The Tesla deal’s 3 problems

Like many Nevadans, I have mixed feelings about the deal our state made with Tesla Motors to get it to locate its electric vehicle (EV) battery giga-plant near Reno. The deal raises at least three salient, related issues, and it shows how fast and loose politicians, bureaucrats, advocates, opponents and the press play with numbers and facts.

First, did Nevada give Tesla more than it should have? The headline figures are that Nevada committed $1.3-billion in incentives to get Tesla to locate its $5-billion lithium battery factory with 6,500 permanent jobs at the Tahoe Reno Industrial Center (TRIC) beginning in 2017 plus 3,000 jobs during plant construction.

That account makes it sound as if Nevada will hand over $1.3-billion up front to Tesla, but that’s not the deal. Nearly all the incentives come from tax abatements and credits over the next ten to twenty years. Further, the deal has a number of provisions regarding investment, job creation for Nevadans and other matters that Tesla must satisfy to get the tax breaks.

Tesla will get discounts on electric energy and related benefits that will cause our power bills to increase by an estimated $1.84 per year. And it will be exempt from laws that unreasonably constrain is scope of business in Nevada, while those laws will still apply to its competitors. Overall, one account says Tesla’s deal is 15 times larger than any incentive package Nevada has given to any other company.

So, did Nevada give too much? We can’t really know whether Tesla would have come for lesser incentives, because other factors complicate the matter. For example, Tesla claims that Texas offered greater incentives. However, TRIC has key cost and logistics advantages that make it the prime place for the plant. First, it’s closest among all industrial sites to the only active lithium mine in the country. Second, it’s closest among the non-California sites to the plant at which the batteries will be used. So, we can’t know what level of enticements was the minimum Tesla would have taken from us.

Moreover, we can’t know whether we gave too much because we can’t know the likelihood of success of the venture, nor have a reliable estimate of its likely total economic benefits to Nevada — the second key issue. The batteries are proposed to be used in EVs to be built in Fremont California, but EVs are not yet a commercial product without government subsidies of various kinds, and they may never be. Consumers may prefer existing car technologies or some other ones being developed, and we have little way to know the likely success of Tesla’s EVs.

We do know that Tesla has never turned an annual profit, despite benefitting from much government subsidy and preference, which should give one pause.

While wild figures of total expected economic and jobs benefits have been touted, they should be almost entirely discounted. As an economist and an elected official who has had to sit in judgment of proposals involving such estimates, I know they typically involve apples-to-oranges comparisons at best and more likely shoddy and unsupportable claims and estimates. With no reliable assessment of the likely success of the venture and its probable benefits to Nevada, we can’t know whether we paid too much.

That said, I, like nearly all Nevadans, hope for the success of this project and great benefits to our state now that Nevada has committed to it.

But that still leaves the final issue: the fairness of the deal to existing Nevada businesses and to other businesses that might want to locate here. Even if we knew that the incentive package was the minimum deal needed to get Tesla’s plant here and we further knew that the project would be a success at the levels estimated by Tesla and that the deal passes constitutional muster (which has been questioned by some folks), Tesla got a deal that other businesses won’t get. It will pay little or no state or local taxes for at least a decade and continue to get great breaks for another decade after that.

The benefits to Nevadans due to the project’s employment and purchasing of goods and services, plus other more speculative benefits may be substantial, but that’s also true of many existing Nevada businesses and new projects that won’t receive Tesla’s tax breaks and other benefits.

If the incentives were being offered to Tesla by a private firm that saw net expected benefit from the deal, the fact that some other companies did not get a comparable deal would be no legitimate concern of any other party. But the public sector has a fundamental obligation to deal with all taxpayers and other parties on a consistent and equitable basis. And that issue is not satisfied even if one concludes the project is a good economic deal overall for Nevadans and our economy.

Ron Knecht is an economist, law school graduate and Nevada higher education regent.