BUSINESS
09/05/2014 02:35 pm ET Updated Sep 05, 2014

Nevada Taxpayers Lose With Tesla Deal, Even If Factory Succeeds

Bloomberg via Getty Images

Gamblers who play a hand of poker in Las Vegas may go home broke, but the house always wins. That's because casinos collect a percentage of every pot, known as the rake, in exchange for hosting the game.

In wooing Tesla Motors, Nevada offered the electric carmaker and its founder, Elon Musk, a deal that would never fly at the Bellagio. Pending legislative approval, Tesla will build a giant battery factory near Reno, but it won't pay the equivalent of the rake -- state or local taxes -- for a decade, officials said Thursday.

Nevada officials are lauding the deal as a huge win for the state, touting the creation of 6,500 well-paying jobs that the factory is expected to generate, along with an another 22,000 indirect jobs. But the enormous cost of the deal, in terms of lost revenue to state coffers, is staggering: an estimated $1.3 billion. Paradoxically, it is a deal that could prove even more painful for taxpayers if the factory is a success.

"If the Reno area grows because of the deal, it will need more teachers, more trash collectors, more roads," said Greg LeRoy, the executive director of Good Jobs First, an employment policy group. "Tesla won't pay for that growth, which means either higher taxes or worse services."

Nevada's proposed tax giveaway to Tesla is only the latest example of how states are competing to persuade corporate giants to locate facilities inside their borders. Last year, Washington's state legislature voted to grant Boeing $8.7 billion in breaks to persuade it to locate production of a new jetliner fleet in the state.

Boeing's deal was the biggest tax incentive package ever. According to Good Jobs First, Tesla's would be the 10th-largest, if it is approved.

These deals have proliferated, despite growing evidence that the jobs they create are often not worth what states give away in uncollected tax revenue.

In a study last year, Good Jobs First analyzed 240 so-called megadeals, in which a state awarded a subsidy worth $75 million or more. For these projects, the average cost per job created to the state was $456,000, the study found.

In advance of the Nevada announcement, Musk sparked a bidding war by reportedly asking states to offer at least $500 million in tax breaks in order to secure the $5 billion factory, which will manufacture lithium-ion battery cells that the company hopes will fuel the next generation of electric vehicles.

California, Arizona, New Mexico and Texas were also contenders.

Though the full picture of why Nevada prevailed in the beauty pageant is not clear, the huge tax break package certainly played a role. In addition to essentially allowing Tesla to operate tax-free for 10 years, the state will grant a sales tax abatement for even longer -- until 2034, according to a summary released by the governor's office. Nevada will also spend $43 million to obtain a right-of-way for a road to make accessing the "Gigafactory" easier.

Tesla and the Nevada's governor's office did not respond to requests for comment, but the deal does include a measure likely intended to thwart criticism: Tesla agreed to contribute $35 million to Nevada schools over five years beginning in 2018.

Speaking in Nevada on Thursday, Musk said that the deal offered by Nevada "was not the biggest incentive package" and that "it wasn't just about the incentives."

"What the people of Nevada have created is a state where you can be very agile, where you can move quickly and get things done," he said. "It’s a real 'get things done' state."

Nevada won't collect taxes from Tesla until 2024. After that, the state expects to collect about $400 million in tax revenue over 10 years.

CORRECTION: A previous version of this article said Nevada won't collect taxes from Tesla until 2014. It is 2024.

Email: ben.hallman@huffingtonpost.com. And follow Ben Hallman on Twitter: @ben_hallman.

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