Via @BlogWood, I learned that Boeing is going to move 2000 skilled jobs away from Washington state, despite just receiving $8.7 billion (with a B) in subsidies for the years 2025-2040. Really, I'm speechless. "Chutzpah" is one of the more printable words I can think of to describe this.
You will recall that the state's legislators were angry when their $2 billion (present value of $3.2 billion over 20 years) 2003 subsidy for the Dreamliner did not stop Boeing from putting a Dreamliner assembly line in South Carolina. So the 2013 subsidy was supposed to guarantee that Boeing couldn't do this again.
Boeing's response no doubt will be that these jobs are in the Defense division, not in civil aircraft. Thus they are not covered by either the 2003 or the 2013 subsidy. This has already been hinted at by a commenter on the Business Week article, wraiths13@yahoo.com.
Thursday, October 2, 2014
Tuesday, September 30, 2014
Apple set to lose billions in EU state aid case
The Financial Times writes today that the European Commission has decided to open a formal investigation into whether Apple received illegal subsidies ("state aid," in EU-speak) from Ireland going as far back as 1991. The FT quotes "people involved in the case" as saying that this can cost Apple billions of euros.
What the decision technically does is establish what is known as an "Article 108(2)" investigation, which means that the Commission has concluded from its preliminary investigation that state aid has been granted in violation of the EU's competition policy rules. It is therefore opening a more comprehensive investigation. It is worth noting that if the Commission opens an Article 108(2) investigation, it almost always decides that illegal state aid was given. The only recent exception I can think of is state aid from Poland to relocate Dell computer manufacturing from Ireland in 2009, and I actually think the Commission should have ruled against that as well, as I discussed in my book Investment Incentives and the Global Competition for Capital.
As I speculated in June, one issue raised by the Commission is Apple's "nowhere" subsidiaries created under Irish law. Both Apple Operations Europe (AOE) and its subsidiary, Apple Sales International (ASI), are incorporated in Ireland, hence not immediately taxable by the United States until they repatriate their profits to the U.S. However, they are managed from the U.S., which by the provisions of Irish tax law makes them not taxable in Ireland. It is these provisions that are at issue in the case. See, in particular, paragraphs 25-29 of the decision, especially paragraph 29: "According to the information provided by the Irish authorities, the territory of tax residency of AOE and ASI is not identified." Richard Murphy suggests today that these corporate provisions account for the largest proportion of Apple's tax risk.
What is especially important for this investigation (and the similar ones of Starbucks and Fiat) is that if the Commission finds that state aid was given, it was never notified in advance to the Commission. The state aid laws require that any proposed subsidy be notified in advance and not implemented until approved. Ever since the 1980s, the penalty for giving non-notified, illegal ("not compatible with the common market") aid is that the aid must be repaid with interest. Since this alleged aid was not notified, and will probably be found to be incompatible with the common market, Apple will be on the hook for aid repayment.
As I reported in June, this would not be the first time the Commission has used the state aid law to force changes to Ireland's tax system. In 1998, it ruled that Ireland's 10% corporate income tax for manufacturing was specific enough to be a state aid. Ireland then reduced the corporate income tax to 12.5% for non-manufacturing firms, while raising it to that level for manufacturing (mainly foreign multinational) companies.
If the Commission rules against Ireland and Apple, this will send a signal that the European Union is going to take tax manipulation very seriously with all the tools at its disposal. It would be especially great to see one of the pioneers of arcane tax avoidance strategies taken down a notch. For Ireland, at least there would be a small silver lining from losing this case: Apple's aid repayment would go to Ireland and help reduce its budget deficit.
Cross-posted at Angry Bear.
What the decision technically does is establish what is known as an "Article 108(2)" investigation, which means that the Commission has concluded from its preliminary investigation that state aid has been granted in violation of the EU's competition policy rules. It is therefore opening a more comprehensive investigation. It is worth noting that if the Commission opens an Article 108(2) investigation, it almost always decides that illegal state aid was given. The only recent exception I can think of is state aid from Poland to relocate Dell computer manufacturing from Ireland in 2009, and I actually think the Commission should have ruled against that as well, as I discussed in my book Investment Incentives and the Global Competition for Capital.
As I speculated in June, one issue raised by the Commission is Apple's "nowhere" subsidiaries created under Irish law. Both Apple Operations Europe (AOE) and its subsidiary, Apple Sales International (ASI), are incorporated in Ireland, hence not immediately taxable by the United States until they repatriate their profits to the U.S. However, they are managed from the U.S., which by the provisions of Irish tax law makes them not taxable in Ireland. It is these provisions that are at issue in the case. See, in particular, paragraphs 25-29 of the decision, especially paragraph 29: "According to the information provided by the Irish authorities, the territory of tax residency of AOE and ASI is not identified." Richard Murphy suggests today that these corporate provisions account for the largest proportion of Apple's tax risk.
