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Will The Tax Incentives Nevada Gave To Tesla Pay Off?

Tesla's decision to build its Gigafactory in Reno is a big deal for Nevada. But it's also a big deal for the automaker, which could walk away with $1.25 billion in subsidies and tax incentives. Before Tesla, the largest incentive package ever awarded by the state was $89 million for Apple.

And the 2012 Apple deal hasn't exactly proved to be a windfall for the Silver State, at least so far. The server farm will create fewer than 100 full time jobs, says Mike Kazmierski, CEO of the Economic Development Authority of Western Nevada. And the part of the deal that calls for a building in downtown Reno has not been fulfilled.

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In 2012, the New York Times published an article about several economic development deals that did not work out as planned. Companies came in with big promises, received generous tax subsides or loan guarantees, then shuttered, leaving states and cities with little to no return on investment. Incentive deals rarely include accountability measures that require companies to hold up their end of the bargain.

However, Nevada doesn't offer money to companies up front. Kazmierski says the incentive dealsare structured to be performance-based, meaning that companies receive tax rebates every year they are in business.

"A lot of people talk about incentives as giving corporations money," Kazmierski says. "We are not giving them anything, we are just taking a little bit less of what they are paying."

But the state is still giving Tesla a pretty big gift by providing infrastructure like roads to the factory, and schools to educate the children of those who will work at the plant, said Ann Markusen, a professor at the University of Minnesota. If Tesla isn't paying for those services, then somebody else is -- and it will probably be residents of the state who pay instead.

Given the large size of the incentive, it is possible that Nevada overbid for the company, says Tim Bartik, an economist at the W.E. Upjohn Institute. It is impossible to know whether Tesla would have accepted a smaller subsidy, but the fact that they had already broken ground in Nevada suggests that the company was already leaning toward the Silver State. If Tesla would have settled for a $500 million incentive package, then Nevada basically lost $725 million in tax revenue, because the bigger subsidy won't result in more jobs or better pay in the jobs that have been created.

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But now that the cat is out of the bag, the state can do some things to maximize the benefit from Tesla, Bartik says. They can require the company to create a certain amount of jobs at a certain amount of pay. They can require Tesla to hire Nevadans. And they can make sure Tesla is benefiting other companies in the area.

But none of those regulations will ensure that the company sticks around for 20 years. Tesla is a relatively new company with a small base of customers. If it fails to create a product that appeals to the masses, then the company, and the Gigafactory, could go out of business.

"The company could go bankrupt," Bartik says. "If the company goes under, then the state will never recover its investment."

The legislature could convene as early as next week to consider the tax incentive deal for Tesla. Greg Leroy, executive director of Good Jobs First, would like the governor's office to make all the reports and records of its meetings with Tesla public and available to decision makers. It is important for Nevada lawmakers to understand how the job creation numbers have been generated.

"I want experts to really be able to kick the tires on this deal," Leroy says.
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