By Matthew L. Wald Sept. 12, 2014
When Nevada lured Tesla Motors to the Reno area to build a giant battery factory, a triumphant governor, Brian Sandoval, proclaimed that every dollar his state was spending in tax incentives and other subsidies would yield $80 in economic activity.
But experts in industrial development say that his estimate is not so clear-cut. The calculation, they say, relies on two big assumptions: that the factory, which is to be built on a scale never tried before for a battery plant and is to employ 6,500 people, will achieve the radical cost savings that Tesla envisions, and that all the business it spurs will go to local companies. And even then, not all of the $80 would reach governments; most of it, in fact, would go to the private sector.
A crucial issue is that whenever a state offers an incentive for a company to build a factory, the economic stimulus is rarely concentrated in the surrounding area. Building and equipping the battery factory, for example, will cost about $5 billion, and while some of that money will have to be spent in Nevada, many of the equipment purchases, for example, cannot be.
“Are there any factories in Nevada that make the equipment to manufacture lithium-ion batteries?” said Greg LeRoy, the executive director of Good Jobs First, a nonprofit watchdog group in Washington that generally opposes such state incentives. “I don’t think you get to count that as a Nevada impact.”
That logic did not carry the day in Carson City. Late Thursday, the Nevada Legislature, in a special session, approved a $1.3 billion package of incentives, which Governor Sandoval immediately signed into law. He thanked the Legislature for its comprehensive review, in a session that he had called 48 hours earlier.
The package was more than twice as large as the $500 million that Elon Musk, Tesla’s chief executive, had said a month earlier that he was seeking. But Mr. Sandoval stressed that it would provide a lift for a state that has not recovered from the recession, and increase its gross domestic product by 4 percent.
The governor’s statement is apparently based on an estimate by an official in the Small Business Development Center at the University of Nevada, in Reno. The official, Jeff Hardcastle, whose title is state demographer, used an economic model developed by Regional Economic Models Inc.
That model predicted an increase in economic output over the next 20 years of more than $100 billion, or about 80 times an incentive package of about $1.3 billion. The incentives kick in as more money is invested; the factory is supposed to employ 6,500 people, but that is not what the tax breaks are tied to.
Even if the state forgoes taxes, its tax revenue could increase, the governor’s analysis says; for example, its employees will spend 31 percent of their incomes on taxable goods.
The mismatch of who pays and who benefits was referred to in a study that the governor’s Office of Economic Development commissioned fromApplied Economics, a firm based in Phoenix. It used what it called “national multipliers” to calculate the maximum possible benefit. For every million dollars in Tesla spending that the government subsidy spurs, an additional $1.58 million in economic activity would be generated somewhere, with the local economy delivering an increasing fraction of the factory’s needs over the next 20 years.
“Suppliers do end up co-locating,” said Sarah Murley, a principal of Applied Economics. And if things do not go as planned, “it’s a risk more for Tesla than the state of Nevada,” she said. If Tesla does not expand the factory as planned, then the taxes that Nevada agreed to waive would be meaningless anyway.
The package is expensive also when measured in terms of jobs created. At about $200,000 a job, the package at first blush was higher than those some other prominent companies have received in recent years. By comparison, last year Boeing was promised $120 million by South Carolina in exchange for adding 2,000 jobs at a factory near Charleston that builds 787s. That comes to $60,000 a job. And Volkswagen received about $178 million in benefits for adding 2,000 jobs at an assembly plant in Chattanooga, Tenn., nearly $90,000 a job.
Nevada approved the package quickly not only because it wanted to meet Mr. Musk’s requests, but also because it sought to do so before another state did. Tesla was also courting California (where the company already builds electric cars, and where most of the batteries would go), Arizona, New Mexico and Texas. Battery manufacture requires dry conditions, so starting in a desert helps. Perhaps to whet Nevada’s appetite, Tesla even sent in bulldozers to move some dirt around at the site near Reno.
By any measure, Tesla’s ambitions are enormous: It aims to build a factory that will more than double world capacity for lithium-ion batteries, and cut their cost of production, at a time when some battery factories are partly idle. With the savings, Tesla says it will be able to build mass-market electric cars, stimulating demand.
But if the batteries come in above the price target, demand will be sharply lower, and the factory risks becoming another Solyndra, a firm that took a giant federal loan guarantee, turned out a product and could not find a market niche. Mr. Musk said it would transform the auto industry, but electric cars have been much slower to catch on than supporters predicted.
The incentives may be a high-risk strategy for the state, but not for the officials who negotiate them, some critics say. At the Council on Foreign Relations, Edward Alden, an economist who has proposed that countries make agreements not to bid against each other with such incentives, said that for a governor, “you get the political benefits up front, the political credit for attracting this company, but all the costs are offloaded to the future.”
Diarmuid O’Connell, the vice president for business development at Tesla, said Nevada did not offer the most money, but when combined with various other factors, like logistics and costs for land and energy, had the best package.
As for the idea that states and countries should not compete to lure industrial facilities, that is “well divorced form the reality of business and free enterprise,” he said. Executives of a public company like Tesla have a duty to seek the best deal, he said.
Some opponents see shorter-term costs. The Progressive Leadership Alliance of Nevada, which characterizes itself as a social and environmental justice group, and lobbied against the concessions to Tesla, said the package took money away from schools that were already wanting.
“Students sit on the floor, they share books, and our Legislature could not come up with any kind of deal for the schools to fund them,” Laura Martin, the group’s spokeswoman, said.
Richard Florida, a global research professor at New York University and a frequent critic of development incentives, said the factory would probably have been built in Nevada even without the generous subsidy.
“They had the site picked out; they started on it,” he said in an email. Companies like Tesla “exploit that information asymmetry,” creating uncertainty in a potential host state, he said. “They know where they want to locate, and then essentially game the process to get incentives from states. It is wasteful and it should be banned.”
A version of this article appears in print on September 13, 2014, on page B3 of the New York edition with the headline: Nevada Woos Tesla Plant in Tax Deal, but Economic Benefits Prompt Debate.