The state of Nevada, of all places, should understand the gambler's adage about how if you can't pick out the sucker at your card table, it's you.
Despite that, the state Legislature has approved a massive giveaway to Elon Musk's Tesla Motors to build a lithium-ion battery factory in the desert north of Reno.
Tesla will get more than $1.25 billion in tax breaks and other incentives. That includes up to 20 years of exemptions from sales, payroll and property taxes; $125 million in tax credits Tesla can sell to other companies; and $8 million in electricity discounts. The sum doesn't include millions of dollars in infrastructure improvements — schools, highways and so on — that Nevada taxpayers will be shouldering.
How eager was Nevada to land this project? The offer is more than twice what Musk was seeking from the five states, including California, competing for the factory. Musk told analysts on July 31 that he expected the winning state to provide "maybe 10%" of its estimated cost of about $5 billion. And there are signs that the die was cast even before Nevada Gov. Brian Sandoval started shoveling out the bucks. Ground was broken at the factory site early this year, long before the tax abatements were offered, and the site was attractive for other reasons — it's close to a lithium supply and to Tesla's California auto plant and corporate headquarters.
Sandoval brags that the project will produce $100 billion in economic stimulus over the next 20 years, including 6,500 permanent jobs at an average wage of $25 an hour, for an 80-to-1 return. "Nobody really believes it, outside the governor's office," says Bob Fulkerson, state director of the Progressive Leadership Alliance of Nevada, a watchdog group questioning the deal. The deal doesn't require Tesla itself to create any specific number of jobs directly, according to an analysis by Good Jobs First, an economic development think tank. Skepticism about the Tesla handout spans the ideological divide; conservative groups have attacked it as corporate welfare too.
The incentive flow around the Tesla plant won't be all one way. Musk has promised to fork over $7.5 million a year for five years to the state's education system.
"We call that chicken scratch," says Fulkerson. "There will be thousands of children of new workers coming in. Teachers, roads, schools, transit, infrastructure — all that will be paid for by working stiffs."
"No matter how you slice it," asserts Richard Florida, an expert on economic development incentives at the University of Toronto, "the deal makes utterly no sense. It is just one more example of a government giveaway for a factory that would have been built anyway."
In other words: Nevada, the sucker is you.
But let's be fair. Nevada isn't the only sucker. Industrial development incentives have become a nationwide rip-off. The Tesla offer is the 12th most-expensive such state subsidy in history, according to Good Jobs First, and about 14 times larger than any ever made by Nevada. But governors desperate to show they're creating jobs have become addicted to these deals, and industrial companies have fed the addiction by demanding them as a condition of almost any construction, relocation or expansion.
Some states are willing to fork over millions even without a promise of job growth. Wisconsin's Scott Walker, for instance, recently approved a $6-million grant for a furniture manufacturer that reserved the right to cut its workforce in half.
Since the recession, megadeals — those worth $75 million or more — have surged, doubling in number and rising in value to total about $5 billion per year, says Greg LeRoy, executive director of Good Jobs First. Their cost per job has reached a stratospheric $456,000. That's partially because manufacturing, the traditional target of tax incentives, has become less labor intensive, and states have started to offer lavish perks for corporate headquarters and service-industry relocations.
Every big deal begets demand for more. "Once you open the door to massive taxpayer-funded packages," says Leigh McIlvaine of Good Jobs First, "it's very hard to shut the door." Indeed, Nevada's Tesla announcement was followed within days by a demand from Switch Communications, a data center company, for incentives to build $1 billion in facilities serving Las Vegas and Reno.
The sad irony is that there's no evidence that these handouts have any positive impact on economic growth. Florida says his research, in line with other studies, has found "no statistically significant association between economic development incentives per capita and average wages or incomes; none between incentives and college grads or knowledge workers; and none between incentives and the state unemployment rate."
Typically, he has written, companies "select locations based on factors such as workforce, proximity to markets and access to qualified suppliers, and then pit jurisdictions against one another to extract tax benefits and other incentives."
State officials take the virtues of these deals on faith, but almost never look into whether they make a difference, a report by the Pew Charitable Trusts found in 2012.
Perhaps the best illustration is the film production incentive, which states use to attract Hollywood movie shoots even though objective studies universally show that they don't pay for themselves. California recently increased its annual program from $100 million to $330 million even though its legislative analyst's office found that the program returned 65 cents in revenue for every dollar spent. Maybe the state expects to make it up in volume.
On a national and regional level, state industrial incentives are merely weapons for interstate poaching that end up impoverishing taxpayers all over. Here and there, politicians are showing some gumption.
Missouri Gov. Jay Nixon signed a bill this summer barring subsidies to businesses relocating within the Kansas City area from Kansas to Missouri. It goes into effect only if Kansas enacts a similar bill. But that doesn't seem to be happening, so the border war that benefits only grasping businesses will continue. And California Gov. Jerry Brown set limits on how much he was willing to ask taxpayers to contribute to Tesla for the factory: "Tesla wanted a massive cash upfront payment that I don't think would be fair to the taxpayers," he said during a Sept. 4 debate.
Industry extracts lavish subsidies not merely by playing states and communities off one another, but by monopolizing the information about them. Tesla imposed non-disclosure agreements on the five states it lured into a bidding war on its battery plant (Nevada, California, Arizona, New Mexico and Texas). Secrecy achieves nothing except to keep taxpayers out of the loop.
And politicians will continue to offer lavish payoffs for dubious returns. "How many other corporations will now come in to see how low Nevada will go?" asks Fulkerson. "It seems we're willing to go pretty low."