Inside Nevada’s $1.3 billion gamble on Tesla | The Verge

Tesla Motors

In June of 2014, Texas Governor Rick Perry pulled into Sacramento behind the wheel of a Tesla Model S. Unseasonably dressed in a black jacket, Perry was in California for fundraising, but nonetheless took time to address reporters in front of a local hotel. He told them that he enjoyed driving a Tesla, the Los Angeles Times wrote, and would happily make one addition: “a made-in-Texas bumper sticker.”

Tesla had been shopping for a site to place its Gigafactory, promising to create thousands of jobs wherever the massive battery plant landed. But the company, and CEO Elon Musk, wouldn’t go just anywhere. Tesla bargained its way through lucrative deals, asking local governments for millions in tax incentives to grease the company’s wheels.

Four states — Arizona, Texas, New Mexico, and Nevada — became finalists for the factory, and were more than willing to accommodate Tesla by competing with other states’ bids. (California, after being dropped, was also later put into the running again.) The company asked for $500 million, up front, in cash, to move to Nevada, but was rebuffed by officials in the state. “Really, Nevada wasn’t in a position to directly respond to that, either functionally or financially,” says Steve Hill, executive director of the governor’s office of economic development in the state. It seemed like the deal was lost.

tesla gigafactory ground

Until, without warning, Tesla came back to the table. Nevada ultimately won the factory deal, but at a cost that has proven controversial: the state offered an incentives package that was the largest in Nevada history, and became one of the 15 largest nationally. Over the next 20 years, Tesla could take in nearly $1.3 billion in tax benefits for building its Gigafactory in Nevada, according to projections from the state, as hires are made for the factory locally and from around the country. Assuming Tesla meets its obligations under the deal, it will spend 20 years free from sales tax, and 10 years free from property tax, while it receives millions of dollars more in tax credits.

Tesla could take in nearly $1.3 billion in tax incentives

Tesla has been reporting on its progress since the Gigafactory first broke ground, but as construction tails off and manufacturing kicks up, the long-term future of the project still remains uncertain. Some economists have questioned the incentives, while the state and Tesla have issued apparently conflicting numbers on the company’s immediate prospects. Should the factory fail to live up to its promises, the question that has surfaced about the project will likely continue to plague the deal for years: was it worth it?

On one level, it’s hardly surprising that Tesla would be the beneficiary of such a deal. States have long seen manufacturing as the perfect place to bet tax dollars, viewing the incentive as a down payment — a lure that will first draw a business, then an industry, then a new population built around the industry. Often, that money goes to transportation companies. Although there is no federal database for tax incentives, and it’s therefore difficult to account for where money is being spent, car manufacturers have outpaced many other businesses. A 2012 New York Times investigation found that GM earned $1.7 billion in incentives over five years, with Ford and Chrysler close behind. Data from Good Jobs First, a watchdog organization that follows major subsidy deals, has found that the largest subsidy ever offered went to Boeing in 2013 — a deal from the state of Washington that could eventually be worth as much as $8.7 billion.

Future of the project still uncertain

The potential windfall for a state is alluring. A manufacturer requires suppliers. Entice the company to come to you instead of someplace else, and maybe an entire industry will crop up to work near the first business. Suddenly, you have many more jobs than what you first paid for, and a revitalized service industry may grow to attend to the larger population. Those people pay their taxes, and in the end, the benefits could outweigh the bargain given out. This idea has guided the thinking behind tax incentives, and helped build the deals into the behemoth they are today. The Tesla deal is just the latest example: Nevada estimates that the factory will bring 6,500 "direct" jobs but 22,700 "total" jobs to the state.

Those jobs were enough to persuade the legislature to approve the deal in a special session, despite some outcry over the cost. Bob Fulkerson, state director of the Progressive Leadership Alliance of Nevada, which has opposed the deal, summed up some of the backlash in the state when he told me the ones paying for the deal "will not have names like Musk."

"The way [Musk] played this tax break game was super old school."

"The way he played this tax break game was super old school," says Greg LeRoy, executive director of Good Jobs First. Without federal data on tax incentives, the group has become the preeminent collector of tax incentive deals, maintaining a list of so-called "megadeals" that exceed more than $50 million in incentives. The group has been critical of the Tesla deal, arguing that the company effectively gamed the states into a bad bargain, playing them off each other to raise incentives beyond reason.

But the Tesla deal is also in some ways very new. Unlike its automotive counterparts, the factory isn’t for cars, but for batteries, which Tesla is making in partnership with Panasonic. Nevada is suddenly taking on industries more closely associated with Asia than with the Southwest, and it’s unclear if the state will see the domino effects it’s predicted. "It’s a really big risk to try to build a brand new industry," says Kenneth Thomas, a professor of political science at the University of Missouri–St. Louis.

Certainly Nevada hasn’t previously seen anything like the Gigafactory in scope. Prior to the Tesla deal, the largest tax package ever offered to a company was Apple, which received an $89 million incentive deal, just a fraction of the benefits Tesla could receive. That giant leap has given pause to some observers. "Nevada not only hasn’t done this before — it doesn’t even have the experience in negotiating incentives this large," Thomas says. After studying the Tesla deal, he estimated that the state will lose about $183,000 per job — on the high side, he says, but some states have lost far more.

