Dan Morain

Tesla is playing the tax subsidy game, and winning

Tesla, the Palo Alto-based electric car maker, is requesting a sales tax exemption in California worth $47 million on the purchase of equipment.
Tesla, the Palo Alto-based electric car maker, is requesting a sales tax exemption in California worth $47 million on the purchase of equipment. The Associated Press

In the never-ending competition among states for jobs, Arizona stung California by enticing Lucid, a Menlo Park-based electric car company, to build its factory in Case Grande.

But as Deana Carrillo has concluded, “Every company has its black box.” They all have internal reasons for coming, staying or departing for greener tax-subsidized pastures. Carrillo is executive director of the entity within Treasurer John Chiang’s office that goes by the unwieldy name of the California Alternative Energy and Advanced Transportation Financing Authority.

The authority had offered a $44 million sales tax break to Lucid. However, the Arizona Commerce Authority offered $46.5 million, The Arizona Republic reported. Unlike California, Arizona is a low-cost, low-tax state. Perhaps most significantly, Lucid will be manufacturing many of its parts just across the border in Mexico where labor is cheap.

Lucid’s decision to pass on California’s offer will be Tesla’s gain. On Tuesday, the Palo Alto-based electric car maker will appear before the authority seeking a sales tax exemption worth $47 million, much of which had been earmarked for Lucid, on the purchase of equipment needed to build Tesla’s new Model 3 electric car.

Tesla has been here before, having received four previous tax exemptions since 2010 worth $29 million, $24 million, $35 million and $39 million. The company clearly relies on such breaks. But there are benefits, as became evident when I toured the company’s Fremont factory a few weeks back.

Much of the work is done by robots. Indeed, one of the most impressive machines is one that Tesla CEO Elon Musk bought from a bankrupt auto parts factory in Michigan in 2008 for $6 million. The massive machine is mesmerizing, stamping out new panels at a rate of 5,000 a day. The cost new would have been $50 million, give or take.

But robots can do only so much. Roughly 6,000 people work in the Fremont factory. Some are engineers. But many of them are craftsmen and -women who make sure the sleek Teslas fit together just so.

And remember back to 2010, when California’s unemployment rate was 12.5 percent, and Toyota sent 20,000 wage earners in Fremont and environs to the unemployment lines by shutting what was the last car factory in California, the old NUMMI plant. So it was especially good news in May 2010 when then-Gov. Arnold Schwarzenegger announced that the upstart Tesla would occupy the factory, a beginnings of a new green manufacturing base.

Tesla estimates that when it fully ramps up to build the Model 3, it will need an additional 3,249 employees. It’d be politically expedient to attribute all those jobs to the tax break. It’d also be misleading. By the authority’s calculation, only 79 of the jobs are directly attributable to the tax break, and three of the 55 construction jobs are due to the exemption.

But there are other benefits. The state figures that because of the sales tax break, the company and its employees will pay other taxes. And this being California, Carrillo’s staff estimates the environmental benefits of placing more electric vehicles on the road at $16.4 million, plus another $1.55 million for what it calls “out-of-state nongreenhouse gas pollution benefits.”

The Legislative Analyst’s Office is generally skeptical of tax incentives, questioning whether they provide windfalls to companies that would have done business here anyway.

With his itchy Twitter finger and craving for photo-ops, President-elect Donald Trump brought into focus the tax subsidy game that all states play when he flew to Indiana to persuade Carrier Corp. to keep its furnace factory open a little longer.

Carrier Corp. obliged, keeping 780 jobs in Indiana rather than moving them to Mexico, although Trump inflated the number to 1,100. No doubt, $7 million in tax subsidies offered by the state helped. But once Carrier attracted the president-elect’s attention, there was good reason to stay: fear that Trump might take Carrier’s departure out on its parent company, United Technologies, a defense contractor.

“I was born at night but not last night. I also know that about 10 percent of our revenue comes from the U.S. government,” United Technologies CEO Greg Hayes said on CNBC’s “Mad Money with Jim Cramer” last week, though he also said there was no “quid pro quo.”

The nonprofit organization Good Jobs First, a critic of subsidies, issued a statement saying: “By swapping taxpayer dollars for political favors, this Carrier deal is very much business as usual.”

The organization lists three car makers among the top 10 recipients of subsidies: General Motors, Ford and Tesla. Tesla landed on the list thanks to a $1.2 billion package of incentives and breaks granted by Nevada when the company agreed to open its battery factory outside Sparks in 2014.

Tesla is easy to deride. I’ve done it. It wouldn’t exist without subsidies. And yet its founder, Elon Musk, is building a company no other auto maker has matched. Once the robots are installed and the assembly line starts up in late 2017 in Fremont, Tesla intends to deliver on average 226,563 Model 3 electric vehicles, with 3,249 additional workers.

Those are numbers that ought to attract notice of any businessman, including the one who soon will occupy the White House.

  Comments