Economy & Business

Tesla and Its Subsidies

Tesla Model S Signature (Bill Pugliano/Getty)
Most of the taxpayers who are subsidizing Tesla cars cannot afford to buy one.

It’s natural to assume the enemy of your enemy is your friend, especially when the enemy in question is big government. So it should come as no surprise that many conservatives have rallied to the side of Elon Musk and his electric-car company, Tesla Motors, in their fights to change state auto-retailing laws so they can sell vehicles directly to consumers, without using franchised auto dealerships.

Bans on direct sales don’t make much sense, and it would be great to have a less regulated automotive market. But it is dangerous to allow Tesla to portray itself as a free-market champion, because the company is actually a prodigious harvester of government favors and handouts.

Tesla’s flagship automobile, the Model S, would not only fail to make money in a free market, it would likely bankrupt any company that tried. As the Los Angeles Times reported, Tesla’s “cars themselves aren’t making the company any money.” A Model S with a typical options package sells for more than $100,000, but that is literally tens of thousands of dollars less than it costs to manufacture and sell.

How, then, does Tesla make its money?

The direct subsidies for purchasers, to encourage them to buy “clean-energy” vehicles, are fairly well-known: a $7,500 federal tax credit and a wide variety of state-level incentive programs. (Tesla has them all listed conveniently here.)

Less well-known are the hidden subsidies that flow directly to Tesla, thanks to “zero-emission vehicle” (ZEV) credits. ZEV credits are a mandate dreamed up by the bureaucrats at the California Air Resources Board (CARB), which requires manufacturers to build and dealers to sell an arbitrary number of “zero-emission” vehicles each year. (Note that these vehicles are actually “zero-emission” only in the unlikely event that the electricity used by the car comes from a zero-emission source — which, of course, would also be heavily subsidized.)

Tesla’s Model S generates four credits per unit sold. This means the company can sell $20,000 in ZEV credits to other manufacturers for each Model S sold — a cost borne by purchasers of other cars.

And that amount used to be even higher. Because ZEV law is so arcane, Tesla was able to game the system for additional credits; for example, it was able to generate an additional three credits per vehicle when it demonstrated to CARB that its batteries could theoretically be rapidly swapped. But in fact the battery-swapping pilot program is more than a year late getting started. Nonetheless, those extra credits netted the company an additional $15,000 per car sold — and the company is now trying to get them reinstated.

In 2013, ZEV credits to Tesla totaled $129.8 million — to a company that lost $61.3 million for the year on its actual manufacturing and selling operations.

In 2014, Nevada lavished the company with one of the biggest corporate-welfare packages in history: In exchange for building a battery-manufacturing facility near Reno, Tesla will pay no payroll or property taxes for ten years and no sales taxes for 20 years, and will receive $195 million in cash via “transferable tax credits,” which can be sold to other companies to satisfy their Nevada tax bills. All of this amounts to a $1.3 billion giveaway.

Tesla and its apologists constantly tout the fact that the company paid off its hefty $465 million taxpayer-subsidized loan from the Department of Energy early, but they don’t explain why: Had the loan not been paid early, the U.S. Treasury stood to grab a significant portion of the company’s increased stock price by exercising warrants. Capitalizing on the subsidy-stoked electric-car mania that pumped its stock to record levels, Tesla issued $450 million in new stock to pay the loan early and cancel those warrants. The shrewd deal cost taxpayers about a billion dollars, leading Scott Woolley to conclude: “Tesla is worse than Solyndra.”

Tesla has effectively socialized its costs through subsidized loans, tax credits, abatements, and regulatory schemes while privatizing its gains by canceling the warrants owned by taxpayers.

Every time a Tesla is sold, we witness a transfer of wealth to a rich hobbyist (most Teslas are their owners’ third or fourth car), while average Americans are on the hook for at least $30,000 in federal and state subsidies. Tesla is more a regulatory arbitrageur than an auto manufacturer.

In its 2014 annual report, Tesla made clear that continued special tax benefits are critical to the company’s business plan: “Our growth depends in part on the availability and amounts of government subsidies and economic incentives.”

Yet the company and Musk are now free-market heroes because they want to disrupt the franchised-dealer system? Sorry, but no. Prohibitions on direct vehicle sales are restraints of trade that shouldn’t exist, but I have mixed feelings at best about repealing them for the purpose of making it easier for Tesla to fleece taxpayers.

As Mike Jackson, CEO of AutoNation, the largest U.S. auto-retailing company, aptly put it: “There’s a certain irony here that as Elon Musk complains about government intervention and government protectionism, he wouldn’t exist without the government.”

When Tesla paid back its loan early to extinguish the warrants, Musk stated that he wanted to thank “the American taxpayer, from whom these funds originate. I hope we did you proud.”

They didn’t, and nobody should mistake Tesla for a friend of the free market.

— Phil Kerpen is the president of American Commitment.


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