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Tesla Nevada deal sparks subsidy debate

Are government tax breaks and credits to corporations the same thing as government-granted subsidies?

SACRAMENTO ‚?? If you want to start a kerfuffle, toss this question into a room of economists: ‚??Are government tax breaks and credits to corporations the same thing as government-granted subsidies?‚?Ě You‚??re likely to find as much disagreement from economists on the left as you will from those on the right.

Non-economists ought to be pondering this question also, especially as we digest the details of the deal Nevada officials inked on Thursday with the electric car company, Tesla Motors. The company announced its decision to site a ‚??gigafactory‚?Ě to build car batteries near Reno.

‚??A little over half the package, or $725 million, is in a 20-year, 100 percent sales tax abatement,‚?Ě reported Forbes. ‚??Tesla also would receive a 10-year, 100 percent property tax abatement worth $332 million. There also is a provision for $120 million in transferable tax credits.‚?Ě This is an exceedingly generous package no matter what you call it.

The deal still must be approved by the Nevada Legislature ‚?? but enough legislators from both parties and from throughout the Silver State were there with the governor at the Carson City press conference to suggest the final OK is pro forma. Tesla CEO Elon Musk said that Nevada didn‚??t offer the biggest financial incentive package, but that Nevada “is a real get things done state.”

Unlike California, where officials tried ‚?? but failed ‚?? to piece together an incentive deal during the waning days of the legislative session.

The Reno decision is a poke in the eye to California officials, given that Tesla is based in the San Francisco Bay Area ‚?? and California‚??s green-energy policies and subsidies have helped spark the electric-car revolution that gave life to Tesla. Apparently, Tesla officials are building the plant as close as possible to its California headquarters without having to actually operate here.

‚??I‚??m devastated for the 6,500 families who won‚??t have the chance at these jobs unless they move to Nevada,‚?Ě said Sen. Ted Gaines, R-Roseville, in a statement. ‚??It‚??s a clear indictment of our business climate that Nevada is pulling this huge investment away from its natural home.‚?Ě But given the subsidy debate, it‚??s not clear this is the best example of California losing businesses as much as it is of other states luring them.

Some of those feuding economists would argue that a credit is about letting companies keep their own money and isn‚??t the same thing as a subsidy ‚?? where government robs Peter and pays Paul. The distinctions can be fuzzy, given that credits mean other taxpayers have to pick up the slack. Without the credit, others note, the job-producing business might not be there at all and they can pay back more than they cost.

Ironies abound. Democrats, who often push for more regulations and higher taxes, often back these deals (note the tax credits for movie companies and for defense contractors approved in the recently concluded California legislative session). Deep down, they must know higher taxes and more government control impede business growth.

But Republicans, who claim to champion freer markets, also promote these deals that let the government pick winners and losers. All such incentives shift decision making from business owners to regulators and legislators, which is more about cronyism than capitalism.

Tesla has benefited from $7,500 federal tax credits for consumers who buy these pricey luxury cars and from a $465 million federal loan. It profits from a California Air Resources Board program that lets it sell its energy ‚??credits‚?Ě for producing zero-emission vehicles to other manufacturers.

But the company also has suffered at the hands of competitors who are equally adept at influencing the political process. Some states have banned direct auto sales on behalf of independent car retailers that don‚??t like the competition from Tesla‚??s direct-sales model.

Clearly, Tesla and most other companies operate in a complex world of government-created incentives and disincentives. One need not be an economist to wonder whether it wouldn‚??t be better for states to create a fair tax and regulatory climate ‚?? and just let companies use their own cash to locate wherever they choose.

Greenhut is the California columnist for U-T San Diego. Write to him at steven.greenhut@utsandiego.com.

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Steven Greenhut is the California columnist for U-T San Diego. Write to him at steven.greenhut@utsandiego.com.

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