Press

LAS VEGAS — Nevada’s new Tesla deal makes “utterly no sense,” says NYU Global Research Professor Richard Florida, writing yesterday on The Atlantic’s CityLab website.

Florida, director of the Martin Prosperity Institute at the University of Toronto and a senior editor at The Atlantic, questions both the economic impact of the new Tesla venture in Nevada and also the wisdom of Gov. Brian Sandoval’s call for a special session to provide Tesla with $1.3 billion in tax breaks and transferable tax credits.

Florida’s article is titled “Reno Won Tesla's Gigafactory. Was It Worth It?” In it, the professor argues that government officials have dramatically overstated the economic impact of Tesla in Nevada. He cites, among others, Martin Kenney, a University of California, Davis, professor and expert on high-tech factories, who predicts the Tesla factory would at most employ 3,000.

Florida than looks at the “multiplier effect” that government officials trot out to transform an estimated 6,500 jobs at the Tesla factory into more than 22,000 jobs in the economy. Florida writes:

The state of Nevada says the factory will ultimately create 22,000 jobs, after the multiplier effect of the Gigafactory is taken into account. That's a multiplier of more than three times the number of direct jobs. A smaller multiplier — say around 1.5 — is generally thought to be more in line with something like a high-tech battery plant…

Combining 3,000 jobs at the factory with a multiplier of 1.5 means the Tesla factory would produce, directly and indirectly, only 4,500 jobs. Presuming state lawmakers approve the proposed $1.3 billion in tax abatements and transferable tax credits, each direct job would be costing taxpayers over $365,000 in lost tax revenue. Even if indirect jobs are included in the calculation, each job still would cost Nevada over $240,000.

Florida argues that Tesla is unlikely to create an industry hub in Nevada, noting that trade-offs always accompany economic growth. He describes a scenario where Tesla, backed by government-guaranteed advantages, would kill off thousands of currently existing high-paying jobs:

The spillovers are limited, Kenney notes, by the simple fact that a battery plant, however advanced its technology, is much more self-contained than an automotive assembly plant, which forms the hub of an extensive supply chain. “There is little high-tech benefit in terms of things like research,” Kenney writes in an email. And since there is no real supply chain for the plant in the region, it is likely that a lot of money will leak out of Reno. Thomas notes that if the plant is ultimately successful, and electric cars take over our roadways, there will be job losses at traditional auto companies, where conventional gasoline-powered engines are built. “Therefore,” he writes in an email, “the net benefit to the country will be less than 6,500 jobs.” Those lost engine plant jobs would almost certainly be higher paying ones than the $22 an hour jobs the Gigafactory will create.

In view of this article, Andy Matthews, NPRI’s president, released the following comments:

Richard Florida’s article raises many important questions regarding the economic impact of $1.3 billion given to Tesla in targeted tax breaks. This new analysis also describes a scenario where Tesla’s factory produces just 4,500 jobs directly and indirectly — not 22,000 as GOED claims. In that scenario, taxpayers would be handing out over $240,000 for each job, hardly a good deal for the state.

Lawmakers should not just immediately accept the economic impact numbers put out by the Governor’s Office of Economic Development, Instead, they should conduct a thorough examination of both the best- and worst-case scenarios. Credible independent economic analysis needs to be done on this deal before lawmakers vote on any tax breaks for Tesla.

Life is full of tradeoffs, and taxpayers and lawmakers need to know what the opportunity costs are in this situation. That’s not something lawmakers can accomplish in just a one- or three-day Special Session — especially for targeted tax breaks of this magnitude.

If lawmakers wanted to give Nevada’s entire economy a boost, they should lower Nevada’s sales tax across the board.

###

LAS VEGAS — NPRI President Andy Matthews today sent the below open letter to Gov. Brian Sandoval and the members of the Nevada Legislature regarding a potential special session and subsidies for Tesla. The letter urges Gov. Sandoval and lawmakers to avoid unconstitutional subsidies that would leave the state exposed to the potential for legal action.

