NEVADA NEWS AND VIEWS 09/16/2014

Nevada Gets Musked:

Tesla's billionaire extracts $1.3 billion in taxpayer subsidies
WALL STREET JOURNAL
Review & Outlook
Sept. 15, 2014 6:58 p.m. ET

Charles Munger, vice chairman of Berkshire Hathaway, the other day described Silicon Valley billionaire Elon Musk as a "genius." Maybe he was alluding to the Tesla CEO's cunning ploy to mine subsidies from Nevada taxpayers.

Last week the Silver State's legislature unanimously approved $1.3 billion in tax breaks for Tesla to build a $5 billion lithium battery factory in Reno that will supply its electric-car plant in Fremont, California. "We have changed the trajectory of this state, perhaps forever," declared Republican Gov. Brian Sandoval, who wagers that the "Gigafactory" will grow the state's economy by $100 billion, or about 80%, over 20 years. Will he take that bet to Vegas?

Politicians bribing businesses to locate in their state is an old if unfortunate story. Tennessee this year offered  Volkswagen  $274 million to expand its Chattanooga plant. Last year Washington awarded long-time employer  Boeing  $8.7 billion over 16 years to build its new 777X jetliner in Puget Sound.

But the Tesla giveaway is in a category of its own, coming in an unproven market for a company that has never recorded an annual profit (based on generally accepted accounting principles), notwithstanding various subsidies. Nevada's gift is 15 times larger than any incentive package the state has awarded and among the richest nationwide.

Mr. Musk handled it like a private  Sotheby's  auction, launching a secret bidding war among southwestern states with a price floor of $500 million. Tesla also wanted to be exempt from states' dealer laws that prevent car companies from selling directly to consumers. Such dealer laws are bad policy, but it must be nice to carve out an exemption that doesn't apply to Ford and GM. 

In June Tesla broke ground at the Tahoe Reno Industrial Center, yet Mr. Musk denied that he had made a decision. "We'll be doing something similar in one or two other states," he cautioned, because "it makes sense to have multiple things going in parallel." Message: Better not under bid.

Earlier this month Mr. Musk declared Nevada the winner. "It wasn't all about the incentives," he noted. Nevada is "a get-things-done state." Gov. Sandoval surely appreciated that in-kind contribution to his re-election campaign. Mr. Musk also intimated that Nevada made the most logistical sense. Reno is easily accessible by rail and highway to Fremont, and Nevada hosts the only active lithium mines in the U.S.

But if those were the attractions, then why should Nevada have to pay such a steep subsidy price? Tesla will be exempt from property taxes for 10 years and sales taxes for 20 years at a cost of $1.1 billion to taxpayers. Tesla will also get $195 million in transferable tax credits that it can sell to other businesses. Since Nevada has no personal or corporate income tax, Tesla will effectively operate tax-free in the state.

Tesla will also receive a 10% to 30% electricity discount over eight years. The NV Energy public utility will pay for this discount by charging other customers $1.84 more on average per year. Mr. Musk claims the factory will generate all the renewable energy it needs, but the utility discount will pay for back-up power from the grid because renewables provide intermittent energy.

By being connected to the grid, Tesla will also be able to exploit Nevada's "net-metering" regulations to sell its excess renewable power back to the utility at the retail price, which can be up to 50% higher than wholesale. So Tesla can buy electricity at a discount, and then sell it for a premium.

Tesla will also get a 30% federal tax credit for building its own renewable generation, which will help wipe out its future federal tax liability, assuming it has any. Tax credits and carry-forward losses have already absolved the company from paying federal income tax since at least 2008. Last year Tesla paid a mere $2.5 million in corporate income taxes—zip to Uncle Sam, $178,000 to the states and $2.35 million to foreign governments.

California Gov. Jerry Brown shrewdly observed on Friday that "Nevada's tax breaks are California's benefit" because they will help Tesla cut the cost of its cars by half to $35,000. Mr. Brown understands that California's target of getting one million "zero-emission vehicles" on the road by 2020 will require much larger price discounts than the state's $2,500 rebates.

So maybe Mr. Musk really is a genius, of the political kind at least. He's figured out that as long as you pick a politically favored industry you can be one of the world's richest men and still get taxpayers to finance your operations and become even richer. Not so smart are the Nevada politicians who seem to have no idea how thoroughly they've been fleeced.