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A lesson from Tesla

About 34 hours after the 28th Special Session of the Nevada Legislature began, Gov. Brian Sandoval last night signed legislation, passed unanimously by lawmakers, granting Tesla roughly $1.3 billion in tax abatements and renewable tax credits to build a battery factory in Storey County.

My NPRI colleagues and I have already spilled a good deal of ink weighing in on this story over the past week. In doing so, we’ve stressed a few points consistently: that the idea of Tesla coming to Nevada was cause for excitement; that the opacity and haste that have characterized the deal raised serious concerns; that lawmakers shouldn’t allow the euphoria of the moment to blind them to their responsibilities to make sure they were truly acting in the state’s long-term economic interests and examining risk as well as reward; and that crafting public policy to give special treatment to one company raised important questions of both constitutionality and justice. 

The deal having now become official, it may be tempting to assume that all the relevant questions have been answered. On the contrary: Many questions remain, and they can and will be answered only by the combination of careful future analysis and the continued unfolding of events.

So while the dust settles, at least for now, I thought I’d take this opportunity to highlight a facet of the Tesla saga that’s been getting far too little attention. There’s an important and fundamental lesson to be learned here, and it shouldn’t get lost amid the hype over this one particular deal.

Let’s start with a basic question: Why did Tesla decide to come to Nevada?

Surely, all businesses take many factors into consideration when deciding where to operate. But at least part of the answer to that question was provided by Steve Hill, the governor’s economic-development chief, who told the Reno Gazette-Journal that, “Without the sales tax abatement, we would've been immediately out of the conversation.”

Whatever you think of the merits of the Tesla deal itself, there is an inescapable lesson here: Favorable tax climates attract businesses. Tesla chose Nevada because of the opportunity to pay nothing to little in taxes, and because of the obvious benefits to the company that will result from that nonexistent to low tax burden. The less money Tesla is paying into government coffers, the more it has to grow, create jobs and increase wages. This benefits Tesla’s ownership, its employees and others in the economy as well.

So here’s another question: If it’s good for Tesla, then why not for everyone? If we acknowledge the power a low tax burden has to attract one business and to create jobs — and 60 lawmakers, plus the governor, just did exactly that — doesn’t it follow that extending such opportunities to other businesses all throughout the economy would lead to broader benefits as well?

The answer, of course, is yes. And since that’s the case, then the converse must also be true. Business owners will respond to higher taxes by shrinking their business, eliminating jobs or even moving away from those high-tax locations (or by not setting up shop there to begin with). And when that happens, the ill-effects are felt throughout the economy.

Still, we’re constantly being told, by advocates of higher taxes, that we can increase the tax burden on businesses without bearing those negative consequences. These folks constantly downplay or even deny the connection between the tax burden a business must pay in a particular location and its likeliness to choose to operate there. Well, the Tesla deal is a big, fat, $1.3 billion argument to the contrary.

It’s important to note that the benefits or negative effects of lowering or raising taxes are felt most acutely by small businesses, which are the primary driver of job growth in Nevada and across the country.

I had a chance to bring this up just yesterday, when I was a guest on Las Vegas Channel 3’s “What’s Your Point?” with Amy Tarkanian and Rory Reid. Rory is a big proponent of the margin tax, which will go before Nevada voters on this November’s ballot and would, if passed, result in a new, 2 percent tax levied against the gross revenues of businesses — even those that aren’t profitable.

Rory expressed his skepticism that implementing the margin tax would actually drive any businesses away, but the irony is that he did this immediately after applauding the decision to lure Tesla to Nevada with a massive tax-break package. Again, if the size of the tax bill was a major factor in Tesla’s decision on whether to do business in Nevada, then surely it would factor into the calculations of other businesses as well.

There’s a fundamental disagreement, even among free-market adherents, regarding the propriety of targeted tax breaks. Some favor them, arguing that it’s always good to let people keep more of their own money, and that we should strive to create as many loopholes as possible until everyone’s tax burden is decreased. Others argue that a true, competition-based market system requires a level playing field, with everyone operating under a uniform set of rules. And I’ve enjoyed hearing from lots of people in both camps over the past several days.

But wherever you fall on that divide, let’s make sure we appreciate the area where we can agree. Taxes do matter, and we should all work to advance public policies that keep taxes low here in the Silver State. With or without Tesla, that’s the path to a bright and prosperous future.

Take care, and have a great weekend.

Andy Matthews
NPRI President

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