Tax Breaks for Tesla? States Should Think Twice

Tax Breaks for Tesla? States Should Think Twice

Tesla Motors

This week’s merger between Burger King and Tim Hortons, and the proposed shift of the American food icon’s headquarters to Canada, has everyone talking about the merits of corporate taxation. But something is missing from this discussion: the billions in tax breaks states lavish upon corporations to lure their operations.

You cannot talk about the corporate tax burden honestly without accounting for these subsidies.

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The recession only intensified this war between the states, and one example playing out now on the West Coast is unusually brazen. Tesla Motors, the electric carmaker, announced plans this year to partner with Panasonic and build a large-scale “Gigafactory” to produce its vehicle batteries. It claims that the factory, which would double world lithium-ion battery production, and grow as Tesla expands vehicle sales, will create 6,500 well-paid manufacturing jobs by 2020.

But Tesla did not select a site for the Gigafactory. Instead, it publicly announced that five Western states — California, New Mexico, Arizona, Nevada and Texas — could compete for the factory, in a kind of public auction. Tesla’s demands began with asking states to cover 10 percent of the factory’s expected $5 billion price tag. The $500 million subsidy would mostly come in the form of sales and property tax breaks for the facility. For context, the entire general fund of Nevada in 2013 was $6.4 billion, so the Tesla subsidy would represent almost 8 percent of the state’s total budget.

States have begun to up their offers. California, already home to the Tesla production assembly line in Fremont, has floated streamlining environmental reviews for the facility, effectively waiving the state’s Environmental Quality Act. Nevada passed a state law that could discount electricity use at the plant by up to 30 percent. Officials in San Antonio, Texas, offered a package worth as much as $800 million, mostly in property tax abatements. Texas and Arizona operate “deal closing funds” that exist solely to subsidize corporate relocation and expansion deals. “It’s war,” blares the headline of the Phoenix Business Journal.

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Tesla has already broken ground in Reno, Nevada on a potential site, but has not made a final decision, with CEO Elon Musk saying on an earnings call recently that the company could develop several other potential locations. Senate Majority Leader Harry Reid warned Nevadans last week not to raise their hopes. “There is kind of a bidding war out there,” Reid said at a news conference in Reno. “I’m not sure they aren’t playing us.”

Experts say the very public nature of the bidding process is far from the norm. “Usually this gets done in secret, with code names and confidentiality agreements,” said Greg LeRoy, executive director of Good Jobs First, which maintains Corporate Subsidy Watch, a compendium of company-specific sweetheart deals.

While the deals are usually hidden, they are often just as shameless. In the past two years, New Jersey has granted $1.25 billion in taxpayer dollars from its “bank for business” to firms that make large campaign donations to Republicans like Gov. Chris Christie, including a $223 million tax break to build a mall. Good Jobs First’s Megadeals report from last year lists over $64 billion in large subsidy packages over the past three and a half decades, with state and local breaks of more than $75 million to individual companies doubling in number since 2008.

Related: Will Congress Ever Crack Down on Corporate Tax Abuse?

With state economies suffering since the Great Recession, public officials have felt pressure to look more aggressive on job creation, increasing demand for a scarce set of deals. “Companies like Tesla have the ability to run these auctions, to whipsaw states against each other,” Greg LeRoy of Good Jobs First said.

This is true, despite the overwhelming evidence pointing to the fact that these corporate subsidy deals do little to improve state economies. “The data and the academic evidence has never supported what happens in practice,” said Chris Hoene, executive director of the California Budget Project.

The Megadeals study puts the cost per job at $456,000. An exhaustive New York Times analysis in 2012 found the job creation benefits unclear at best. Another report from Good Jobs First using National Establishment Time Series (NETS) data finds that “the net effects of interstate job movements are extremely small.” Texas, which touts itself as a major job pirate, from 2003-2009 created a net gain of just 0.03 percent of total jobs from relocations, according to the report. “We think it’s a fool’s errand to chase companies in other states,” said Greg LeRoy.

Yet the trend persists because the politics are challenging for state officials. “It’s hard to be the elected official dealing with other states galavanting around saying they’re going to steal your businesses,” said Chris Hoene of the California Budget Project. “Doing nothing becomes a difficult option.”

Related: Tax Breaks 2014: A $63 Billion Boon to Business

Budget watchdogs have begun to fight back. The California Budget Project joined with colleagues in New Mexico, Arizona, Nevada and Texas to write an unusual open letter, urging officials not to give in to Tesla’s Gigafactory demands by draining financial resources intended for public services. “It is time to break the harmful pattern of one state ‘winning’ a high-profile competition, with other states left believing they need to offer even larger tax breaks to win future deals,” they write.

Hoene hopes to influence the active legislative session in California, where a bid for Tesla would have to be constructed. Already this year, the state has gone on a shopping spree, with multiple corporate tax subsidy deals, including a tripling of the benefit for film and television production (which still leaves it short of the subsidy in other states like New York).

“More important, we want to call the whole practice into question,” Hoene said. “These are public dollars states are choosing to forego. They ought to be more careful, and not pit themselves against one another.”

Activists have had modest success in tamping down these deals lately, with an assist from local businesses that see corporate giants lavished with perks while they get nothing. After business leaders decried the border competition between Missouri and Kansas to create “new” jobs in the towns that straddle Kansas City, they actually got Missouri’s Republican legislature to pass a bill restricting subsidies in the two-state metro area, if Kansas passes a companion measure (Kansas has not yet taken them up on the offer).

In Illinois, House Speaker Michael Madigan, a Democrat, put a stop to three large tax incentive packages last December, railing against “corporate pay-to-play,” with businesses holding up the state for tax incentives amid threats to move. “It was his mad-as-hell-and-not-going-to-take-it-anymore moment,” said LeRoy.

You cannot debate the usefulness of corporate taxes without addressing the state-level gift-giving that enriches businesses with taxpayer funds. Despite the microscopic economic benefit, the gravy train of perks keeps unloading at the executive suites.

The open bidding war for Tesla’s factory could create more awareness of these unjustified subsidies, and give public officials more spine to resist them. Whatever the case, any solution on reforming corporate taxes must necessarily deal with how they blackmail states for money.

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