Actually, they're not making the last argument, but they're saying that without dealerships, customers will never figure out where or how to get their cars repaired. By the way, the dealerships pay lawmakers with campaign contributions and promised future support if the lawmakers keep Tesla out of their states.

Tesla's response is that the car dealerships' position violates every notion of free markets. Tesla argues that prohibiting direct sales protects only the dealerships and harms the consumer. Tesla is right. There's no reason to prohibit a consumer from buying directly from the manufacturer. Cutting out the middleman is generally a good thing -- unless you're the middleman.

So Tesla is right -- but few companies owe their existence to the government and the public fisc as Tesla does. The idea that Tesla can enter a legislature and sing the praises of free markets with a straight face is rich. In 2010 the company received a $500 million loan from the U.S. Department of Energy. It prospers because of the federal tax credit of up to $7,500, plus $2,500 in California credits for each new purchase. It receives credits from the California Air Resources Board, which it sells for a large profit. Last year the company received $34 million in tax breaks from California as an incentive to build a plant in the San Francisco area. Tesla has the gall to encourage consumers to ask state lawmakers to subsidize the purchase of their vehicles. Free markets, indeed.

Tesla wants to expand its operations and is considering investing up to $5 billion for a new plant in Nevada, Arizona, New Mexico, or Texas, all of which ban direct sales except Nevada. Tesla wants Texas to repeal its direct sale prohibition, but while the Lone Star State is offering infrastructure money, it's not budging on the direct sale issue. Arizona has already introduced a bill to lift its ban on direct sales and Gov. Jan Brewer (R) is promising tax breaks. New Mexico Gov. Susana Martinez (R) has promised that the state will do whatever is necessary to land the expected 6,500 jobs. Rumors are that in lieu of tax breaks, Nevada is willing to purchase all the land Tesla needs for the plant. You can be sure the free-market-loving Tesla lobbyists are in the middle of the fight.

Read Comments (6)

emsig beobachterApr 2, 2014

David, You have done society a service in pointing out Tesla's hypocrisy in
taking government subsidies when it needs them and lambasting government
interference in the market place when it works against them. I, for one, am
shocked and appalled to find such blatant hypocrisy in government or in

However, I believe Tesla is giving up large future profits by not joining the
other auto makers in the establishment of either corporate owned or franchised
dealerships. The profit for new car dealerships does not come from selling new
cars -- the retail markets are too competitive to earn quasi rents on the sale
of new cars. The profit comes from after sale markets (financing, rust
protection, extended warranties, etc.) the service department, the used car
department, and the body shop. For example, where will the new car buyer turn
to when the serrafolator breaks, or, in the case of an all electric car, when
the flux capacitor burns out? Where will they go when their new Tesla gets
dinged? If you can't beat them, join them.

bob kammanApr 6, 2014

Speaking of public subsidies for private enterprise, let’s consider those roads
and highways used by customers of local vehicle dealers. As the NY Times
recently reported,

“Lawmakers and some business groups are pushing to lift the ban on new tolls
along existing Interstate highways, a move that would provide additional
revenue for road maintenance and repair.

“But a coalition of some of the nation’s biggest companies, including FedEx and
McDonald’s, are fighting to keep the Interstates as toll-free as possible. They
argue that tolls would add significantly to the expense of moving their goods
across the country.

“There is also a hidden cost, they say, for restaurants, convenience stores,
gas stations and other businesses that depend on Interstate highway traffic.
The tolls could cost them customers as travelers choose other routes.

“ ‘People aren’t going to stop at a McDonald’s or a hotel if they have to get
off the Interstate and pay a toll, then pay a toll to get back on,’said Jay B.
Perron, vice president of government affairs for the International Franchisee
Association, which is part of the toll opposition. ‘It’s a significant economic
hit for these businesses, if people chose to avoid them because of tolls.’ ”

Elon HuskApr 6, 2014

What ever happened with the "$500 million" loan...

Desmond LyleApr 6, 2014

Tesla has paid off the DOE loan in full.

The federal tax credits you mention Tesla "profiting" from apply to all
electric vehicles, regardless of manufacturer.

This is such a poorly researched article with obvious bias.

david brunoriApr 7, 2014

Elon and Desmond,

I like Tesla. I think Tesla is right in its fight with the auto dealers. There
is no reason in the world that Tesla should not be able to sell directly to
customers. In fact, I think it outrageous that the autodealers would try to
stifle the market.

But let's face it, Tesla is pretty sophisticated when it comes to gaining the
government's help. They fight for tax incentives (and encourage customers to
fight for their tax incentives) all the time. I think that is wrong -- and
wholly inconsistent with free market thinking. That other companies do it is
beside the point. And yes, I think getting a government loan is bad whether you
are Tesla, GM, or Chrysler.

Annette NellenApr 26, 2014

Good point on the "free market" - whatever that is. Many of these tax
incentives are complicated. Some required advance application, recertification,
and more. Why not remove them, lower the tax rates and let businesses and
their financial advisers spend that time to help grow the business?

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