Tag Archives: economic development

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.

1 Comment

Filed under Economy, Nevada economy, Taxation

Home Defects, Budget Shortfalls, and Picking Losers

Jig Saw Puzzle

Interesting items, each worthy of a post, but in the interest of keeping up to date – here are some newsworthy items deserving of a click and read.

Nevada Legislature: Take a moment to read Eli Segall’s piece in the Las Vegas Sun about the interest taken in the Assembled Wisdom about homeowner complaints in regard to construction defects.  Here’s a taste:

“Supporters say the proposal will boost construction jobs, but outside analysts say it will hammer trial lawyers, a political and business foe of builders, and, despite the bill’s name, will make it harder for homeowners to sue for shoddy workmanship.”  Why?

“As proposed, AB 125 would, among other things, strip homeowners’ ability to recover reasonable attorney fees in defect cases; require homeowners to state each problem in “specific detail” rather than in “reasonable” detail as current law allows and to give the defects’ “exact” locations in the house; and change the definition of a constructional defect, eliminating the provision that such flaws are made in violation of law and local codes and ordinances.”

Republicans in Disarray?  There is an effort to recall Assemblyman Hambrick (R-NVAD2).  Hambrick, GOP opponents say, has Strayed From the No New Taxes Pledge. [LVRJ]

School Daze: There’s this from Let’s Talk Nevada:

“8:00 AM: H/T Ralston for this. Pedro Martinez, the man Governor Brian Sandoval (R) hand-picked to run the new “Achievement School District” where he wants to transfer 10% of Nevada public schools into, is so dedicated to improving public education in Nevada… That he’s now running for School Superintendent in Boston. And yes, that’s Boston, Massachusetts.”

Meanwhile in Wisconsin under the Austerity/Trickle Down Hoax regime of Scott Walker – the governor’s solution to the $283 million budget shortfall created by his tax cuts is to skip $108 million in debt paymentsAnd in Kansas, the legislature backed down and decided to allow governor Brownback to sweep $475 million over the next two years from KDOT into the budget hole created by his tax cuts. [Kansas.comGet ready Ohio, governor Kasich is gearing up his 23% cut in the state income taxes over the next two years.

And in Congress, the Republican leadership is operating on the same theme:

“House leaders plan to schedule votes this week on seven bills recently approved by the Ways and Means Committee to make permanent an array of “tax extenders,” a set of primarily corporate tax provisions that policymakers routinely extend for a year or two at a time.  The seven measures, which will likely be packaged into a smaller number of bills for floor consideration, are the first installment in a series of bills that House leaders are expected to move to make many of the largest tax extenders permanent, while offsetting none of the cost.”

I think we’ve seen this before, and labeling it “Credit Card Capitalism,” wherein the Bush Administration turned the Clinton Administration surplus into a massive deficit – and then blamed the Democrats for “tax and spend” policies.  We might get the drift – the Republicans get into control, lower the taxes and revenues, thereby piling up a massive debt. The Democrats take back the control, enact taxes to fill the holes in the state budgets – and the GOP screams about “Tax and Spend?”

About those “economic development” and “job creating” ideas – a report (pdf) from North Carolina documents that 60% of the recipients of their incentive awards were cancelled because the firms failed to live up to their promises. H/T Angry Bear.  The story is about the same in Wisconsin:

“The Wisconsin Economic Development Corporation, a public-private body set up by Walker shortly after he took office in January 2011, was supposed to help the state climb out of recession by shedding bureaucratic rules and drawing on private-sector expertise.

But the WEDC has fallen short of its own goals by tens of thousands of jobs and failed to keep track of millions of dollars it has handed out. One reason for the agency’s disappointing performance: Walker’s overhaul of the state bureaucracy drove away seasoned development workers, economic development experts who work closely with the agency told Reuters.” [CapBlue]

There are other ways to create jobs and improve our economy; take a look at the CAP proposal for the Appalachian region.

Comments Off on Home Defects, Budget Shortfalls, and Picking Losers

Filed under Economy, Nevada legislature, Nevada politics, tax revenue, Taxation

NPRI Throws Mud At Governor’s Shiny New Economic Plan

Nevada Governor Sandoval has a new plan for the state’s economic recovery, [LVSun] by which he hopes to add 50,000 new jobs by 2014.

“The state’s finalized plan was based on a 178-page report prepared by researchers with the Brookings Institution and SRI International. That plan identified seven areas for the state to focus on, based on the state’s strengths. That included a renewed focus on gaming technology and innovation, developing the private aerospace and defense industries, and renewable energy.” [LVSun]

The Brookings Report identified seven economic sectors and 30 “targets” which hold potential for growth: (1) Tourism, Gaming, Entertainment; (2) Health and Medical Services; (3) Business IT ecosystems; (4) Clean Energy; (5) Mining, Materials, Manufacturing; (6) Logistics and Operations; and, (7) Aerospace and Defense.

The report calls for rationalizing the state’s economic development structure, regionalizing it under a general umbrella of state planning, and (a) “bolstering capacity for innovation and commercialization,” (b) “expanding global engagement,” (exports/imports), and (c) “aligning higher education and workforce development resources for innovation and diversification.”  The plan has several features to commend it.

As argued in yesterday’s post, it is far easier to build on existing economic sectors which have growth potential than it is to apply either a shot-gun approach wherein we attempt to attract “anything” that may come our way, or to attempt to dream up “new” areas of economic activity which may or may not fit Nevada’s existing economic situation.