What is especially important for this investigation (and the similar ones of Starbucks and Fiat) is that if the Commission finds that state aid was given, it was never notified in advance to the Commission. The state aid laws require that any proposed subsidy be notified in advance and not implemented until approved. Ever since the 1980s, the penalty for giving non-notified, illegal ("not compatible with the common market") aid is that the aid must be repaid with interest. Since this alleged aid was not notified, and will probably be found to be incompatible with the common market, Apple will be on the hook for aid repayment.
As I reported in June, this would not be the first time the Commission has used the state aid law to force changes to Ireland's tax system. In 1998, it ruled that Ireland's 10% corporate income tax for manufacturing was specific enough to be a state aid. Ireland then reduced the corporate income tax to 12.5% for non-manufacturing firms, while raising it to that level for manufacturing (mainly foreign multinational) companies.
If the Commission rules against Ireland and Apple, this will send a signal that the European Union is going to take tax manipulation very seriously with all the tools at its disposal. It would be especially great to see one of the pioneers of arcane tax avoidance strategies taken down a notch. For Ireland, at least there would be a small silver lining from losing this case: Apple's aid repayment would go to Ireland and help reduce its budget deficit.
Cross-posted at Angry Bear.
Thursday, September 25, 2014
Iceland Bankers Convicted and Unemployment is Down
Remember Iceland? During the high-flying early 2000s, its three main banks went berserk, paying high interest rates to international investors that accumulated deposits equal to more than 100% of the country's gross domestic product (GDP) and making loans equal to 980% of GDP. When the collapse came, Iceland took a route not taken by Ireland, Spain, and other EU countries: Rather than bail out the banks, the government simply let them go bankrupt. The value of the krona fell by about half, the country was embroiled in disputes with the Netherlands and the United Kingdom over paying off Dutch and British depositors, and it had to take an International Monetary Fund (IMF) loan just to stay afloat.
When we last checked in, there were indictments and criminal investigations of the officers of all three banks, and Icelandic banks were forced to forgive all mortgage debt in excess of 110% of a home's value. Iceland's 2012 unemployment rate was 6.0% compared to Ireland's 14.7%. But that was two years ago; what's happening now?
In December 2013, four top officials of the country's formerly largest bank, Kaupthing, were sentenced to jail terms ranging from five and a half years for its chief executive to three years for one of the majority owners. While their cases are currently under appeal, they were indicted this July for further fraud charges. Various bank and government officials have had final convictions as determined by the Supreme Court of Iceland; Wikipedia has a handy rundown on where numerous cases stand, all based on Icelandic-language sources so I cannot read them myself.
Homeowners are still in difficulty in Iceland, however. This is because mortgages in Iceland are usually indexed to the inflation rate; that is, the amount of principal is increased by the rate of inflation. Iceland's inflation rate was 5.2% in 2012 and 3.9% in 2013, while Ireland's inflation was 1.7% in 2012 and a near-deflation 0.5% in 2013. That is a pretty hefty load for Icelandic homeowners. The current conservative government has instituted a new round of mortgage relief, but there are a lot of devils in the details. Almost half of the "relief" comes in the form of people being allowed to use their retirement savings (which are tax-advantaged like U.S. individual retirement accounts) to pay down their debt. Yeah, it's great to pay your mortgage with pre-tax dollars, but it's still your own money you're paying, which will no longer be available for retirement. The IMF has raised doubts about the plan's overall effect on government finances, too.
As I mentioned in my last post, unemployment in Iceland stood at 4.4% in July, versus 11.5% in Ireland (navigate to Labour Force Statistics, then Short-term Statistics, Short-term Labour Market Statistics, then Harmonised Unemployment Rates). And, as I also mentioned in the post, Ireland's unemployment rate has been artificially lowered due to net emigration from the country.
While Iceland suffered a great deal from the crisis and is by no means out of the woods, it looks like the country made the right call by not bailing out the banks. The economy is growing and unemployment is down to less than half of its peak crisis level. As Paul Krugman has emphasized, having your own currency to devalue helps as well, although it substantially raised inflation and mortgage balances. Iceland was dealt a bad hand by its bankers, but it's making at least some of them pay for that, which is more than we can say in the United States.
Cross-posted at Angry Bear.
When we last checked in, there were indictments and criminal investigations of the officers of all three banks, and Icelandic banks were forced to forgive all mortgage debt in excess of 110% of a home's value. Iceland's 2012 unemployment rate was 6.0% compared to Ireland's 14.7%. But that was two years ago; what's happening now?
