Nevada Lures Tesla Battery Plant With $1.3 Billion in Tax Breaks

Sep 05, 2014 12:01 am ET

Sept. 5 (Bloomberg) -- Nevada offered Tesla Motors Inc. as much as $1.3 billion in tax incentives to build the world’s largest lithium-ion battery plant, a facility that officials said would boost the state’s economy by $100 billion over two decades.

Governor Brian Sandoval said the electric-car maker’s factory, with 6,500 jobs, would add 4 percent to the gross domestic product of Nevada, where unemployment is 7.7 percent, the nation’s third highest. Tesla would pay no sales taxes for 20 years and no property or business taxes for 10 years. It also would receive $195 million of tax credits over 20 years.

“Is this agreement good for us?” Sandoval said yesterday at a press briefing in Carson City, the state capital. “This agreement meets the test by far.”

The 5 million-square-foot (465,000-square-meter), diamond- shaped facility going up in a sagebrush-strewn industrial park east of Reno is part of Tesla Chief Executive Elon Musk’s plan to lower prices on his company’s cars. Musk pitted Arizona, California, Nevada, New Mexico and Texas against each other for concessions for the factory, which he initially said would cost $5 billion.

“This factory is important to the future of Tesla,” Musk said on the steps of Nevada’s statehouse. “Without it, we cannot produce a mass-market car.”

Sandoval, a first-term Republican, said he plans to call a special session of the legislature next week to seek approval for the proposed tax breaks, which were reached in consultation with legislative leaders.

Assembly Speaker Marilyn Kirkpatrick, a Democrat from North Las Vegas, said in an interview that she expects a deal to go through, possibly with modifications such as a requirement to employ a certain percentage of Nevadans.

State Offers

Nevada’s package of incentives “was not the biggest” the company was offered, Musk said at the press briefing, without elaborating. “It was not just about the incentives,” he said, adding that Nevada moves quickly to approve projects.

“Nevada is getting this project for a bargain,” said Dennis Cuneo, president of DC Strategic Advisors LLC and a former Toyota Motor Corp. executive whose consultancy near Reno worked with Nevada to land the factory.

The scale of Tesla’s project ranks as one of the biggest industrial development projects in the U.S. in terms of jobs and investment, said Cuneo, who previously helped Toyota select factory sites.

‘Good Deal’

“Tennessee spent nearly $1 billion to land a Volkswagen plant a few years ago, and that was for considerably less investment and fewer jobs,” he said in a phone interview. “This is a very good deal.”

For Nevada, whose unemployment rate is tied with Michigan and Rhode Island for third-highest in the U.S., Tesla represents an opportunity to show that its economy can diversify beyond gambling and housing.

Musk said in a July 31 conference call that the winning state would be expected to provide about 10 percent of the factory’s anticipated cost.

The tax write-offs being offered by Nevada, with less than $9 billion in revenue in 2014, would be the largest in its history. They could reach $1.3 billion for a $10 billion project, which Steve Hill, Sandoval’s director of economic development, said Tesla proposes over 13 to 15 years. The company plans a $5 billion initial investment in the building and equipment, according to a press release from Sandoval’s office.

Other companies probably will seek similar deals, Hill said in an interview.

“This needed to be a benefit in every way to the state,” Hill said. “Certainly you can take it too far. But we feel comfortable that has not happened in this case.”

New Revenue

Even with the tax breaks, the state government is likely to realize $430 million in new revenue from the gigafactory over 20 years, while local governments will collect about $950 million, Sandoval said in a statement.

“If the state government does a good job of picking the right industries to give tax incentives to, they can anchor economic development,” Stephen Brown, a professor of economics at the University of Nevada at Las Vegas, said yesterday.

While Nevada prevailed over rival states, Musk has said other states would be in the running for future projects.

California’s Senate President Pro Tem Darrell Steinberg, a Democrat from Sacramento, said Tesla never put forth a concrete proposal to the state.

“I’m not sure that there was ever a specific offer sheet from Tesla,” he said in an interview. “I’m not sure there was ever a consistent proposal.”

No Agreement

California Governor Jerry Brown said the Golden State wanted to strike an agreement with Tesla, which is based in Palo Alto, but wasn’t able.

“We fought hard for Tesla, but Tesla wanted a huge upfront payment,” Brown said yesterday during a debate with Republican Neel Kashkari, who is challenging him for governor. “We wish them well.”

Tesla spokesman Simon Sproule declined to comment on Brown’s statement, saying negotiations with states were confidential.

The company will eventually need more than one such factory to support its goal of selling hundreds of thousands of electric vehicles a year, according to Musk.

Tesla plans to eventually sell at least 500,000 electric cars annually and supply stationary battery packs to store power from solar panels for homes and businesses.

Panasonic Corp., Tesla’s main supplier of lithium-ion cells, said in July that it plans to participate in the battery plant, without saying how much it will invest in the project. Tesla rose 1.7 percent to $286.04 at the close in New York. The shares have advanced 90 percent this year.

--With assistance from Michael B. Marois in Sacramento.