Nevada Tesla Gigafactory Tax Package: Are States Getting Too Generous In Their Efforts To Attract Big Business?

Story was updated Wednesday to include a comment from a Nissan spokesperson.

Nevada’s planned $1.25 billion package for electric carmaker Tesla Motors Inc. (NASDAQ:TSLA) to build a $5 billion lithium-ion battery cell factory east of Reno in the northern part of the state isn’t the first large corporate incentive package used to lure big business, and considering the trend since the Great Recession, it won’t be the last. As questions linger about how state officials came to their rosy projections of the benefits to the local and state economies, past billion-dollar-plus megadeals in other states offer a glimpse into the possible results of Nevada’s generous offer to the Palo Alto, California, maker of the Model S luxury electric car.

Just days after Nevada briefly summarized the details of its proposed incentive package (pdf), Moody’s, the bond credit rating agency, said Monday the regional economic benefits of building the 5-million-square-foot factory would be so offset by what the state gave up that the region is “unlikely to see any direct fiscal benefits from the factory for at least the next decade.” The 20 years of sales tax exemption and three transferrable tax credits “will reduce the positive effect on state finances,” the note added.

Critics of these megadeals have plenty of corporate incentive packages to study for their effects. In the late 1990s, Nissan Motor Co. Ltd. (TYO:7201) was shopping for a U.S. location to build a $930 million auto assembly plant. In 2000, Japan’s third-largest automaker picked Madison County, Mississippi, under a $295 million state subsidy package funded by borrowing. In ensuing years the Legislature approved expanding the incentive deal until it ballooned to $1.3 billion.

Meanwhile, Madison County has been struggling to pay for the growing demand for services brought by the Nissan facility. The county is struggling to pay for education, roads and a wastewater treatment plant, according to a report last year (pdf) from the union-supported corporate accountability watchdog Good Jobs First. Nissan, the group says, is not paying what it should, which requires local and state government to either cut services or increase debt to provide what the community around the factory needs to support it.

Nissan has also faced criticism for its use of temporary labor to reach the number of jobs the state expects it to maintain at a factory that produces eight of the company’s vehicles for the U.S. market, including its bestselling Sentra and Altima sedans.

“Many of those jobs are regular Nissan payroll positions,” the report said. “The figures from the state audit show that around 20 percent are temps.” Good Jobs First estimates that the Nissan deal cost Mississippi taxpayers about $290,000 for each job it created, including about almost 1,000 temp positions that pay $12 an hour.

The Mississippi Development Authority did not reply to requests for comment to these criticisms, but as its website makes clear, the agency hails the Nissan incentive package as a success story, focusing largely on the jobs the project created.

"Nissan has more than met the requirements for job creation called for in the state’s incentive package," Justin Saia, spokesperons for Nissan North America, Inc., pointing to a Mississippi State University study on the effects of the Nissan plant. "Our more than 6,000 team members hold some of the most secure jobs in Mississippi and enjoy competitive pay well above the state average for manufacturing jobs and strong benefits."

Nevada’s proposed incentive plan for Tesla promises 6,500 direct hires, but Martin Kenney, a professor at the University of California, Davis, who studies high-tech factories, thinks a facility like that would require only about 3,000 direct full-time employees.

In some cases, these megadeals seem too generous for the economic benefits they provide.

Houston-based Cheniere Energy, Inc. (NYSEMKT:LNG), for example, got a $1.7 billion incentive deal through the Louisiana Economic Development Authority to build a $6 billion natural gas liquefaction plant in southeastern Louisiana that the company says will create or retain 225 jobs, support 589 regional jobs, and utilize 3,000 temporary construction jobs. The plant is expected to be operational next year.

Critics point to the high cost of tax abatement and the relatively low number of jobs the incentive ostensibly creates by luring an 18-year-old company that has yet to turn a profit but whose CEO, Charif Souki, is one of the highest-paid executives in the country. Cheniere employees were paid $1.7 billion in stock bonuses last year. In July the company was forced by shareholder outrage to withdraw a proposal to pay out $2 billion in stock bonuses this year. Meanwhile, as the executives reap huge reward for a company that has never turned a profit, Louisiana has sacrificed property tax and other revenue to attract the plant, which aims to export natural gas globally.

LED’s website toutes the Cheniere incentive deal as a success story, offering the company a decade of property tax exemption on new investment and payroll deduction rebates. “With the support of LED and the congressional delegation in place, Cheniere was ready to embark on this new venture and capitalize on the new opportunity in the market,” the LED says, pointing to the future prospects of exporting natural gas globally.

While public-private deals are common ways for local government to attract big business, create jobs and promote growth, in the wake of the Great Recession states have pushed the total value of large corporate incentive packages to historic highs, leading advocacy groups to warn that governments are spending too much in their efforts to attract big business.

“Overspending on Tesla — or any other company — could be a net-loss game in which fewer public resources are then available for investments in areas that benefit all employers, such as education and training, efficient infrastructure, and public safety,” said a recent letter authored by a group of public budget advocates from the five states that had been vying for the Tesla factory.