Taxing Tesla and Its Promises

Tesla

It isn’t quite a bait and switch, but it’s close enough to warrant further scrutiny.  Back on April 17th there was a news report about Tesla, it’s promises for wages, and the tax incentive package awarded if Tesla would build a really big factory in northern Nevada.  I’ve argued against tax incentive packages in general because: (1) Tax rates are not among the priorities given real consideration by corporations when determining factory locations.  (2) The actual criteria include (a) transportation and commercial infrastructure – can the materials be received and products shipped with ease and economy? (b) availability of local and accessible research and development assistance – are there research institutions in proximity which can enhance the research and development goals of the factory/corporation? (c) is there a well trained work force immediately available that can meet the corporation’s employment and staffing needs?

Tesla made the argument that Nevada was not first on the list in terms of the usual criteria, and the tax incentives were a “significant factor.”

“The application confirmed that the plant will employ 6,500 full-time employees but raised its average wage estimate to $26.16 per hour. Tesla expects to employ 300 workers during the first year of the project, growing that to 2,000 workers by the third year and 4,000 workers by the fifth year. Tesla plans to have 6,500 employees by its eighth year. Initial projections had the gigafactory being fully operational by 2017.” [RGJ]

Predictably, there are problems now – such as The Lawlessness of Averages.  Return with us now to elementary school arithmetic. There are three kinds of averages: the mean, mode, and median.  And, just to make certain we do well on the test – there’s also the Range.

Reports from October 2014 indicated Tesla’s personnel costs would include $22.79 for production associates and material handlers; $27.88 for technicians, and $41.83 for engineers and senior staff.  

One of the obvious problems with projections is that they are always based on figures said to be the ‘best available at the time.’  What else could they have been based upon?  Thus we had Tesla saying “$22.00, and the state saying $25.00” and no one offering hard and fast numbers on which to base the calculations.  Enter a new factor – contract negotiations elsewhere:

“Contract negotiations this year between the United Auto Workers and Detroit automakers are likely casting a spotlight on Tesla wages, said Kristin Dziczek, research director at the Center for Automotive Research. Tesla’s Fremont manufacturing operation, however, might be playing a bigger role in the wage issue, Dziczek said. The Free Press story noted, for example, that the starting pay at Tesla’s Fremont facility is $17 per hour.

“They don’t pay ($25 per hour) for their assembly wage,” Dziczek said. “Certainly, there are forces that would like to organize the Tesla assembly plant and would use a $25-an-hour wage in Nevada to rile up assembly workers.” [RGJ]

Yes, some people could become a bit riled if the wages for production workers (the most numerous in any operation) were as far apart as $25 and $17 per hour.  It’s not like we weren’t warned that the state was overestimating the economic benefit of the tax incentive package.

tesla chart

The Los Angeles Times offered the graphic shown above in September 2014.  There were some assumptions not necessarily in evidence:

“The projection, for instance, counts all future tax revenue, but makes no allowance for government spending to serve the influx of residents. It counts every dollar of workers’ salaries as if they were unemployed or lived out of state before Tesla arrived. And more than half of the estimated economic jolt relies on the assumption that the bulk of the factory’s supply chain will relocate to Nevada.” [LAT]

We can calculate dandy results for Nevada’s economy if we simply ignore some pesky details – such as: the cost to state and local governments to absorb the influx of new residents; or, we assume that everyone who applies for work at the battery plant was previously unemployed; or, we assume the suppliers will relocate to Nevada…

We might also have to factor in the costs associated with getting those suppliers to relocate?  Are we to offer “tax incentives” (read breaks) to suppliers who want to move to Nevada – on top of the tax breaks already given to the parent factory?

What we might want to consider before we go launching off on any new forays into ‘economic development’ and diversification is guidance which:

(1) Calls for a minimalist approach to employment prospects; one in which we do not assume that all applicants for positions are previously unemployed.

(2) Specifies that ‘average wages and salaries’ do not include senior executives and specialists.  Those higher salaries have a way of skewing the arithmetical averages.  Since Nevada has no personal income tax, we cannot expect revenue to stream straight in from wages and salaries; we have to assume that most of the wages will be spent within the state.

(3) Takes a situation as it is not as we would want it to be; that is, we do not assume the existence of an imaginary number of suppliers who would move at no cost to support a manufacturing facility.

(4) Takes into consideration the impact on local governments and their services in terms of an influx of population, and the need for physical infrastructure to support manufacturing.

It’s not necessarily a bad thing that the Tesla plant will be built in Nevada, but it is not helpful when the tax incentives applied to attract such manufacturing may end up costing the state and local governments more than they can bear.  And, certainly less than what Nevada citizens might have expected in return.

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