Tesla and the Interstate Subsidy Chase

by Reihan Salam

The Wall Street Journal has published an outstanding editorial on the success of Tesla, the boutique manufacturer of high-end electric automobiles, in extracting $1.3 billion in tax subsidies from Nevada for its new $5 billion ”Gigafactory,” to be built in Reno. Much of the editorial simply details the various provisions of the deal, which will leave crony capitalists everywhere salivating. It is worth noting that, as Kevin Bullis warned in MIT Technology Review last year, there are reasons to doubt the economic viability of Tesla’s new battery factory, not least because sluggish sales for electric vehicles have led to a glut of battery manufacturing capacity. Though I’m sure Tesla will do its best to drum up interests in its vehicles, despite the fact that they’ve been plagued by serious questions about their reliability, and though Tesla is indeed planning to release a mass-market product at a lower price point than its luxury sedans, larger changes in how Americans live and work might be challenging for Tesla’s business model, as they have been for all automobile manufacturers. If Tesla were operating according to the old-fashioned rules of free enterprise, I wouldn’t care in the slightest if the Gigafactory were a boondoggle in the making. Indeed, I might celebrate the company for its daring. But federal subsidies have been crucial to keeping the hothouse flower that is Tesla alive since its inception, which makes the gargantuan scale of the project seem like something other than a triumph of the entrepreneurial spirit. Had Nevada eliminated property and sales taxes for all business enterprises within its borders, or for all of them younger than, say, 15, I’d respect Nevada Gov. Brian Sandoval, a Republican running for reelection, incidentally, for his moxie, if not for his fiscal prudence. Instead, like the Wall Street Journal’s editorial board, I can’t help but think he and his allies have been snowed.

Emily Badger of Wonkblog has zoomed out from the specifics of the Gigafactory to discuss the many ways business enterprises try to pit one jurisdiction against another. Rather than base location decisions on economic fundamentals alone, large firms have taken to shopping around for where they can secure the biggest tax breaks. Even desirable jurisdictions that should have no problem attracting investment have been getting in on the game. And when location decisions are distorted by subsidies, they are often less sticky than they would be otherwise. That is, the firms in question often threaten to pick up stakes and move again, setting off yet another bidding war among desperate state and municipal governments. One possible solution, promoted by Mark Funkhouser, a former mayor of Kansas City and one of Badger’s chief sources for the article, is a federal law designed to limit these zero-sum subsidy wars. In a 2013 column, Funkhouser elaborated on the idea:

We need a national law that prohibits corporations from extracting bribes from state and local governments and bans governments from donating tax dollars to private entities — a sort of domestic equivalent of the Foreign Corrupt Practices Act, which prohibits American companies from bribing foreign governments.

Some will argue that such a law would damage America’s global competitiveness and drive companies to outsource even more of their work abroad. I think that, on balance, this is not so. America is a magnet for global talent because of the quality of life offered here, and current economic trends are damaging to that quality of life.

The governors of the six states that Texas Gov. Rick Perry is targeting, urging their entrepreneurs to pack up and move to the Lone Star State, ought to support such a federal law, and Missouri Gov. Jay Nixon should lead the charge. For years the economy of the Kansas City metropolitan area has been damaged by the “border war” of incentive-fueled competition between Kansas and Missouri. Recently, in response to big tax cuts pushed into law by Kansas Gov. Sam Brownback, the Missouri legislature enacted massive tax cuts of its own. Nixon vetoed the legislation, saying it would gut the state’s ability to deliver services, and he called for an end to the destructive competition between the two states “The competition with the highest stakes … isn’t between Kansas or Missouri, or between Jackson County and Johnson County.” Nixon said. “It’s with Brazil and Russia, South Korea, Germany and India.”

It’s not clear how such a law would work in practice. Congress could attempt to ban firm-specific incentives, for example, but then state and local governments would presumably draft provisions that could only apply to one firm, or to a narrow class of them. Moreover, Funkhouser seems to be confusing different issues. Whether or not the tax cuts backed by Kansas Gov. Sam Brownback have proven wise, they’re quite distinct from the kind of special interest subsidies that the Wall Street Journal rightly condemns. Indeed, I see nothing wrong with Texas Gov. Rick Perry urging entrepreneurs to move to the Lone Star State by touting its attractive economic climate. What I’d find objectionable is if Perry promised individual firms tax breaks and other subsidies, which he has routinely done. But again, as Badger suggests, it’s hard to know where a federal law would begin or end. So as with most of these policy dilemmas, what we really need are vigilant citizens willing to make a stink about corporate giveaways. For conservatives in particular, cronyism has to become a voting issue. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.