David slew not one but two Goliaths to win the battle for the Tesla Motors prize. Who would have thought Nevada could conquer the giants, Texas and California, to land a massive high tech plant to manufacture lithium-ion batteries for the electric vehicle market?
Elon Musk, Tesla’s chief executive officer, said of Nevada, “It’s a real get-things-done state. That was a very important part of the decision.” That adds up to a package big business likes: a bureaucracy that can move, as little regulation as possible, no income tax and, in this case, forgiveness of almost all other taxes for the next 10 and 20 years worth up to an estimated $1.3 billion.
For decades state and local economic development programs have offered ever-larger incentives for companies to locate in their jurisdictions. In this case, Nevada’s $1.3 billion is almost three times the amount Tesla said it had to have to build the plant. That is far more than government-business partnership. Shouldn’t private sector investment be based on a viable business model, not dependence on government subsidy?
But that’s not reality, and Gov. Brian Sandoval and his team are to be commended for their successful pursuit of this venture. What remains to be seen is how good they are at predicting the future.
Importantly, almost that entire amount is in the form of forgiven tax levies, not cash from the state treasury. It’s tax that will not be collected, but it’s not a sunk cost that will be at risk.
Mr. Sandoval says the state will earn 80 times its “investment.” That assumes an estimated 22,500 direct and indirect jobs will be created statewide. If all goes well and the economic assumptions are valid, the return will be $100 billion over the next 20 years. In addition, Tesla’s decision will influence other companies to consider Nevada as a home.
That sounds like it’s one of those “too good to be true” stories. So what are the hurdles and the risks?
The Nevada Legislature must approve the tax concessions and other legal requirements. The special session, convened Thursday, should not become a north-south bargaining event. The manufacturing facility can only be located in one place, and Tesla has made that decision. Legislators should work together in considering the best course of action for the entire state.
Assuming the legislature approves the agreement between the governor and Tesla, the constitutionality of the tax abatements may be challenged. Public school funding also could be raised. If these legal challenges materialize, Tesla may choose an alternative to the Nevada site.
Whether Nevada has, or will have, a skilled workforce to bring home the full benefits of the battery plant is problematic. And Tesla undoubtedly will bring in many of the high-skilled workers.
The principal risk for Nevada is if Tesla is unsuccessful in developing the electric vehicle market and the projected demand for its lithium-ion batteries is not met, or at worst abandons the venture after 10 years or so. The state’s anticipated $100 billion return would not be fully realized.
Mr. Musk, on the other hand, is an exciting entrepreneur who’s not accustomed to failure. At 43 years of age, he’s the founder or co-founder of PayPal, Space Exploration Technologies (or SpaceX) and SolarCity, in addition to Tesla. So far, he has done what he set out to do.
Bo Statham is a retired lawyer, congressional aide and businessman. He lives in Gardnerville and can be reached at bostatham@me.com.
