Dan Morain

Dan Morain: Luring Tesla with $1.25 billion in tax breaks

Not long after a grinning Tesla founder Elon Musk joined Nevada Gov. Brian Sandoval outside the governor’s office in Carson City to announce Musk would build his fancy battery factory in Storey County, Nev., critics attacked Gov. Jerry Brown and California for failing to make Tesla happy enough.

“I don’t think Gov. Brown did nearly enough on Tesla or any number of businesses,” Neel Kashkari, the Republican candidate for governor, said at the debate with Brown at the Senator Hotel on Thursday.

“Today, California has lost another opportunity to create more jobs and improve our economic environment,” Tim Draper, the Silicon Valley entrepreneur pushing the initiative to chop California into six states, said in a news release. “How much longer do we tolerate a monolithic, job-losing California?”

Tesla’s decision to build its battery factory on the other side of the Sierra does not mean it is deserting California. Its headquarters remains in Palo Alto, and it builds Teslas in Fremont, thanks in some small part to California’s generous subsidies, rebates and green sensibilities.

Not that these grapes are too terribly sour, but the “gigafactory” episode in which Musk played five states against each other raises questions about how far lawmakers should go to hang on to businesses and attract new ones, and what pledges should they expect in return.

Sandoval is answering that question for his state by providing Musk with a breathtaking package of tax breaks and incentives valued at $1.25 billion during the next 20 year years, huge in a state with a budget of slightly more than $20 billion. Tesla will operate in Nevada tax-free for 10 years, the Reno Gazette-Journal reported.

This is from a state whose constitution includes a 19th century anti-graft clause saying: “The State shall not donate or loan money, or its credit, subscribe to or be, interested in the Stock of any company …” No matter. The Silver State’s legislature surely will approve the deal when it convenes Wednesday.

“The reality is that the powers that be support it,” Nevada Sen. Tick Segerblom, a Las Vegas Democrat, told me. He’ll vote for it, but with a protest.

Nevada will approve a sweet deal for Tesla in one day, Segerblom plans to say, but can never seem to see its way clear to raise taxes to fund schools or mental health care.

Nevada is simply following a trend. The Washington, D.C.-based nonprofit organization, Good Jobs First, tracks such giveaways. Tennessee gave Volkswagen $554 million in incentives. Mississippi gave a $1.3 billion package to Nissan in 2000. Oregon gave $2 billion in incentives to Intel.

“Unfortunately, it is common to see subsidies of this size,” Leigh McIlvaine, a research analyst for Good Jobs First. “There seems to be a perception on behalf of companies that they should be paid by the public sector to finance that growth. It is looking like an entitlement.”

California lawmakers are not shy about opening the treasury to help companies. They approved $420 million in tax breaks this summer for Northrop Grumman and Lockheed Martin, on condition that they build new bombers in California.

At least California ties the tax breaks to jobs. Northrop, for example, would need to add 1,500 jobs to get the full subsidy.

Under a new Brown administration program, the state gave a $6 million tax credit to Samsung on the condition that it add 400 employees. Macy’s received a $1 million credit to hire 193 people. Amazon received $1.57 million, so long as it adds 1,550 jobs.

California Assembly Appropriations Committee Chairman Mike Gatto, D-Los Angeles, voted against the aerospace deals and said he would have voted against the Tesla package.

“I don’t believe in chasing individual companies. That looks too much like crony capitalism and extortion,” he said.

But Gatto carried the legislation that more than tripled the Hollywood tax credit to $330 million. The measure gives subsidies to producers who film television episodes and movies in California. Organized labor backed it, contending California loses union jobs to New York, Georgia, Canada and other locations that offer fat incentives.

Early in the negotiations over the Hollywood tax break, Gatto said he was asked to insert language intended to persuade the “Tonight Show” from leaving beautiful downtown Burbank for the bright lights of New York.

He resisted, noting that such an amendment would have aided not one company, NBC-Universal, which is owned by Comcast, but rather a specific television show. That was fine by New York and then-New York Mayor Michael Bloomberg, which provided what New Yorkers called the Jimmy Fallon tax break. It’s worth an estimated $20 million a year.

“If you’re doing something for just one company, that is an entirely different thing than if you’re doing something for an industry,” Gatto said.

Gatto, rightly troubled by the need to give subsidies to compete with other states, inserted a clause in the legislation urging the International Trade Commission to sanction countries that grant unfair breaks for productions and requests “the United States Congress to take other appropriate actions.” It’s wishful thinking. But a guy can hope.

“It is hard to sit back and watch as other states lure away our jobs. Congress has to take action,” Gatto said, adding that there must be someone, anyone, in Congress willing to take up this cause. Then again, maybe not. Each tax break has supporters and lobbyists.

California has done plenty for Tesla over the years. The company sells 40 percent of its cars to Californians, and taxpayers give Tesla buyers $2,500 rebates for the asking, $24 million so far and counting.

The California Energy Commission has awarded Tesla $10 million to upgrade its Fremont factory where Teslas are built, and the California Public Utilities Commission has given another Musk company, SolarCity, $125 million from one program and promises another $64 million from another.

Perhaps Californians were being greedy by trying to lure the battery factory, too. Perhaps Musk might ask himself how much is enough, though I don’t think he will.