Nevada’s $1.3B gamble on Tesla | Hacker News Reader

Nevada’s $1.3B gamble on Tesla

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28 pointsghosh48 comments

I don't like seeing any company get such special treatment. A facility free from sales taxes for a generation is definitively unfair competition. If Tesla does manage to lower costs as expected and floods the market with cheaper batteries, how will this not be dumping based on a private deal?

1.3 billion. There are only three million people in Nevada. That's 433$ for each and every person in the state.

Shouldn't states be able to compete among themselves, in a free market fashion, in order to attract business development that is likely to pay huge dividends over the long term?

It's a little disingenuous to divide the incentive package--which is effective over 20 years and only if Tesla meets all its targets--by the population of Nevada, without similarly considering the taxable revenue the company will generate over the same period if those targets are reached.

My problem with it is that citizens are supposed to be equal under the law. There isn't equal access to these incentives. Doesn't an educated professional moving to Nevada also bring positive externalities to the state? Yet they will never be able to negotiate incentives like these due to the great disparity in bargaining power.

I am against special carve-outs, subsidies, and other manipulations of the tax code in general for the same reason.

Your point is well taken, but an educated professional moving to Nevada is not likely to affect the state's economy enough to move the needle.

I'd contend that there is equal access to incentives like this for any entity with sufficient scale.

Sometimes I like to pretend I live in a country where those with money and influence don't receive preferential treatment from the state. I know why it happens. I know it will continue to happen. The same thing happens on the country-scale with multi-nationals picking the most favorable nation to be taxed in. But I don't want my government to enable the game by playing it.

Pardon me while I wait for Tesla's windfall to trickle-down and lift all my boats.

> there is equal access to incentives like this for any entity with sufficient scale.

Even when that's perfectly so and the rest of Democracy is perfectly fair, this dynamic is intrinsically unfair and benefits the rich and powerful established interests at the expense of smaller entities. It's the gateway from capitalism to cronyism.

Maybe I'm out of touch, but I just don't consider a fledgling electric car manufacturer to be an "established interest."

Elon Musk is worth $13 billion. Tesla Motors is worth $19 billion (roughly half of Nissan). Both are household names. You read about their exploits in these pages, and in publications such as the New York Times or Wall Street Journal, as a matter of routine. QED

And sure, you don't expect the Mom and Pop family-owned shop down the street to spring up to compete with Tesla like you might expect a local bakery to compete with General Mills, but you do expect Tesla to have some competition in areas like the labor market.

> Shouldn't states be able to compete among themselves, in a free market fashion, in order to attract business development that is likely to pay huge dividends over the long term?

That sounds perfect except we are talking about governments that are supposed to represent all of the people and not just selected interests. This is a judgement by government picking a winner.

I dearly wish it was illegal for local or state governments to give any tax deals for specific companies or organizations.

The Federal government does the same and much of it is for similar reasons, should it be prevented from doing so? We have many examples at all levels of companies donating to political campaigns to get returns.

I don't mind states competing with each other to bring in jobs. Such competition can cause some states to not make bad budgetary decisions that drive business out as well as trap their population in undesirable areas. Business and personal mobility is what makes the country stronger economically. They are betting on a return of investment which is better use of money that making financial promises to agencies which produce no money but instead incur long terms costs. Those deals are usually purely to prop up the political fortune of local politicians. They lead to upside down budgets and long term debts that force higher taxes putting them at a competitive disadvantage for new jobs and drive professionals out.

> The Federal government does the same and much of it is for similar reasons, should it be prevented from doing so?

Yes, a hundred times yes. This is one of the biggest problems with our tax law and allows politicians, under the guise of promoting businesses and jobs, of bribing people and companies. One law for all.

Competing can be done without alterations in tax law to bribe companies. Its a straight up cash bribe and nothing more honorable. All of these deals are made with other people's money. Its bad enough we have status seeking politicians trying to attract sports teams. I look at the absolute bull that FX companies deal with and see all the problems of allowing government bribes.

> This is a judgement by government picking a winner.

It's not like Nevada had a rush of battery factories, and they picked out one company, letting the others rot.

Politicians get elected and fired based on jobs and taxes. New factories bring jobs and (allegedly) increase the tax base.

They chose to use tax money to support one business over the existing businesses in the state. If it requires tax breaks to foster businesses than perhaps they need to work on the whole system and not pick a specific business.

