Will other states follow Nevada’s Tesla deal?

September 11, 2014

CBS News

The recently announced deal between Tesla Motors ( TSLA) and Nevada to build a $5 billion battery “gigafactory” in the mostly rural, western part of the state is getting a deep look from the nation’s government managers and corporate executives, who might be considering similar agreements.

And while Nevada beat out four other states for the Tesla plant, analysts wonder if the deal will end up being worth the cost, considering the tax breaks Nevada is providing.

Governor Brian Sandoval says the agreement comes with $1.3 billion in tax breaks over 20 years. But he also told a press conference last week the deal would produce $80 in economic impact for the state for every $1 Nevada cedes to Tesla.

“This agreement meets the test, by far,” he added.But there are concerns that the deal — characterized by a Washington Post blogger as the biggest corporate giveaway in Nevada’s history — could end up creating a controversial precedent.

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“Generally, handing out money to individual firms is bad policy,” said Daniel Mitchell, public policy professor at UCLA’s Luskin School of Public Affairs.

Mitchell noted that, in international trade the subsidizing of firms that export to other countries is criticized as “dumping,” and is usually discouraged by treaties.

“If another country exports a subsidized product to the U.S., the U.S. can impose an anti-dumping duty (tariff) which offsets the subsidy,” he continued. “Somehow, when the same thing happens within the U.S., there is no remedy.”

And there are also unexpected consequences to consider.

“The downside is if, for example, Tesla were to not employ as many as originally forecast, if maybe those jobs weren’t quite as high-paying as originally forecast,” said Mac Clouse, professor of finance at the University of Denver’s Daniels College of Business. “You just don’t get the economic growth that you thought would happen.”

Activists are also questioning the deal.

In a statement following the announcement, the Progressive Leadership Alliance of Nevada and the group Good Jobs First demanded more information about the agreement, including whether Nevada taxpayers would be protected and if Tesla would refund some or all of its subsidies if the deal fails to bring about the expected 6.500 new jobs.

Until those and other questions are answered, their statement said, “Nevada taxpayers will remain in the dark. Without answers, no one will be able to judge if Nevada elected officials are overspending for a trophy deal.”