Tesla Tax Breaks and Nevada’s Economy

The entire economy is an interconnected and fragile system. Sometimes causes which relate to one part of the system may have effects in what seems to be a totally unrelated part. However, the entire system is linked by chains of cause and effect. The surprising economic effects of many policies have been enumerated in a book called Freakonomics.

Another example of this unusual cause and effect linkage can be seen in Nevada. The state has recently offered a billion dollar tax incentive package to Tesla in order to build its factory. Tesla has supposedly gotten the better of Nevada in this deal. This is because once the factory is built, Tesla is likely to not be liable for sales tax for the next twenty years. It wouldn’t even have to pay property tax for the next ten years. Also, it would be the recipient of countless tax credits for the jobs it is supposedly going to create.

The many unintended consequences of this package will be discussed in this article.

Why has Nevada Offered a Deal to Tesla?

The state of Nevada believes that bringing in Tesla could be a game changer. This is because big companies never move alone. They have an entire ecosystem of suppliers and service providers which are needed in order to function. Hence, if Nevada could somehow lure in Tesla, the suppliers and service providers would be forced to move to Nevada. The end result would be that industry will spring up in the entire region creating many more jobs than the government had paid for in the first place. Since these jobs will lead to an increase in taxes, the state of Nevada views the $1 billion layout as an investment that will pay rich dividends.

How Tax Breaks Affect the Taxpayer

Politicians and journalists have been gloating about the ground-breaking investment that has been made by the Nevada government in this futuristic project. However, no one is mentioning the fact that this is not really Nevada’s first venture supporting an electric car manufacturer.

Prior to this, Nevada has already apportioned $300 million to a company called Faraday which was also trying to manufacture electric cars. However, in less than two years, Faraday Futures backed out of the state and handed the land and other facilities back to the state. The so-called investment made by Nevada into Faraday went down the drain, and the taxpayers were asked to pick the bill.

The lessons from the Faraday fiasco seemed clear. Politicians were not to be trusted with spending huge chunks of taxpayer’s money since they are not as careful while spending this money as they should be. Also, the rosy projections that are provided by politicians should not always be believed.

The taxpayer of Nevada seems to have forgotten that they are the ones that bore the brunt for the failed Faraday deal. If anything goes south with the Tesla deal, they will once again have to bear the brunt in the form of higher taxes to make up for the losses.

How Tax Breaks have Affected Real Estate

Tax breaks in Nevada have had an impact on many sectors. However, the biggest impact has been in the real estate sector. Nevada faces a shortage of essential products such as housing. However, instead of working on improving the housing situation, the government has aggravated it. As soon as the announcement of the Tesla factory became public, real estate prices started surging.

The median income of the people of Nevada remained unchanged. Hence, the housing simply became more unaffordable. Also, since the property tax is dependent on the appraised property value, very soon residents of Nevada may have to pay more in property taxes. Hence, in effect, they are the ones who are personally subsidizing the Tesla gigaplex that is being built by Elson Musk.

Also, Tesla has been buying land for the factory. Since the company has received taxpayer dollars, it can afford to spend more on the land. However, the end result is that the price of land is being raised for everybody.

Tesla Effect or Inflation?

Politicians have been giving a positive spin to these rising property prices. They have started calling it the Tesla effect. According to these politicians, these rising prices are somehow good for the economy. However, the reality is that the tax break given to Tesla is causing inflation for everyone else.

The land prices have increased for the reasons mentioned above. Since land is an input to almost every service, the prices of services have also increased. This includes essential services such as day care and medical services. The rampant inflation is worsening the standard of living of the people of Nevada instead of improving it.

Quid Pro Quo

The reality is that these deals only take place because they are beneficial to politicians. The politicians can claim to be heroes who have brought economic development to the region in order to gain more votes. The taxpayers are the ones left holding the bill in the end.

The Tesla deal has caught the attention of auditors and is now under scrutiny. However, it is unlikely that the system of granting tax breaks to mega-corporations will halt in the near future.

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