RCG: Tesla Deal A Chance Worth Taking

Posted on by & filed under Nevada by the Numbers Blog.

While the size and scope of the abatements and tax credits in the Tesla incentive package have received criticism from some quarters, the deal has greater significance for Nevada than just the raw numbers. Critics and supporters alike should read the bill thoroughly before over-generalizing, spreading misinformation, or passing final judgment.

It is worth noting that the Tesla bill is one of the few of its type to contain performance criteria, require periodic audits, and include potential clawback provisions. The suggestion that the bill is a “free bag of cash” for Tesla is simply incorrect. Further, as a result of the deal with Tesla, the state’s economic development efforts are likely to be viewed in a new and more positive light by companies around the country.

Every worthwhile entrepreneurial venture at some point requires going “all in.” In other words, all new ventures require taking on acceptable levels of risk in return for potential payoff. Nevada went “all in” with the Tesla deal and has thus taken an important first step in re-crafting its image as a serious player in the world of economic development. The economic payoff is also potentially a game-changer, and thus, a chance worth taking.

North vs. South

It’s time for thoughtful Southern Nevadans to stop questioning the Tesla decision to build its new plant in Northern Nevada. Notwithstanding speculation to the contrary, there was no conspiracy to steer Tesla to Reno. The Reno-Sparks area has all the features Tesla wanted and needed and that Southern Nevada simply does not have. These include proximity to lithium deposits as well as proximity to the company’s car plant in Fremont, CA; easy access to the I-80; and the fact that the Tahoe-Reno Industrial Park has ready-to-go rail access.

A Word on Economic Multipliers

Estimations are that the Tesla facility will create approximately 16,000 indirect jobs combined with 6,500 direct jobs at build-out.

When estimating likely jobs created, it is important to understand that multipliers are attempts to capture in a simple, single number the complex interaction and subsequent product(s) of businesses, employees, consumers, and government when there is a new type or level of economic activity in a region.

There are three types of multipliers that are considered in regional economic analysis:  output, jobs, and employee compensation. These multipliers are not precise numbers but rather order-of-magnitude estimates related to data-driven, reasonable expectations of new economic activity, whether from a new firm entering a region or a major expansion by existing employers.

For example, a new manufacturing facility – like the Tesla gigafactory – not only needs to be built, but once up and running has a permanent workforce and purchases ongoing materials for its operations, some from local suppliers. The local suppliers and the manufacturer’s employees also purchase goods and services in the community. These purchases by the new facility, local suppliers, and the facility’s employees then generate further economic activity by creating sales and income for local businesses and their employees. In this regard, the basic concept of the multiplier is based upon common sense and predictable human activity.

A typical published employment multiplier attempts to collapse a complex system and set of processes into a simple, single number – such as 3.5 – implying that every new job directly generated by the new economic activity will eventually create a total of 3.5 new jobs in the regional economy. These multipliers can be useful, but it is important to note that they are only approximated forecasts of very complex economic relationships.

Below is an overview of the major parts of the Tesla deal, by the numbers.

Tesla Project Highlights

  • 6,500 direct jobs on-site with an average wage in excess of $25 per hour and full benefit package
  • $5 billion initial investment in facility within 3-5 years: ($1 billion in building, $4 billion in equipment)
  • $5 billion in planned replacement equipment over a subsequent 10 year period, or a total investment of $10 billion
  • Peak construction employment of more than 3,000 construction and installation workers over a three year period

Economic Estimates

  • 16,000 indirect jobs in the community for a total of over 22,000 jobs
  • Direct economic impact generated by the project estimated to be nearly $40 billion over 20 years
  • Indirect economic impact estimated at approximately $60 billion over 20 years
  • Estimated value of abatements is between $675 million and $1.1 billion, depending upon size of investment

Tax Credits

  • Transferable Tax Credit of $12,500 per permanent, full-time job, up to 6,000 jobs – average wage of jobs must be $22 per hour to qualify
  • Transferable Tax Credit of 5% of first $1 billion investment
  • Transferable Tax Credit of 2.8% of next $2.5 billion investment (Involves repurposing of existing Tax Credits reducing the existing Film Tax Credit program from $80 million to $10 million
  • Sunset the Home Office Tax Credit program at a value of $125 million over the first five years

Fiscal Projections After Abatements

  • $430 million in state General Fund revenue over 20 years
  • $950 million in local government revenue over 20 years
  • $500 million in K-12 education revenue over 20 years
  • $1.9 billion in total fiscal impact