Tax credits and incentives are back in the news. California automaker Tesla is in talks with five states to build a new, ten-million-square-foot factory. The battery plant will cost $5 billion to construct and will create an estimated 6,500 jobs. It’s easy to see why so many states are playing the role of suitor. In this post we’ll take a look at the power of tax credits and incentives plus we’ll examine California’s chances of landing the new Tesla contract.
The Power of Tax Credits and Incentives
Tesla is a good case study to understand the significance of tax credits and incentives. The five states in the running (California, Nevada, Arizona, New Mexico and Texas) are all offering something to attract the car maker. The exact details are closely guarded but these types of deals typically involve breaks on everything from tax credits based on the number of employees hired to income tax or sales tax credits for purchases of equipment, and property tax reductions or abatements. Oftentimes the negotiated incentives also include promised assistance with infrastructure.
Does California Stand a Chance?
Officials in Reno, Nevada recently broke ground on a proposed Tesla site. No deal has been publicly announced, and Tesla is keeping its options open – including the possibility for more than one site. California is notoriously hard on business. The “Golden State’s” tax policy recently led Toyota to relocate to Texas. Also, California has the highest state sales tax in the nation and is near the top when it comes to corporate income tax.
The news isn’t all bad. Governor Brown recently signed into law a tax credit for aerospace companies. Language in the bill may extend to Tesla which would certainly help. The recently enacted California Competes Credit is too small a program to encompass this project, but the fact that California has stepped up to the plate with an incentive program is overall progress for the state. The larger issue is the state’s growing reputation as a bad place for business. In the negotiations with Tesla, California may not have as much wiggle room as other states, but the fact that Tesla is headquartered here doesn’t hurt. For the state to be viable in the future, a more business friendly tax approach is the only sustainable solution.
While the discussion about Tesla’s “Gigafactory” is certainly in all the headlines lately as states vie for these 6,500 jobs and the cache of saying that they won the deal, it’s important to remember that there are negotiations going on all the time in the state tax credits and incentives realm. States are interested in luring manufacturing companies and the jobs that they will bring. Companies that are smaller than Tesla (and trying to negotiate deals with smaller headlines), can still take some lessons from this process: be willing to share anticipated capital expenditures, and expected employee hiring data; take into account economic and geographic factors that are important to the company (i.e.; proximity to airports, ports, etc.); consider workforce needs including education (does it help to be close to universities or research centers?) and if possible, be truly open to moving to another state away from company headquarters.
Photo Credit: Robert Scoble via Flickr
