Learning the Right Lessons From the Fight over Tesla’s “Gigafactory”

September 4, 2014

The announcement that Tesla has selected the state of Nevada over other western states for its new “Gigafactory” will undoubtedly reignite the debate about whether California is unfriendly to businesses. Critics will likely point to policymakers’ inability to secure a California location for the new manufacturing plant as another indicator that tax and regulatory policies drive businesses and jobs out of the state. However, it’s worth taking a step back to look at what lessons can really be learned from this experience, and what policymakers should consider moving forward.

First, site-location decisions are about more than just taxes or regulations. Where businesses locate depends on a multitude of factors, including the availability of skilled workers, shipping and transportation costs, and the quality of public services. This is further borne out by the fact that one region in Texas is reported to have offered Tesla almost $800 million in subsidies and tax breaks and still did not convince Tesla to locate there — and this reported offer far exceeded the $500 million that Tesla requested. While we will learn more specifics in the coming days about the reasons why Tesla chose Nevada, it is unclear that Nevada has the capacity to offer a similar upfront deal, considering that this would represent a substantial share of the state’s total $6.4 billion budget.

Second, California will still see some economic benefit from a Tesla factory located in Nevada. In our open letter to policymakers, signed with stakeholders from other western states, we emphasized that states have an interest in cooperating given that the automotive industry spans across states and cities. As the Sacramento Business Journal reports, a Tesla factory in Reno could help the Sacramento region because warehousing and supplier companies could locate along the Interstate 80 corridor. This speaks to the need for states to be more transparent and cooperative in their approaches to economic development, since Nevada taxpayers may end up paying for a decision that could benefit California anyway.

Finally, it’s worth pointing out that California’s job growth is outpacing the national average, and this includes jobs from companies expanding in or relocating to California. While we have written extensively about how California’s economy remains difficult for many of California’s workers, the state’s high unemployment rate is more about the historic losses incurred during the recession rather than California’s economic growth being comparatively weak. Companies like Mercedes have expanded operations in California, and the state is adding an average number of new jobs each month that is four times what the Tesla plant would have directly provided in total, if the new factory met expectations.

With these things in mind, what should policymakers do? It’s understandably frustrating to engage in a public fight over securing jobs that would benefit a community, only to “lose” that fight. However, policymakers should not learn the wrong lessons from this experience: that California needs lower taxes or needs to offer even costlier deals to individual companies. Research consistently shows that tax cuts at the expense of public investment are not the best means by which to spur job growth. Enhancing public services and investing in a skilled and educated workforce remain the preferred long-term strategies. For instance, with the amount of public subsidies California was considering for Tesla — estimated to be around $500 million – the state could have tripled this year’s increase in General Fund support for the California State University system. It’s this type of investment — and similar ones that create the foundation for future growth — that will promote broad-based economic prosperity in the future.

— Luke Reidenbach

 

 


How Should California Spend Nearly $2 Billion?

August 25, 2014

The state of California is poised to direct an estimated $1.8 billion over the next four years to new and expanded tax breaks for specific industries and businesses based on actions recently taken by state lawmakers, or actions pending and likely to be approved by state lawmakers in the coming days. These include:

  • Nearly $420 million in tax breaks for aerospace companies — specifically targeted to Lockheed Martin and Northrop Grumman — that are competing to build the next generation of stealth bombers, an incentive package approved by the state Legislature and signed into law by Governor Brown earlier this month;
  • Expansion of a state tax credit for film and TV production — from $100 million to $400 million annually — that is currently working its way through the Legislature; and
  • Efforts to lure Tesla Motors to build a new “gigafactory” in California, which are likely to include tax credits to help meet Tesla’s demands that state and local governments help pay for 10 percent (estimated at $500 million) of the cost of construction. The legislation, expected to emerge in the coming days, is also likely to exempt Tesla from some environmental (CEQA) requirements.

All told, these actions stand to commit the state to nearly $2 billion over the next four years in targeted tax breaks for business and industry.

We think that California would benefit more from investing this money in vital public systems and services. While we don’t question that state leaders should place a high priority on boosting employment and expanding opportunity, we do question whether these new and expanded credits and incentives are the best strategy for meeting those objectives. Consider just a few alternatives for the state’s $2 billion:

  • Phasing in a refundable state Earned Income Tax Credit (EITC) to further leverage the federal EITC, which would boost the incomes of working families most in need of assistance, raising thousands Californians out of poverty each year;
  • Continuing to restore the 110,000 subsidized child care and preschool slots (nearly one-quarter of the total) cut since 2007-08 that help working parents find and keep jobs and build a foundation for children’s success; and
  • Making a down payment on reinvesting in the economic engines that are the state’s higher education systems, for which state General Fund spending per student has declined significantly over the last three decades.

All of these alternatives, among others, are proven winners at helping working families to prosper, while the evidence on targeted tax breaks for businesses is mixed at best.

As state leaders clamor to give away tax credits to high-profile businesses and projects, we should all be asking the question “How should California spend nearly $2 billion?”

— Chris Hoene