Nevada's gamble on cronyism is NOT 'economic development'

There’s a reason government shouldn’t be in the business of picking winners and losers.

It isn’t very good at it.

In 2014 Nevada offered Tesla Motors, Inc. nearly $1.3 billion in tax benefits, over the course of 20 years, to get the company to build a new “Gigafactory” near Reno. Tesla had been touting the economic boom it would bring the area — complete with thousands of jobs, billions in capital investment and lots of related economic activity.

So, as 2016 gets underway, how’s Tesla keeping up its end of the deal?

Not well.

When legislators approved the massive tax incentives, they justified them by pointing at a Tesla projection of 700 permanent jobs to be created by 2015’s end.

By that date, however, according to the most recent audit released from the Governor’s Office of Economic Development, only 272 fulltime employees had been hired.

Steve Hill, executive director of the governor’s office of economic development, told The Verge the shortfall is nothing to worry about, because the projections given to lawmakers for evaluating the deal were off “by months.” Tesla’s official application, said Hill, only projected 300 fulltime jobs by the end of 2015.

According to The Verge, Hill says his office “probably could have” informed the legislature about the miscalculation before the Tesla deal was approved in September of 2014, but decided that it ultimately wouldn’t matter, because Tesla “should” still hit it’s 10 and 20 year targets.

So really, all is well. Right?

Not exactly.

The Gigafactory is projected to be built in multiple phases. By the end of 2015, Phases 1 and 2 were to be completed — and Phase 3 was to be underway.

It is now the end of February 2016, however, and only one phase of construction has been completed. It is this slow-moving construction, more than any alleged miscalculation, that’s behind the failure to meet deadlines.

According to Seeking Alpha, the total capital expended by both Tesla and its gigafactory partner Panasonic last year was roughly $400 million. That’s $600 million short of the sum Tesla pledged as the first year’s capital investment, back when lawmakers were approving Tesla’s tax incentives.

Furthermore, the company had promised that more than a dozen sub-suppliers would be brought into the deal. To date, with the exception of Panasonic, not another company has joined the massive factory.

Despite Tesla’s clear failures to fulfill the grand promises made to lawmakers in 2014 — 700 jobs created, $1 billion in capital investment, cooperation with roughly a dozen companies and at least three phases of construction completed — state officials don’t seem worried at all.

Officials from both Tesla and Nevada point out that the tax incentives are “tied to performance,” with Tesla CEO Elon Musk stating unequivocally “there is no way for Nevada to lose.”

But is that anything more than nice rhetoric from a crony billionaire interested in preserving his decade of tax-free occupancy in the Silver State?

According to the legal agreement signed by the State of Nevada, Tesla can only default in one of three ways:

Tesla and its partners fail to invest $3.5 billion in the factory by June of 2024,
Fewer than 50 percent of employees are Nevada residents or
The company factory fails to engage in “continuous operations.”

Then, if 2024 comes around and Tesla has failed to meet its obligations, Nevada can try to “claw back” the incentives it gave the automaker — assuming the company still exists.

Economists of all political stripes recognize this may be easier said than done.

Throughout that decade of operations, Tesla will have already enjoyed broad tax abatements and credits, not to mention ancillary benefits such as discounted electric rates. Additional state spending tied to infrastructure and tax-revenue shortfalls will be virtually impossible to recoup.

With so much at stake, it’s worrisome to see how willing Nevada officials are to make excuses for Tesla’s underperformance. However, it’s not surprising. Few politicians fail to realize that keeping public hope alive is politically easier than admitting your crony-corporatist deal was nothing but theater.

Tesla officials still insist they can pull together a successful coalition for the Gigafactory, reverse the company’s profitless status and significantly contribute to Nevada’s economy by completing the project within the 10-year timeframe.

But even Hill recognizes that nothing is guaranteed.

“We don't pretend to be able to predict how these companies will do moving forward,” he said.

Gambling billions of dollars on such an uncertainty isn’t the job of government. It’s a job for private investors, venture capitalists and private stakeholders who use their own money. Contrary to what Elon Musk tells politicians, taxpayers are at risk when government starts playing favorites.

The Silver State is risking $1.3 billion on Tesla’s ability to create roughly 6,500 jobs in the next decade — which is a mere fraction of the jobs Nevada’s small businesses already create annually. Clearly, Elon Musk’s Tesla Motors isn’t the only company that can employ Nevadans.

It’s just the only one getting the largest “incentive package” in state history.

That’s not economic development. That’s favoritism, and political theater.

Michael Schaus is communications director of the Nevada Policy Research Institute, a nonpartisan, free-market think tank. For more visit http://npri.org.