> They chose to use tax money

Non-existent tax money as of now. The way the incentives work, Tesla would have to generate enough business activity (revenues, sales, profits) to accrue that tax liability. It's quite possible that business activity will never materialize, the tax liability will fail to accrue, and the incentive won't even have a chance to kick in.

The state is making a bet that (a) such activity will materialize, (b) once materialized, it will draw such a high amount of ancillary business (suppliers, resellers, distributors, etc.) and residential (property, shopping) activity that it will more than compensate for lost revenue.

The bet is not completely uneducated as case studies from the past (mainly around Texas cities attracting Nissan and then Toyota away from Californian cities) suggest that overall it's worth it.

It may make them money, but they picked a winner. I find governments doing this type of stuff just encourages churn of companies. If anything would improve the overall business climate in the US, making all of these deals illegal would be a good first step.

The "pick" though was 1 out of 1, and I mentioned in another comment how one could sort of replicate it by moving into a state that has 0% sales tax to boot (finding a cheap property that would not generate a large property tax bill would be step 2). It also seems that Nevada extended a similar deal to Faraday, and actually went out of their way to attract them http://www.autoblog.com/2016/01/28/nevada-lawmakers-spent-25... at which point I get what you're saying - why doesn't Nevada just pass a universal incentive for certain industries instead of operating on a company-by-company basis?

I agree on the churn, though, in dense populated environments big retailers are known to close up shop in one town to reopen it across the street in different town with different plaza, just because the second town offered a better tax deal.

> in the US, making all of these deals illegal would be a good first step

It might improve the overall business climate in China though. Once the supplier chain is set up and functioning, it's hard to move it elsewhere

http://www.nytimes.com/2012/01/22/business/apple-america-and...

If you want to read an example of the churn check out the FX industry and incentives.

Technically, the pick was tailoring laws for 1 company versus all the other companies in the state. Is there no company in the state that could benefit more than Tesla and produce growth with changed rules? Even if there was, I still believe this dealing making should be illegal since it encourages corruption and is unfair to everyone else. This is the type of thing that has politicians / political staff members "retiring" to cushy jobs in the private sector.

Expecting to have a government (or a series of governments) work like a "free market" is problematic, because there is no reason to expect that market to be efficient. In particular, no one should expect a free market to be efficient when transaction costs are high. Consider transactions one would have with a regional government: a family moving from one state to another is expensive, paying a lawyer for your small business to ensure compliance with a new jurisdiction is expensive... even just getting a real conversation with your state-level representative (let alone lobbying for a tax break) is kind of a big deal: has anyone here done it recently?

As a result, you would expect concentrations of power to emerge in the form of special interest groups and corporations who can pay those transaction costs more readily.

(This is intro-to-Econ level stuff, if you ever care to study the field.)

Plus, there's no money to dole out without the deal.

>Shouldn't states be able to compete among themselves, in a free market fashion, in order to attract business development that is likely to pay huge dividends over the long term?

Sure, but that competition should be based on taxes that don't discriminate for and against certain individuals and companies.

There is also an argument that allowing states to compete with each other just causes a race to the bottom. Tesla was going to build the factory anyway. The country as a whole is worse off is Telsa is allowed to negotiate away all taxes by forcing states to compete over it.

> The country as a whole is worse off

In a vacuum environment where it's 50 states and no one else that rings true. In global environment US was already competing at country level, would Nevada be better off if the factory went to China or Mexico?

Shouldn't states be able to compete among themselves, in a free market fashion, in order to attract business development that is likely to pay huge dividends over the long term?

Of course they should but I believe his objection is the sweetheart deal for one company.

For example, if Nevada wants to compete with Arizona, it should lower its tax rate. It shouldn't be able to keep the tax rate high and offer a deal to one company that eliminates taxes for them and for them alone.

It provides one company with an unfair advantage over any potential competitors.

Isn't this standard operating procedure these days? Big companies have the leverage to negotiate their tax situation, Walmart and NFL teams come to mind.

Yes it is sop. That doesn't make it a good things. People in the UK are very angry at Google's seeming ability to negotiate a tax deal. Google is today denying any such negotiation. But Tesla seems proud of their ability to negotiate special deals with local governments.

It won't help that Tesla's boss could write a check for this amount, perhaps 10x this amount. So this isn't a liquidity issue. The business can be financed with or without this deal. And Tesla claims profitability regardless. They only want this money because they want the money.

If it's mostly/all tax credits, what's the downside for Nevada?

Every other business that operates in Nevada that isn't getting this deal.