Some economists have been critical of the deal

Other economists have been more critical of Nevada. "Most people who are, like me, unbiased outsiders, would say they’re getting taken to the cleaners," says Martin Kenney, a professor of the community and regional development program at the University of California–Davis. The state, he says, "gave away the store."

It’s far too early to cast complete judgment on the deal — the consequences of it will be too far-reaching and are too far out to calculate. But the state releases quarterly audits of the Gigafactory as a condition of the deal.

Numbers seem short of state's predictions

Numbers for the fourth quarter of 2015 were released at the start of this month — and they seemed well short of what the state had originally projected. (Previous quarters have been reported on by the Reno Gazette-Journal.) The report, which legislators used to approve the tax abatements before the Gigafactory could be built, suggested that Tesla would reach 700 jobs at the facility by 2015, but Tesla reported having just 232 full-time employees at the factory, along with 40 Panasonic employees. The ramp-up happened quickly; the previous quarter’s audit counted 50 Tesla employees and 32 Panasonic employees.

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The state’s projection number, Hill told me, was due to an error: the government failed to account for the time between when it published the report and when Tesla started work on the factory. He says the report is months "out in front" of where Tesla is, as it was pegged to a January timeline while the project did not get underway until October 2014. The state, he says, "just didn’t think of that time lag."

"What we should have done is update that employment number," Hill says. He pointed to Tesla’s official application, filed in October 2014, that placed its one-year job projection number at 300 permanent employees.

"What we should have done is update that employment number."

Hill says his office "probably could have" informed the legislature about the miscalculation before the Tesla deal was approved in September of 2014, but adds that it ultimately won’t matter: the factory job numbers will soon catch up to the projections from the state. How long exactly that will take, though, isn’t quite clear. The state projected Tesla to be at 4,700 jobs in 2017, and at full capacity — 6,500 permanent jobs — by 2018. Tesla’s application says it will be at only 4,000 jobs in five years, around October 2019.

A Tesla spokesperson told The Verge that the company has adjusted its business and construction plans, but that the factory will now open earlier, and more full-time employees will be there sooner than expected. "The rise in employment in Q4 reflects the personnel required to begin production of Tesla Energy products (which we previously announced went into production late last year)," the spokesperson said in a statement.

Tesla says the factory will open sooner than expected

Assuming the project doesn’t reach future jobs goals, or fails to put down the expected level of investment in the project, Nevada has failsafes installed. The state included so-called clawbacks in its deal, which means, should Tesla fail to reach its obligations for investment spending and employment, the state can demand money equal to incentives it gave. In theory, the state could recoup millions of what it gave up through a clawback that kicks in after 10 years, although in practice such provisions don’t always work.

"The clawbacks will never let you recover what you sunk into it," Kenney says. A company may put up a legal fight, or have gone bankrupt by the time the bill comes due. In the latter case, Hill is blunt about what would happen to Nevada: "we don’t get the money."

As Timothy Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research, told me, tax incentive deals certainly have some effect on a local economy over time, even if that effect is modest. But he’s argued that there are more effective ways for local governments to focus their energies. Customized job training for businesses already in a state, or simply assisting with zoning laws, could be a more valuable exercise than a giant deal, if less impressive to a politician’s constituents.

"Providing a variety of information and training services is relatively cheap and seems to have a fairly high bang for the buck," he says. Although many states, including Nevada, argue that tax incentives bring a business that otherwise wouldn’t have been there at all, Bartik rejects that argument. "If you didn’t have any incentive program, you would’ve collected more tax revenue," he says.

A deal may bring more jobs, but might have other consequences

A deal may bring more jobs, but it might also create other financial consequences, like a need for stronger infrastructure to service a town increasingly populated by factory workers. Ultimately, the deals "aren’t a huge money-maker" for a state, Bartik says, even if jobs are created. It’s not yet clear what those secondary changes will look like for the Gigafactory, but the state’s report mentions that more jobs will be needed to support "significant construction related to transportation and utility infrastructure as well as employee housing." The people filling those jobs, the report points out, "would generate sales and property taxes at the full unabated rate."

"IT's really hard to give out just one of these."

The deals, then, certainly can make economic sense, Bartik says, but another problem is what happens next. "It’s really hard to give out just one of these," he says. Many tax incentive deals are ad hoc, given to one major company and tailored to that company during a national bidding war. After giving the deal to one company, how can you argue against giving a proportional deal to another, if the job numbers line up in the same way? Nevada isn't ready to stop betting on the electric car industry. Soon after inking the giant Tesla deal, the state offered another — a package equivalent to more than $330 million awarded to Faraday Future, a startup aiming to compete with Tesla. (This month, it was revealed that a four-day special legislative session for the Faraday deal would end up costing the state nearly a quarter of a million dollars.)

The job, Hill tells me, is to offer the best chance of success to a company, while minimizing the pitfalls so the state does not "suffer unduly."

"We don't pretend to be able to predict how these companies will do moving forward," he says.

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