Andy Matthews
President, Nevada Policy Research Institute
7130 Placid St.
Las Vegas, NV 89119

September 4, 2014

Hon. Brian Sandoval
Governor, State of Nevada
101 N. Carson Street
Carson City, NV 89701

Re: Open letter on constitutional implications of reported subsidies for Tesla

SENT VIA ELECTRONIC MAIL

Dear Gov. Sandoval,

It was with genuine excitement that we at the Nevada Policy Research Institute and many other Nevadans yesterday learned that Tesla had decided to build its new battery factory in Nevada. We are no doubt in agreement that private business investment in a free-market economy provides benefits to a wide range of stakeholders.

In America, business owners or investors risk their own money with the goal, but not the guarantee, of creating a return on investment. The result is that Americans have new jobs available to them, and state and local governments receive additional tax dollars to provide essential services and lower tax rates.

The biggest winners from this free-market process are the very consumers who ultimately determine which companies will succeed or fail.

Thus, it was with the antithesis of excitement that we, along with many other Nevadans, read news reports that you are preparing to call a special legislative session next week to fund this proposed private factory with massive government subsidies.

In contrast to the profound intelligence operating within free markets, government attempts to pick economic winners and losers are inherently benighted and unfair — as well as unconstitutional in Nevada.

Yes, the promise of a company investing up to $5 billion in Nevada is very appealing. But betting hundreds of millions of taxpayer dollars on an unproven enterprise is extremely risky. Just today, for example, the Wall Street Journal reported that, surprising the conventional wisdom, demand for electric and hybrid cars is declining, driven down by multiple factors. And, of course, in just the last few years, taxpayers lost hundreds of millions of dollars after federal politicians gave handouts to green-energy companies such as Solyndra and Abound Solar.

Government subsidies make taxpayers assume the risks of business ventures while being deprived of the financial rewards that willing stockholders receive for bearing those risks.

Even when government-subsidized businesses do return some nominal profits, hidden behind those profits are always the unseen opportunity costs imposed on everyone else.

At root, it is fundamentally unjust for government to use its powers to financially reward the “connected” at the expense of those not so well connected. This is why Nevada's founders expressly prohibited state subsidies to private companies in Article 8, Section 9 of Nevada's Constitution. It reads:

The State shall not donate or loan money, or its credit, subscribe to or be, interested in the Stock of any company, association, or corporation, except corporations formed for educational or charitable purposes.

Thus, to use government to designate a few financial winners — and many financial losers —undermines the rule of law. What is needed is a single set of rules for entrepreneurs: a common law. To breach that principle — especially when calling a special legislative session for the benefit of one company — is to foster a system where the politically powerful are even more advantaged over everyone else.

That is not the America which has prospered in a free-market economy. That is a country where companies will increasingly ignore consumers and increasingly shift their focus to pleasing politicians.

Government officials should be careful to avoid undermining the fundamental principles of our government and economy — such as the rule of law and the separation of powers — in pursuit of short-term and often hypothetical economic and political gains. No business is worth sacrificing the principles that have built America’s economy and that allow innovative small-business owners to compete on a level playing field against larger companies.

Nevada citizens understand the importance of the state constitution’s prohibition on government giving money to private companies. Three times in the last 25 years, the Legislature asked voters to soften this prohibition, and each time the electorate rejected these efforts by wide margins.

As you know, sometimes elected officials, knowingly or unknowingly, pass laws violating the Constitution and force organizations, like NPRI, to bring litigation in order to defend these fundamental principles.

For instance, in 2011, lawmakers passed and, as Governor, you signed a bill creating the Catalyst Fund, which provides state subsidies to a select few private businesses.