All other taxpayers in the state that will have to cover the amount this entity would have paid. (Something more than zero, something less than the actual tax break)

But those businesses are not losing anything.

Taxpayers don't have to cover any more than they currently do.

There is a mix of issues

https://en.wikipedia.org/wiki/Opportunity_cost

https://en.wikipedia.org/wiki/Environmental_economics#Extern...

Plus whatever tax based services (roads, infrastructure, regulations, etc) that Tesla would not be directly paying for by existing in this location. (That would need to be taken on by the other taxpayers)

Now you're just kind of reaching.

Tesla business is exceedingly popular and so unique that comparisons to other situations are easily avoided (ie, don't have to worry about other businesses clamoring for same deal).

> All other taxpayers in the state that will have to cover the amount this entity would have paid.

Then 49 other states with no such factory but tons of leftover cash will win big time and laugh at Nevada with its stupid battery factory employing people who buy houses and pay property taxes, shop at local stores generating sales taxes, attracting suppliers (with their own employees) who rent out office and industrial properties, generating taxable business activity.

I don't see you complaining about states that already waive sales tax, personal income tax, or corporate income tax. Doesn't Nevada have the right to compete with these other states?

>>> ...any company get such special treatment.

ANY company. I'd say that covers other states.

Is this not what we call "the race to the bottom"?

To generate that (highly optimistic) tax liability, new factory would have to generate multiples of that amount in business activity, and the theory goes that not only the rest of the business activity is taxable, but it also generates ancillary residential and commercial activity resulting in increased tax base.

These are property and sales tax abatements on property and sales that only exist because Tesla set up shop in Nevada. You can quibble about the length of the tax abatements (10 and 20 years), but the perceived "$1.3B gamble" is tax revenues that never existed.

Property taxes are used to build infrastructure used by the taxpayers, such as roads, water & sewer connections, et cetera. Presumably they will be building such for Tesla, so they will be out some 'real money'.

When VW moved into Chattanooga they got their own firestation, EMS dispatch and hospital for instance, that's of course in addition to the roads, water etc...

Which is more than funded by the workers' property taxes, income taxes, and sales tax revenue.

Why should the 'workers' pay higher taxes, and the 'company' pay lower taxes? What makes that a morally just argument?

1) As Nevada has no personal income tax, workers' liability on that portion would be the same as company's - close to zero.

2) Property and local sales taxes are more likely to stay in the community, whereas the corporate taxes would be sent to Carson City and redistributed to who knows what.

3) Municipalities with strong and diverse property tax sources tend to be community-driven and citizen-oriented. Municipalities with single source of income coming from some corporate giant are incentivized to be pushovers for corporate agenda.

Even though those amenities weren't included in the original cost/benefit of the deal because VW sprung them on the City halfway through the process it still might have been covered by increased sales/property tax until it turned out that demand for the Passat had peak the year it opened and they had several rounds of layoffs in the following years.

Not a gamble at all. Aside from the land swap, all the incentives are performance based.

If Tesla reaches its target 50 GWh / yr production capacity in 2020, we're talking at least $5 Billion / year in economic output through the 20-year life of the incentive package (assuming a very conservative $100 / kWh). Not to mention all the employment, development and additional economic activity the factory will generate. How exactly does Nevada lose here?

If I was working at Tesla, towards the end of the 20 years, I would start shopping around other states and try to get a similar package to move there, and then let Nevada counteroffer.

That's what pretty much all companies do with these deals.

I think company-negotiated deals with states should be outlawed. It distorts competition (small companies can't get them) and is a 'race to the bottom' of sorts (with states as a collective losing).

That said, I wouldn't call it a gamble. Almost all of it is tied to performance/output, so there is little risk for the state.

I don't think it's that irregular for small or medium sized businesses to negotiate with states or even the local town, and these are businesses at the 2MM to 5MM scale. This can come down to preferential tax laws in exchange for at-cost services or zoning exceptions. This is certainly the sort of thing that happened with the birth of broadband well before they started merging together.

If the bulk of the tax deal is "20 years free from sales tax, and 10 years free from property tax", you can emulate the first half of the deal with a variety of states whose sales tax is 0% to begin with.

Property tax would be trickier to avoid, but depending on the scope of the project deals can be found in bad parts of town where the property value is low. My guess is that the footprint they require is so enormous, they had to negotiate property tax rates. Otherwise property taxes are usually not a huge concern for manufacturing businesses (and are deductible against other liabilities).

I wouldn't call tax credits a "gamble". Gamble implies downside risk.

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