Comments Guidelines

All comments are pre-moderated. No spam, slurs, personal attacks, or foul language will be allowed.

Friday, August 8, 2014

Tesla wants $500 million for its Gigafactory

Leigh McIlvaine (@Leigh M.) of Good Jobs First alerted me to this article on what Tesla Motors wants in incentives to land its $5 billion Gigafactory: $500 million. This massive 6500 worker facility will produce the next generation of batteries in order to introduce a less expensive line of cars in 2017, the Tesla Model 3. This would be a more affordable vehicle than the widely praised Model S, which starts at $69,900.

I'm not joking about the praise: Consumer Reports, my go-to source for product testing due to the fact that it does not accept ads and thus has complete independence, gave the Model S its best-ever score of 99 out of 100 when it tested the car earlier this year. It also leads the magazine's subscriber survey of customer satisfaction, with 99% of owners saying they would buy the car again. This is a vehicle, and a company, that is generating some serious excitement.

It's no surprise that the Gigafactory is generating serious excitement, too. 6500 jobs, a $5 billion investment, and cutting-edge technology is a heady mix for an economic development official. San Antonio, where Toyota makes pickup trucks, jumped into the auction quickly, offering "almost $800 million in incentives." Although Tesla has broken ground at a location near Reno, Nevada, last week CEO Elon Musk announced plans to break ground at one or two other sites as well. The company clearly considers speed to be of the essence.

It's unclear exactly what the company wants financially, and Tesla did not respond to my request for an interview to seek clarification of some important points. To be specific, does it want that $500 million in cash, in the form of property tax breaks over some number of years, land and infrastructure, or what? Most importantly, is Tesla's goal speed plus $500 million, or speed plus the highest bid? The company has sent mixed signals on this question.

As Forbes wrote, "Last week, Musk said that Tesla wanted to make sure a package was right for the winning state, as well as for Tesla." In the article's very next sentence, however, Tesla VP for communications and marketing, Simon Sproule, said, "Any publicly traded company has a fiduciary responsibility to get the best deal for its investment." Musk's comment seems to imply that $500 million is all the company wants. By contrast, fiduciary responsibility has often been used to justify a company going after the maximum incentives possible. Forbes quotes the business editor of the San Antonio Express-News that it was hard to tell if Tesla is conducting "a search (or) a shakedown."

Sproule disputed the shakedown thesis, despite invoking "fiduciary responsibility." How should we think about this project?

On the one hand, we could take Musk's comments as meaning that the company wants $500 million, no more, no less. Given that he expressed it as a percentage of the investment, my intuition is that we should assume that means $500 million in cash or cash equivalents like free land (my guess is that San Antonio's "$800 million" was mainly tax breaks, which would have a lower present value). If that's true, Sproule's contention that the incentive is not really so expensive is actually true in a comparative sense. A 10% aid intensity (subsidy/investment) would be the second-lowest for a large automotive facility in the modern history of megadeals. It would even probably be legal in the European Union under its Regional Aid Guidelines, if it were located in one of the EU's poorer regions. Moreover, the cost per job would be $76,923, substantially below the $100,000-$150,000 level common for most U.S. automobile assembly plants.

Of course, cost alone doesn't make a deal a good one. In particular, if Tesla wants its incentives up front, there is a substantial risk that the project won't ultimately produce 6500 jobs, or that changes in the market could even lead to the Gigafactory closing. New Mexico lawmakers have certainly recognized the importance of this vis-a-vis Tesla. In my email to Tesla, I asked what taxpayer protections, like clawbacks, the company is prepared to accept. Alas, no response, but I will update if I do hear back from Tesla.

On the other hand, if $500 million really is just meant as the minimum acceptable opening bid, all bets are off for saying how (comparatively) good a deal it might be.

Once again, we are confronting the issue of information asymmetry: government officials have less information about what the company really wants than the company has about the various governments, and of course its own intentions. This is a major source of bargaining power for companies shopping around for an investment location. If Musk really means that Tesla will voluntarily limit the incentives it requires, that would be a refreshing change from the typical bidding wars we have seen in so many industries. Or, it could just be business as usual, with the highest bid (adjusted for cost structure at the different locations) winning. We just don't know, but the decision is expected by the end of the year.

Cross-posted at Angry Bear.

Monday, August 4, 2014

Illinois' next governor may make Romney look like a saint UPDATED

Does the name Bruce Rauner ring a bell? No, me neither. It turns out he's the Republican nominee for governor in Illinois, which under normal circumstances would mean he's a nobody. But he's been leading incumbent Democrat Pat Quinn in polls all summer, and could actually end up as the state's next governor.

This is a problem, because he is even more out of touch with the middle class than Mitt Romney (Rauner is a private equity near-billionaire) whose idea of transparency is to release the first two pages of his 1040 tax return for 2010-12, and nothing else. Romney at least released his full tax return for each of two years. As Think Progress points out, Rauner is also a big fan of the Cayman Islands as a tax haven, just like Romney. In fact, Rauner is invested in at least five funds there. Also like Romney, Rauner takes full advantage of the "carried interest" tax break that lets him treat his fees, which should be ordinary income taxed at 35 39.6%, as capital gains, subject only to a 15 20% tax rate.

Rauner's agenda is insistent on the need to spur job growth, but somehow misses the fact that Illinois' unemployment rate has fallen from 9.2% (seasonally adjusted) in June 2013 to 7.5% in May 2013 (the figure Rauner used) and even more since the agenda was published, to 7.1% in June, the third-largest drop in the country year-over-year. Still a full point worse than the June national unemployment rate, but a lot better than it was.

One place where Rauner is worse than Romney is the minimum wage. Romney, rather surprisingly, supports an increase in the minimum wage, though he did not specify a number. Rauner, in both December and January, called for Illinois to lower its minimum from $8.25 to $7.25, the national rate. After getting a tremendous amount of blowback, he now claims to support an increase.

His agenda says the state "should implement a phased-in minimum wage increase, coupled with workers' compensation and lawsuit reforms to bring down employer costs." No mention of what the rate would be, or the period over which it would be phased it. He references an op-ed he wrote in the January 9th Chicago Tribune (now only available through the Nexis subscription service), where he clearly buys into the "job-killer" meme and drops a reference to the futility of a "$20 per hour" minimum wage, for good measure. Somehow I don't think he really supports an increase.

Not only that, but Rauner proposes turning the Illinois Department of Commerce and Economic Opportunity, the state's investment promotion agency, into what he calls a "public-private partnership." He doesn't say it, but this means there will be less public oversight into the agency's affairs. As Good Jobs First has shown, such privatized agencies have exhibited high levels of abuse in recent years.

Rauner is a living, breathing example of how we have one tax system for the 1%, and another one for the rest of us. His flip-flop on the minimum wage is as phony as the concern he professes for the middle class. Yet there's a very good chance he will be the next governor of Illinois.

UPDATE: Crooks and Liars links to a brief video where Rauner says it may be necessary to go through a period in Illinois like that when President Ronald Reagan fired the air traffic controllers.

Argyrios at Daily Kos reminds me that the tax brackets have increased. Thanks.

Cross-posted at Angry Bear.