Earlier this year, the Nevada Policy Research Institute’s Center for Justice and Constitutional Litigation filed suit against the Governor's Office of Economic Development (“GOED”) and the unconstitutional Catalyst Fund for violating Article 8, Section 9. That suit is seeking to prevent GOED from giving over 1 million taxpayer dollars to SolarCity, which, incidentally is also owned by Tesla's Elon Musk.

As no details have been officially released as of yet about the incentives for Tesla, and with the official announcement coming this afternoon, we wanted to share these reasons why government subsidies are poor public policy. Further analysis from NPRI will be forthcoming on that aspect of this issue, but I urge you not to propose unconstitutional government subsidies that would leave the state exposed to the potential for legal action.

NPRI will be available to assist you and the Nevada Legislature to evaluate any proposals that may be passed in a special session to ensure that they meet constitutional muster.

Governor, even when we've disagreed, we at NPRI have always respected the enthusiasm you've brought to the job of leading our state. Nevertheless, the rule of law must always be adhered to and defended vigorously.

Sincerely,

Andy Matthews
President, Nevada Policy Research Institute

cc: Nevada Legislature

LAS VEGAS — Responding to today’s report that Gov. Brian Sandoval is preparing to call a special session and offer Tesla huge subsidies and tax abatements for a private battery factory in Northern Nevada, Geoffrey Lawrence, NPRI’s director of research and legislative affairs, released the following comments:

News that Nevada’s current governor will ask Nevada lawmakers to approve a corporate-gift package for Tesla should concern all Nevada taxpayers and entrepreneurs alike. It’s especially alarming when the proposed giveaway is so large that even the governor acknowledges that it outstrips the existing authority to subsidize private businesses granted to him by the 2011 legislature. Even that generous authority oversteps a strict constitutional ban on corporate gifts.

It’s exciting when any company chooses to do business in Nevada, so it’s puzzling why the governor would go to such extraordinary lengths to promote the business interests of one wealthy investor, Elon Musk. Governor Sandoval has already channeled more than $1 million to another of Musk’s firms, SolarCity, and now seeks greater authority to bestow more millions on the Californian. Why should Elon Musk’s firms enjoy advantages that Nevada’s native entrepreneurs don’t receive and for which they must ultimately foot the bill?

Very few Nevada taxpayers will be able to afford the high-end luxury cars manufactured by Tesla Motors. According to automotive reviews, a 2014 Tesla Model S has an MSRP ranging between $69,900 and $93,400. In essence, even low- and middle-income Nevadans would be asked to subsidize the spending habits of wealthy consumers.

Why would lawmakers want to take from poor and middle-class families to subsidize a billionaire making cars for millionaires?

While advocates will predictably claim a public benefit for the subsidy in the form of greater employment opportunities, Nevadans should be careful to consider the trade-offs involved. Subsidies allow firms to create negative value by consuming more in labor and other productive inputs than can be justified by the value of the final product. Nevadans can realize far greater benefit by leaving those productive resources available to entrepreneurs whose products compete on their own merits.

Lawrence added that aside from the many economic and principled reasons to avoid state subsidies, the Nevada Constitution already prohibits taxpayer subsidies to private companies.

“While the specifics of what Governor Sandoval seeks on Musk’s behalf have yet to be made clear, the state constitution specifically prohibits politicians from handing tax dollars to private companies,” he said.  

Specifically, he noted, Article 8, Section 9 of the Nevada Constitution states:

The State shall not donate or loan money, or its credit, subscribe to or be, interested in the Stock of any company, association, or corporation, except corporations formed for educational or charitable purposes.

Lawrence observed that NPRI’s Center for Justice and Constitutional Litigation has already sued the Governor’s Office of Economic Development for violating the constitution’s gift ban to prevent GOED’s gift of over $1 million to SolarCity.

CJCL brought the lawsuit on behalf of Mike Little, a native Nevada entrepreneur who operates his own renewable energy enterprise and who has seen his own tax dollars transferred to Musk, his competitor, through Sandoval’s office.

Litigation in that case is ongoing.

###