Inside Nevada's $1.25 billion Tesla tax deal
The tax incentive package assembled by Gov. Brian Sandoval to woo Tesla's gigafactory is unprecedented in size and scope for the state of Nevada and is one of the largest in the country.
The overall value to Tesla is estimated to be $1.25 billion over 20 years — a figure that is more than double the $500 million package CEO Elon Musk said would be required to draw the company.
If the deal is approved by the Nevada Legislature, Tesla will operate in the state essentially tax free for 10 years.
In exchange, the company must invest a minimum of $3.5 billion in manufacturing equipment and real property in the state—a threshold that is much lower than the $10 billion state officials expect the company to invest in Nevada over the next two decades.
The economic development officials who assembled the tax incentive package argue the massive size of the abatement is justified by the scope of the gigafactory project, which is one of the largest economic development deals in the country.
"What this can do for the region… It will allow every under employed person to reach full employment," said Sandoval's economic development director Steve Hill. "It will lift up everyone in the region. Property values will go up. The prosperity of the region will be materially changed."
Economic development officials anticipate the gigafactory—a three-story behemoth with more than 5 million square feet of manufacturing space—will generate a $100 billion economic impact over 20 years.
"To put that into perspective, that is more than 3 percent of the state's GDP. It is more than 20 percent of the region's economic output," Hill said.
The factory would employ 6,500 people with an average wage about $25 an hour. Indirect jobs created could reach 22,000—a number equivalent to 2 percent of the state's entire work force and 11 percent of the region's workforce.
But the tax breaks the company would receive with the Legislature's blessing are also staggering. The total package is 13 times larger than the state's previous record-breaking $89 million for Apple. It includes:
-$725 million in sales tax abatements over 20 years, which is equal to about 80 percent of the total sales tax revenue state government receives in a year.
-$332 million in real and personal property tax abatements over 10 years—an amount equaling two and a half times the amount of property tax revenue Washoe County receives in a year.
-$195 million in transferable tax credits, which other Nevada companies will be able to buy from Tesla in order to reduce their own tax liabilities to the state.
-$27 million in payroll tax abatements over 10 years.
-$8 million in electricity rate discounts over eight years.
To sweeten the deal, the Nevada Legislature will be asked to pass a law clarifying that Tesla can sell cars directly to customers through a manufacturer's store, rather than requiring an auto dealer franchise agreement.
The state has also agreed to buy the right of way for USA Parkway—the main thoroughfare through the Tahoe Reno Industrial Center where Tesla will locate—for $43 million. That will result in a windfall for park developer Lance Gilman and his partners. The state would also extend USA Parkway to U.S. Highway 50 in Lyon County, an extension long sought by Gilman and other park tenants to ease access to and from the industrial center.
To mitigate concerns that the tax breaks will deplete already limited education funding in Nevada, Tesla has agreed to contribute $7.5 million a year for five years beginning in 2018 to education. Exactly how that money would be used is still being debated.
The $195 million in tax credits, which would be a direct hit to the state's general fund, will be paid for by reducing the recently created film tax credit program from $80 million to $10 million and eliminating a little known tax break—worth $25 million a year—for insurance companies that locate their home offices in Nevada.
The largest piece of the package—a 100 percent sales tax abatement for 20 years—was one of the first components to which Nevada had to agree, Hill said. Five other states charge no sales tax at all and 34 states, including Arizona and Texas, don't charges sales tax on manufacturing equipment.
"Without the sales tax abatement, we would've been immediately out of the conversation," Hill said.
Under the deal, the gigafactory would begin generating tax revenue for state and local governments beginning in 2024, when the property tax abatement expire. Tax revenue from the plant is estimated to be $400 million over 10 years—roughly 50 percent of which would go to Storey County, 25 percent to the state and 25 percent to Storey County School District.
To put that in perspective, the Storey County School District now serves 400 students on local revenue of about $4.9 million a year. That figure would triple in 2024.
Economic Development officials are estimating indirect tax revenue for the state could reach as high as $1.9 billion over 20 years.
If approved by the Legislature, the tax incentive package would tie for the 10th largest in the country, according to data compiled by Good Jobs First, a labor-backed non-profit that analyzes tax incentives.
A look at the tax incentives proposed for the Tesla gigafactory:
- A 100 percent sales tax abatement for 20 years: $725 million
-A 100 percent real and personal property tax abatement for 10 years: $332 million
-A 100 percent modified business tax (payroll tax) abatement for 10 years: $27 million
-Transferable tax credits worth $12,500 per job for up to 6,000 jobs: $75 million
-Transferable tax credits worth 5 percent of the first $1 billion investment and 2.8 percent of the next $2.5 billion investment: $120 million
-Discounted electricity rates for eight years: $8 million
-Nevada will buy the USA Parkway right of way: $43 million
-Nevada will extend USA Parkway to U.S. Highway 50 in Lyon Co.: Cost unknown
-Tesla will pay Nevada $7.5 million for education for five years: $37.5 million
Source: Governor's Office of Economic Development
A look at the $100 billion estimated economic impact from the Tesla gigafactory:
-6,500 direct factory employees earning an average wage above $25 an hour
-3,000 construction jobs
-$1.5 billion indirect tax revenue generated over 20 years
-$400 million direct tax revenue generated beginning in 2024
-16,000 indirect jobs once the factory is up and running
-Overall job creation equal to 2 percent of state's workforce and 11 percent of the region's workforce
-A 4 percent increase in the state's GDP is expected and the region's economic output is expected to jump by 20 percent
Source: Governor's Office of Economic Development
Winners and losers in the Tesla deal:
Winners:
Storey County: This tiny county's annual property tax revenue is $2.5 million. That would jump to about $20 million a year once Tesla begins paying its real and personal property taxes in 2024. The school district, which now runs on $4.9 million in local money a year, would begin receiving about $10 million a year from Tesla starting in 2024.
Lance Gilman: The man behind the Tahoe Reno Industrial Center and his partners will reap $43 million from the state when it purchases the USA Parkway right of way.
Tesla: The company would reap $1.25 billion in tax breaks.
Losers:
Insurance companies: For more than 40 years, insurance companies that have their home office in Nevada have received tax credits that cost Nevada about $27 million a year. That program would go away and the money diverted to fund tax credits for Tesla. That's a $27 million tax increase for those insurance companies.
Film productions: In a hard fought battle at the Legislature, the film industry succeeded in passing a four-year $80 million film tax incentive program. If the Tesla deal goes through, that incentive program will be slashed to $10 million.
Car Dealerships: In other states, car dealerships have lobbied hard for laws to prevent Tesla from selling directly to the consumer in manufacturer-owned stores. Under this package, the Nevada Legislature would pass a new law giving electric car manufacturers the explicit right to sell directly to the consumer without going through a dealer franchise.
Top 11 tax incentive deals in the country:
Washington: Boeing, $8.7 billion
New York: Alcoa, $5.6 billion
Washington: Boeing, $3.2 billion
Oregon: Nike, $2 billion
New Mexico: Intel, $2 billion
Louisiana: Cheniere Energy, $1.7 billion
Pennsylvania: Royal Dutch Shell, $1.65 billion
Missouri: Cerner Corp., $1.64 billion
Michigan: Chrysler, $1.3 billion
Nevada: Tesla, $1.25 billion
Mississippi: Nissan, $1.25 billion
Source: Good Jobs First