Another feature which hold promise is the regionalization of economic development efforts.  Not only because there are substantial differences between the economic bases in urban and rural Nevada, but also because there are, to some extent, differing interests in northern and southern Nevada.

The third feature which holds promise is that the Brookings Report, and the Governor’s adoption of its general outlines, calls for placing more emphasis on research and development with an eye toward commercializing the results.  This recognizes a shift in focus described last March in a report from the Rockefeller Institute, SUNY:

“For much of the twentieth century, states’ economic development efforts centered on incentives, financial packages, cost comparisons, labor policy, permitting requirements, roads and water systems, and so on — things that state governments are comfortable working with, but that do not suffice to meet key challenges for the new economy. The twenty-first century paradigm, in contrast, is shifting toward putting knowledge first. For states, increasingly, that means connecting their higher education systems more closely to their economic development strategies.”

Nevada has definitely been attempting to function in the 21 century with that old 19th and 20th century approach, a reminder from yesterday:

The State advertises that we have no corporate income tax, no taxes on corporate shares, no franchise tax, no personal income tax, no nominal annual fees, no unitary tax, no franchise tax on income, and no tax on gifts or inheritances.  We have no estate tax, and a minimal payroll tax. Promise to stay in Nevada for 5 years and we will give you a sales and use tax abatement, sales and use tax deferrals, personal property tax abatement, and a modified business tax abatement.  If you are a qualified recycler we’ll toss in a 50% reduction in the recycling property tax. [LCB] [Desert Beacon]

For all intents and purposes, Nevada has been trying to balance its economic development on only one leg of the stool, on the vain and vague hope that “if you keep taxation low enough they will come.”   This would be fine, except that it ignores the four main factors informing the decisions about business location: ” (1) workforce characteristics; (2) transportation infrastructure; (3) research facilities and expertise; and (4) market location.”  [DB 12/14/10]

The NPRI seems equally intent on staking its claim to 19th-20th century solutions to 21st economic challenges. The reported response contains all the right conservative buzz words, without acknowledging the existence of any measures calculated to alleviate economic stagnation:

“It’s a statement of abandoning a belief in free market enterprise,” said Geoffrey Lawrence, deputy policy director for NPRI. He said new industries will be looking for subsidies to get off the ground instead of consumer demands.“Investments will be subject to political factors,” he said. “It’s going to become highly politicized.” He said the state economy is starting to recover, something the report starts out by acknowledging. “This is a big disappointment,” he said. “I think it’s a crony capitalist scheme.” [LVSun]

The Institute may not have heard the venerable line from Dr. Geoffrey Nicholson, the inventor of the now ubiquitous Post It Note, “Research is the transformation of money into knowledge. Innovation is the transformation of knowledge into money.”  The entire idea is that the research results can be translated into innovation by discovering what works and what doesn’t. What does work is the basis for commercialization.

The Institute also repeats what is now becoming a common narrative in conservative circles — they’ve rediscovered Demand.  Now, it’s “demand” that should inform all governmental decisions regarding business environment enhancement.   The NPRI is essentially arguing that if there is no existing consumer demand for a product then there is no reason for governments to support basic and applied research.  This is frankly absurd.

The Water Security Corporation commercialized water purification research from NASA, and since 2005 has been manufacturing purification equipment for homes around the world. [WSC] There was no “demand” for Face International’s Wireless Light Switch before engineers at the Langley developed a way to transform mechanical energy into electrical energy.   There was no “demand” for memory foam mattresses and pillows before the foam was developed for the NASA program. [NASA]  Someone is going to find a way to commercialize the “artificial leaf” developed at MIT which makes fuel from sunlight. [MIT]

If we adopt the posture of the NPRI then we’d have no modern home water purification systems, no wireless switches, no memory foam pillows, and no future commercial applications of that “artificial leaf.”  We’d also be without a host of other popular commercial products, the results of university-business research partnerships.  However, the NPRI isn’t through flame throwing:

“The plan calls for government officials to dole out direct state support and other subsidies in order to “incent entrepreneurship.” The incentive for genuine entrepreneurship is profit from serving the public. Unfortunately, what this plan would encourage is corporatist rent-seeking.”

What?  So, government land grants didn’t help build the U.S. railway system?  It was “corporatist rent seekers” (whoever they might be?) who received Small Business Administration loans to finance Greenville, South Carolina’s “Republic Locomotive,” a manufacturer of small industrial locomotives?  “Nationally SBA-backed lending continued the upward trend we saw last year,” SBA Administrator Karen Mills said. “Due to the Small Business Jobs Act and a return to pre-recession lending levels, over 61,000 small businesses had access to capital. ” [SBA]   My goodness! There are 61,000 little “crony capitalists” on the loose in the country — creating jobs?  Oh, however will our free market economy last?

Should the NPRI release its fingers from its pearls, arise from the fainting couch, and join the rest of us in the 21st century, it would see that there is much to be commended in the Governor’s economic plans.   If anything, the Governor’s proposal doesn’t quite go far enough toward developing the physical infrastructure necessary to facilitate commerce.  We could do with even more construction and renovation in our air transportation system, and in regard to our wastewater treatment facilities as well.  [DB]  At least we’re making a start.

Recommended Reading: Shaffer & Wright, “A New Paradigm for Economic Development,” Nelson Rockefeller Institute of Government, SUNY-Albany, March 2011.  PDF format.   See also: Higher Education Alliance, Rock River (Northern Illinois), “The Role of Higher Education in Economic Development,” NIU Outreach 2005. PDF format.

Comments Off on NPRI Throws Mud At Governor’s Shiny New Economic Plan

Filed under Economy, nevada education, Sandoval