Development incentives and Tesla’s battery factory

Tesla and Nevada Governor Brian Sandoval announced this month that the state has won the gigafactory sweepstakes at the cost of $1.25 billion in incentives. The Nevada legislature quickly approved the deal, despite some political posturing.

The deal is the tenth largest incentive deal ever (For those keeping tabs, Washington gave Boeing a whopping $8.7 billion in the largest incentive deal ever). All of these giveaways have raised a familiar question: Are Nevada residents really getting a magnitude economic return on their $1.25 billion investment?

The deal includes over a billion in tax abatements, ranging from sales tax to property taxes, along with almost $200 million in transferable tax credits which Tesla can actually sell to other Nevada companies to reduce their own tax liabilities. The tax credits are an immediate hit for Nevada as they come out of the state’s general fund. Nevada opted to pay for them by eliminating a film tax credit program as well as a credit for insurance companies that located their home offices in Nevada.

Urban theorist and university of Toronto professor Richard Florida, who has examined the value of economic development incentives at length, has been highly critical of the deal. Florida has done research showing there’s no association between incentives and economic performance of a state. He looks at variables like average wage, unemployment rate and college graduation rates. With all of these studies correlation isn’t causation (or lack thereof for that matter). He does find that incentives are more common in economically disadvantaged communities. Presumably these communities are more desperate to distinguish themselves and win over companies.

The other problem is the bidding process. Tesla did an impressive job of playing states off one another to leverage bigger deals. It was reported that Musk initially only expected $500 million in incentives. But an understandable bidding war occurred and Tesla even broke ground on the Nevada site without committing to a factory, a strategic move to extract more leverage and communicate that the company was willing to move sites if it needed to (or didn’t get what it wanted).

I mention this because one argument critical of incentive deals is that governments tend to keep raising their incentive package sizes until the size equals the economic value to the community. The political value of securing a major factory in a place that is struggling economically can’t be underestimated.

Florida went on to argue that the “factory would likely have ended up in Reno regardless.” I’m less sure of this fact. Yes, companies consider not just tax breaks but proximity to supply chain/markets and workforce, but given the competitive nature of the process, incentives likely played some role.

The core question remains: What will Nevada get and at what cost? A simple dividing of the $1.25 billion incentive package by the 6,500 projected jobs nets a cost of $192,000 per job, which seems pretty steep. Though I’m not sure those calculations are entirely fair. Much of the deal is in tax abatements, taxes Tesla won’t have to pay. That’s not money directly coming out of the government’s budget but money the state and counties won’t be able to collect. Are there costs to the state? Sure, children must be educated, city services must be upgraded when a massive factory comes to town. But those are not the same as Nevada writing Tesla a check for a billion dollars.

The real question for me is whether northern Nevada can become a tech center. This is the multiplier effect of these incentive deals in which a critical mass of tech workers and busineses makes the area increasingly attractive to businesses and helps to transform a tourist economy to a tech one. This usually goes hand in hand with excellent education centers as has been seen in places like Boston, Silicon Valley and Austin, something that could be difficult for Reno to execute.

The reality is that if states weren’t pitted against one another and incentives were eliminated altogether, then states would benefit more from whatever companies they could attract. But the reality is that every politician sees technology as the future of the economy and will do what they can to land those companies. And for Nevada that means a Tesla workforce that is at least half Nevada residents and a shot at further changing the face of northern Nevada.