As Tesla unwraps its $1.3 billion gift from Nevada, it’s not clear whether such tax breaks will result in economic growth — or giver’s remorse
Do government subsidies really help bring new industry to suffering states, creating jobs and jump-starting economic development? Or are they insidious crony capitalism, paying private companies with taxpayer dollars that states can ill afford to lose?
Consider the former through the eyes of Steve Hill, director of Gov. Brian Sandoval’s Office of Economic Development.
Hill is the man charged with helping Nevada emerge from the recession and prevent it from falling into another. His job: bring new businesses to Nevada and reduce the state’s 7.7 percent unemployment rate. He was key to the recent Tesla Motors deal, which will see the electric-car maker build a huge battery factory in Northern Nevada, a project that will bring an estimated 6,500 jobs in exchange for about $1.3 billion in incentives — the biggest such deal in state history.
So, is it worth it? And how can we tell upfront, when the terms of most incentive deals extend for a decade or more?
Hill says one key is to make sure all the state’s incentives are performance-based; the company applying for tax considerations must do something in order to get a benefit. In Tesla’s case, the company must build its factory and create jobs in order to access tax credits.
“The quality of the jobs matters a lot,” Hill said. “The whole idea of economic development is to bring dollars from outside Nevada to inside Nevada.”
Nevada’s incentives are aimed at good-wage jobs: If your company pays an average wage of less than 75 percent of the state’s average wage, you’re only eligible for half (at most) of the state’s potential tax rebates or abatements.
Hill rejected the idea, proffered by some critics, that the state always operates from a weaker position than the private company. Companies have something the state wants badly (jobs, a more diverse economy, the potential that a game-changing business such as Tesla might spark an entirely new manufacturing sector). But they tease various governments, holding something of a public auction to get the best deal.
Hill denied feeling any pressure in the Tesla negotiations. “You really should not allow yourself to feel that way,” he said. “You need to allow yourself to lose the deal.” In fact, Hill said, there were many times during the Tesla negotiations when the deal appeared to have fallen apart, when he had to remind himself that he might have to let the big prize go.
“Don’t fall in love with the deal,” he said. “You get in trouble when you do that. You can chase it off the edge of the cliff.”
The mental checklist that grounded Hill during months of negotiations: The fact that there were limits on what the state could offer, both financially and constitutionally. Making sure that the company would give back credits if it failed to produce jobs or live up to its commitments. Keeping the state’s $6.5 billion general fund intact.
That checklist led him and Sandoval to say no to some Tesla demands (such as $500 million, either in cash or a state loan, both of which are prohibited under Nevada’s constitution). And there were times when offers from other states looked like they’d trump Nevada’s.
“It’s a competitive situation. That’s just reality,” Hill said.
Auctions are bad
Now, consider the same question from the stance of a critic: Greg LeRoy, executive director of the watchdog group Good Jobs First. LeRoy — author of the seminal book Great American Jobs Scam — says states can’t possibly win when governments start bidding for corporate favor.
“The system is rigged in favor of companies and against local governments and taxpayers,” he said. Nowhere is that more true than when companies publicly mull just where they might put their plant. “We never know what they’re really thinking about site location. We just have to trust them,” LeRoy said.
When it comes to what makes a bad deal, LeRoy has a mirror image of Hill’s checklist, and such public auctions are at the top of it. The Tesla deal is a good example, LeRoy said, but examples can also include Boeing, which was quite public about moving its new 787 manufacturing plant from Seattle to South Carolina.
Boeing, by the way, holds the top spot on Good Jobs First’s “Subsidy Tracker,” a listing of public dollars flowing to private companies nationwide. With 137 public subsidies worth $13.1 billion, Boeing dwarfs the No. 2 company, Aloca, a relative piker with subsidies worth $5.6 billion.
There are two companies with Nevada links on the list: No. 15 Berkshire Hathaway, with 310 subsidies worth just more than $1 billion. (Berkshire Hathaway is headed by Warren Buffet, and a subsidiary recently acquired NV Energy.) And Apple Computer is No. 38, with six subsidies worth $446.4 million, including $89 million from Nevada in a deal that saw the company set up an outpost in Reno.
But those aren’t the only companies that have benefitted from incentives in Nevada. According to a New York Times analysis published in 2012, the state spends $33.4 million annually on incentive programs, mostly through sales tax abatements, but also property and payroll tax breaks. (That’s about $12 per person, or 1 cent per dollar of the state’s budget.)
According to the Times, companies that benefitted included data-storage giant Switch Communications, solar panel maker Amonix (which closed a North Las Vegas facility in 2012 after about a year), paint giant Sherwin-Williams, Harley Davidson and Ocean Spray.
The second warning on LeRoy’s list is the quest for the “trophy deal,” landing a big new industry or unique company. The prestige of having Apple, Tesla or Boeing locate in your state — to say nothing of the jobs and political advantages — can push officials to make ill-considered deals, LeRoy said. And smaller states with less population and high unemployment rates (sound familiar?) are especially vulnerable.
Finally, he said, bad deals are rushed. The Tesla package was worked out over months of painstaking talks, but was announced just a week before the Nevada Legislature approved the deal in a two-day special session. Only minor changes to the negotiated framework were made.
LeRoy said one problem with incentive deals — including Tesla’s — is that if they do bring new jobs and residents to local communities, there are impacts not paid for by the new corporate citizen. Those burdens tend to fall on taxpayers — or they go without essential services.
“It’s got to pay for itself somehow,” he said.
Subsidies are one of the ironic issues that unite left and right — liberals dislike handing tax money to for-profit corporations, and conservatives don’t think government should be picking winners.
“Free market people would say those are risks. And Tesla should take those risks,” LeRoy said.
He’s not alone: Forbes contributor David Brunori, writing in March, expressed surprise that incentives don’t draw more ire. “But, more importantly, those [top] economic development programs are almost all the result of insidious cronyism. Narrow business interests manipulate government policymakers, and those interests prosper to the detriment of everyone else. Free markets be damned,” he wrote.
Brunori was reacting to a Good Jobs First report, released in February, which foundthat since 1976, 75 percent of all state economic development subsidies went to just 965 corporations. The Fortune 500 companies alone collected $63 billion in tax breaks.
“Think about that. The largest, wealthiest, most powerful organizations in the world are on the public dole,” he wrote. “Where is the outrage?”