The Tesla gigafactory deal negotiated by Nevada and Elon Musk, as it turned out, amounted to gigabucks. About $1.25 billion…..or was it really that much?
Trying to interpret the true value of incentive packages offered by governments is anything but a science.
The truth is, the costs and benefits of these deals range between hard reality and hypothesis.
On the debit side of the ledger, it comes down to how opportunity costs are viewed. Opportunity cost can best be defined as the benefit of the next best alternative when one is deciding among multiple uses for a limited resource.
In the case of Tesla’s selected site for its factory – the Reno-Tahoe Industrial Center, just nine miles from Reno, is a diamond in the rough. Actually, it is much less than rough with infrastructure in place to handle any sizable operation. It is ready to go. All it needs is business worthy of its capacity.
The Economic Development Authority of Western Nevada claims the center has already produced 1,000 jobs. I always take numbers provided by governments and trade associations with a grain of salt, but it is evident that jobs are being created there and many are coming at the expense of California.
So what is the opportunity cost associated with the Tesla deal?
Sales and property tax relief are by far the largest components of the $1.25 billion incentive package.
Undoubtedly, other firms will be interested in relocating an existing line of business or establishing a whole new operation at TRIC or other locations in Nevada, but what are the chances of one moving in with the potential of creating over 6,000 jobs and several billion dollars worth of improvements sometime in, say, the next ten years?
Pretty slim for any state, I’d guess.
So the potential next best alternative would be relatively low compared to Tesla as far as generating new property and sales tax revenues. Therefore, Nevada is not sacrificing as much revenue as the tax abatement offered Tesla suggests. Let’s say the combined taxes of other possible ventures could potentially reach $500 million, that might amount to a more reasonable estimate of what the state is sacrificing.
Allow me to digress – Sierra Nevada Corporation, which is headquartered in Sparks, is one of three finalists for the space shuttle’s replacement vehicle. However, that contract is not subject to incentive packages. It would be another feather in Nevada’s cap, though, if SNC were selected by NASA.
On the credit side of the ledger, not all the benefits will accrue at once. The 6,000 plus new jobs will acrete over a number of years, but construction jobs and materials purchases would ratchet up quickly, then decrease as the time draws closer to the commencement of operations. So there should be a stream of new employment and investment at a decreasing rate for several years, followed by a period of robust growth as production steps up.
Besides the increased spending activity from construction activities and employment, there will certainly be a boost to the real estate market in the region. I would expect most of the initial housing needs could be absorbed by existing stock between Carson City and Reno/Sparks. This will increase property values and, obviously, bump up property tax collections.
Once Tesla becomes entrenched and production approaches a sustainable level, new housing tracts will be constructed in Washoe and Storey Counties. Here again, how many will depend on the actual direct or ancillary jobs created.
Overall, there is adequate infrastructure in the region to support Tesla. Reno-Tahoe International Airport and the freeways have the capacity to absorb growth. No need for the state to spend any great sums for upgrades.
I have only provided a rough sketch of the impact. It is difficult to envision the ripple effect.
Only time will tell if the pros outweigh the cons, but the prospects are better than fair in the short run and even better over the lifespan of the product – the electric car will play an increasingly important role in our society. Musk might very well be in the position Henry Ford was in when the Model T rolled out in 1908.
And Nevada might be in on the ground floor.
But the ground floor is pretty large; there is room for more players.
Will California reconsider its comparatively unfriendly business climate, or will it risk losing future opportunities to other states?