Las Vegas Sun

March 28, 2024

Politics:

What you should know about tax breaks before the Tesla special session starts today

Tesla

Paul Sakuma / AP

The front of a Tesla sports car at a showroom Dec. 9, 2008, in Menlo Park, Calif.

Nevada lawmakers gather today at the Capitol to consider a $1.3 billion question:

How bad does Nevada want to land Tesla's next-generation car battery plant?

The tax deal would be by far the largest in Nevada's 150-year history. In fact, it would be 15 times bigger than the next biggest project.

Nevada's Tesla deal comes amid a new wave of corporate big-ticket tax breaks by states competing to keep or land big employers. For tax breaks worth $75 million or more, the frequency of those deals doubled between 2008 and 2013 compared with the previous decade.

Although the deals have become common, they're not without risk.

A nationwide arms race

States started granting big corporate tax breaks in the 1980s as Southern states began recruiting automakers.

Since then, the competition has exploded into an economic arms race. State and local governments now spend $80 billion a year on incentives, The New York Times reported in 2012.

The shift has created a marketplace for corporate subsidies. Companies know politicians want to win jobs for their states. Politicians know companies expect subsidies and that if they don't make an offer, the neighboring state will.

“What are you going to do? Pout and say you’re the one state that’s not going to do this?” said Rob Lang, director of Brookings Mountain West at UNLV.

History of incentives in Nevada

Nevada’s standard package of incentives includes reductions in:

• Sales and use tax on capital equipment purchases

• Business tax on wages

• Property taxes.

Tesla will qualify for all three and could get even more generous terms than what’s been previously offered to businesses.

Nevada has traditionally been a small-time player in the incentive business. The state spends at least $33 million per year on incentive programs, compared with Texas' $19 billion and California's $4 billion, according to The New York Times report.

Nevada's records on incentives lag by several years. Businesses that receive the abatements have two years to take advantage before they’re audited. In 2010, the most recent audit available, the state forgave $9.4 million in taxes owed by 17 businesses. Those businesses created a total of 916 new jobs.

Since 2011, the state has approved abatements or incentives for 132 companies. That list includes about $89 million in incentives over 10 years for Apple’s data center near Reno approved in 2012.

Why Tesla incentives make sense for Nevada

Nevada doesn’t have the war chest to compete for every new business or expansion. State leaders have to be selective when they offer incentives.

If the state is set on handing out incentives, Tesla is a worthy bet, Lang said. The company fits with the state's strategy to recruit clean energy and high-tech manufacturing employers. Those industries help diversify the state's economy beyond gaming and hospitality.

Given the size of Tesla's plant and its workforce, the economic spinoff is expected to be massive. According to a state-commissioned report, Tesla will produce between $53 billion and $97 billion in total economic impact over 20 years.

The plant will also put the state at the forefront of the battery technology industry, and that could spur similar companies to move nearby.

Even with the record tax breaks for Tesla, a recent Moody’s analysis rated the deal a net positive for Nevada’s economy.

“Something like Tesla, it’s worth the risk because it’s such an emerging industry,” Lang said.

Why Tesla is not a sure bet

Even if the tax breaks help lure Tesla to Nevada, lawmakers can't be guaranteed the return will ultimately be worth it.

Tesla’s arrival will increase demands on fire, police and park services, but the company’s tax breaks mean it won’t help pay for those services, said Matt Griffin, executive director of the nonprofit Institute on Taxation and Economic Policy in Washington, D.C.

“If you cut taxes for one company, you have to make up for it somewhere else. The question is, how is that going to happen?” Griffin said.

Things for lawmakers to consider

State and local governments have an “appalling” record of signing off on tax incentives without building in protections for taxpayers, Griffin said.

If Nevada lawmakers approve the $1.3 billion Tesla deal, Griffin said it’s important they include “clawback” provisions that allow them to hold Tesla accountable.

He said well-constructed incentive deals typically require three things:

• Targets that ensure new jobs are being created instead of simply shifting existing jobs around the state.

• A way to recover the tax incentives if the company moves out of the state.

• A guarantee that the jobs created offer a certain wage and benefits.

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