Time to Zap Tesla's Subsidy Shopping
This article originally appeared in RealClearPolicy on January 22, 2019.
It's tough to decide which is worse: a subsidized company that can't survive without government largesse or a well-off successful business that doesn’t need taxpayers' help but gets it anyway. Tesla will soon find out, as their electric vehicle (EV) tax credit from Uncle Sam phases out. Current law stipulates that, once an auto manufacturer produces more than 200,000 of a qualified electric vehicle, the tax credit (up to $7,500 for buyers) halves. Tesla officially reached that point in 2018, with the maximum credit slashed from $7,500 to $3,750 this month.
Tesla response to the tax credit cut was to reduce prices on all models by $2,000. A bold move, but this adjustment wasn’t enough to halt the slide in stock prices over the past month. Tesla founder Elon Musk has stemmed the bleeding by hyping a new factory in China operating with substantial subsidies from the Chinese government. Meanwhile, U.S. taxpayers at the state and local level continue to foot the bill for Tesla's luxury vehicles. Governments should end this travesty by cutting off the spigot of taxpayer subsidies, and make sure that Tesla rises or falls on its own merits.
The end of the EV tax credit gravy train came at a terrible time for Tesla which has been dealing with declining demand and sluggish sales. Tesla reported that delivered Model 3 cars in the fourth quarter of 2018 were around 2.7 percent (or nearly 2,000 cars) lower than analysts' expectations.
But when the going gets tough, Tesla knows it can at least count on subsidies from various governments. The company, for instance, is only midway through a gargantuan ten-year $1.25 billion tax credit deal with Nevada, and can continue to pay far lower taxes than its competition as long as it maintains some manufacturing and properties in the state. The state hoped to pay for the tax credits by ending tax credits for the film industry, but due to overly rosy projections on how much business the film credits were supposed to bring in, the revenues didn't nearly offset. According to data from the Nevada Department of Taxation, the film tax credit wind down has so far only offset around half of Tesla’s use of $173 million in tax credits thus far.
But Tesla is at least having some production success in Nevada, in stark contrast to their failed Gigafactory 2 project in New York. Musk promised that, if New York agreed to give Tesla $750 million to build a solar panel plant in Buffalo, Tesla would create 1,500 jobs for the region. Yet only one production line has been set up, and the factory employs less than 1,000 workers, according to Tesla's head of energy operations. The deal was originally inked for Musk-owned SolarCity, which then had nearly $3 billion in debt and was eventually folded into Tesla. The consolidation came amidst a huge downturn in solar installations. Bloomberg reports that, "The company’s solar deployments are down more than 60 percent from their peak under SolarCity, and Tesla has laid off thousands of solar employees around the U.S."
When dealt a bad hand, Tesla doubles down and…departs for China. While it's difficult to estimate how much money Tesla is receiving from the Chinese government, Teslarati reports that the company "does enjoy the favor of the Chinese government," including the benefit of an uncontested bid for the 860,000 square meter plot of land needed for their new Shanghai car factory and special, low-interest loans to defray 30 percent of factory costs.
There is, of course, nothing wrong with setting up shop in new states or countries in response to market conditions. Over the past several decades, the liberalization of international commerce has amped up the pace of globalization, lifting billions of people out of poverty. But in Tesla's case, relentless subsidy shopping has left taxpayers high-and-dry, ensuring that few jobs are created in exchange for sky-high bills. While it is too late for tax and subsidy bills to be taken back, policymakers should learn from the sorry case of Tesla and keep sweetheart deals to a minimum. If Tesla can't thrive in an area without relying on government largesse, then the best company offering the best services to consumers should win the day.