Every week, NPRI President Andy Matthews writes a column for NPRI's week-in-review email. If you are not getting our emails, which contain our latest commentaries and news stories, you can sign up here to receive them.
When I wrote to you last week about the perils that come when government subsidizes private businesses, I didn’t think I’d have the opportunity to broach the subject again so soon.
As you’ve probably heard, Gov. Sandoval announced yesterday that he is calling a special session next week to propose giving Tesla up to $1.3 billion in tax abatements and transferable tax credits in exchange for Tesla building a new battery factory in Northern Nevada. If passed, this would mean that Tesla would pay no sales tax for 20 years and no real or personal property tax or modified business taxes for 10 years and would receive $195 million in transferable tax credits.
Before the announcement I had sent a letter to the Governor and members of the Legislature urging them not to offer Tesla direct subsidies that are prohibited by Article 8, Section 9 of Nevada’s Constitution.
It is good to see that the package the Governor described didn’t include any direct subsidies. I believe that the lack of direct subsidies stemmed directly from NPRI’s lawsuit, filed earlier this year, against the state’s unconstitutional Catalyst Fund. Gov. Sandoval and his team knew that if direct subsidies had been or are proposed, NPRI’s litigation center is always prepared to act to defend Nevada’s Constitution. So the lack of direct subsidies is a victory for all Nevadans, and I believe that you and I helped make this victory possible.
Before digging into the tax package, you and I first need to think about how this is happening. In our system of government, it’s not enough to do the right thing; you must do the right thing in the right way.
Negotiating a $1.3 billion tax giveaway in secret and then expecting legislators to pass legislation approving the deal within one week is simply not the right way to create laws.
Who will be the first lawmaker to quip that we have to pass the Tesla bills to find out what’s in them?
Calling a special legislative session on a few days’ notice for the benefit of one company also fosters a system where the politically powerful are even more advantaged over everyone else.
But what about the staggering $1.3 billion tax package? Is it constitutional, and is it a good deal for Nevadans?
Again, an important caveat: As I’m writing this, our team here has not seen any legislative language, so we’re forced to analyze only summaries of the deal as prepared by the Governor’s staff.
It’s impossible to make a final judgment on this package without seeing the legislative language. Certainly, substantially reducing Nevada’s wasteful transferable film tax credit would be a positive.
There is a legitimate disagreement even among free-market adherents over targeted tax breaks. While all agree that taxes should be low and that government shouldn’t pick the winners and losers, there is some disagreement on whether in the process of lowering taxes, all tax rates must be uniformly lowered or whether on the way to lower taxes it is appropriate to expand tax loopholes incrementally so that at least some folks escape taxation until everyone has a loophole and everyone pays fewer taxes.
Regardless of where you fall on that divide, this Tesla deal will lead to the need for government to either reduce wasteful spending or raise taxes on other businesses or individuals.
I believe taxes should be low — even lower than they are now — but we do need taxes to fund essential government services. Whether a company is planning on hiring 6,500 new employees or 65, companies creating jobs brings more people to Nevada. As Nevada’s population grows, government expenditures also increase. This is why NPRI always references per-pupil or per-capita spending when we compare government spending over time. We expect the amount government spends to increase as the population grows or to decrease if the population shrinks.
So if Tesla hires 6,500 new employees, as it says it will, government expenditures will naturally increase. But if Tesla pays no taxes for 10 years and no sales tax for 20 years, some of the normally available tax revenue won’t be increasing. This means that government will either need to reduce its per-capita spending or look to raise taxes on other businesses and families.
Now, NPRI has done plenty of work on how to reduce government spending while achieving the same or greater results, so that first option is certainly possible and definitely preferable. But if per-capita spending isn’t reduced, higher taxes are the only alternative.
While 6,500 jobs are a lot, it’s important to remember that that would represent just 0.5 percent of the 1.26 million jobs currently in Nevada’s economy. If you’re one the business owners employing some of the other 99.5 percent of Nevadans, how do these tax breaks make you feel?
I hope Tesla succeeds, but I also hope other, less politically connected Nevadans and business owners aren’t left subsidizing Tesla’s success or failure at the expense of their own employees and businesses.
Until next time,
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