In December 2013, four top officials of the country's formerly largest bank, Kaupthing, were sentenced to jail terms ranging from five and a half years for its chief executive to three years for one of the majority owners. While their cases are currently under appeal, they were indicted this July for further fraud charges. Various bank and government officials have had final convictions as determined by the Supreme Court of Iceland; Wikipedia has a handy rundown on where numerous cases stand, all based on Icelandic-language sources so I cannot read them myself.
Homeowners are still in difficulty in Iceland, however. This is because mortgages in Iceland are usually indexed to the inflation rate; that is, the amount of principal is increased by the rate of inflation. Iceland's inflation rate was 5.2% in 2012 and 3.9% in 2013, while Ireland's inflation was 1.7% in 2012 and a near-deflation 0.5% in 2013. That is a pretty hefty load for Icelandic homeowners. The current conservative government has instituted a new round of mortgage relief, but there are a lot of devils in the details. Almost half of the "relief" comes in the form of people being allowed to use their retirement savings (which are tax-advantaged like U.S. individual retirement accounts) to pay down their debt. Yeah, it's great to pay your mortgage with pre-tax dollars, but it's still your own money you're paying, which will no longer be available for retirement. The IMF has raised doubts about the plan's overall effect on government finances, too.
As I mentioned in my last post, unemployment in Iceland stood at 4.4% in July, versus 11.5% in Ireland (navigate to Labour Force Statistics, then Short-term Statistics, Short-term Labour Market Statistics, then Harmonised Unemployment Rates). And, as I also mentioned in the post, Ireland's unemployment rate has been artificially lowered due to net emigration from the country.
While Iceland suffered a great deal from the crisis and is by no means out of the woods, it looks like the country made the right call by not bailing out the banks. The economy is growing and unemployment is down to less than half of its peak crisis level. As Paul Krugman has emphasized, having your own currency to devalue helps as well, although it substantially raised inflation and mortgage balances. Iceland was dealt a bad hand by its bankers, but it's making at least some of them pay for that, which is more than we can say in the United States.
Cross-posted at Angry Bear.
Saturday, September 20, 2014
Irish Austerity Exodus Lingers On
August brings us the annual Irish immigration data, so it's time to look at what has happened in their statistical reporting "year" that ended in April 2014. While better than last year, it's still not pretty.
According to the Central Statistics Office, net emigration continued in 2013-14, with net emigration of 21,400. a decline of just over 1/3 compared to net emigration of 33,100 in 2012-13. Of the new total, once again, the Irish themselves accounted for over 100% of the net departures, with 29,200 more Irish nationals leaving the country than returning.
This continued out-migration continues to diminish any published improvements in Irish employment numbers and unemployment rate. In the year to the second quarter of 2014 (the closest quarter to April 2014 immigration figures), employment increased to 1,901,600, a rise of 31,600 over a year previous. Unemployment fell by even more, 46,200, in the year to Q2 2014. So, while there is definite improvement even accounting for emigration, Ireland is nowhere near back to its peak 2007 employment figure of about 2.15 million. So employment is still 11.6% below its peak.
In Iceland (create a custom table here), by contrast, despite (but also in part because of of) the almost 50% decline in the value of the kronor, the sharp dip in unemployment has been almost completely erased, with July 2014's value of 179,000 employed being a mere 1.7% below May 2008's maximum of 182,100. Indeed, Iceland's unemployment rate has fallen to a mere 4.4% in July 2014, compared with 6.2% in the United States -- and 11.5% in Ireland.
So the lesson, if I have haven't pounded it into your head enough already, is that Ireland's austerity measures are not paying off, as it has failed to regain its pre-crisis employment level and has seen its unemployment rate fall only by reverting to its historical solution of exporting people, as in the 1980s.
Cross-posted at Angry Bear.
According to the Central Statistics Office, net emigration continued in 2013-14, with net emigration of 21,400. a decline of just over 1/3 compared to net emigration of 33,100 in 2012-13. Of the new total, once again, the Irish themselves accounted for over 100% of the net departures, with 29,200 more Irish nationals leaving the country than returning.
This continued out-migration continues to diminish any published improvements in Irish employment numbers and unemployment rate. In the year to the second quarter of 2014 (the closest quarter to April 2014 immigration figures), employment increased to 1,901,600, a rise of 31,600 over a year previous. Unemployment fell by even more, 46,200, in the year to Q2 2014. So, while there is definite improvement even accounting for emigration, Ireland is nowhere near back to its peak 2007 employment figure of about 2.15 million. So employment is still 11.6% below its peak.
In Iceland (create a custom table here), by contrast, despite (but also in part because of of) the almost 50% decline in the value of the kronor, the sharp dip in unemployment has been almost completely erased, with July 2014's value of 179,000 employed being a mere 1.7% below May 2008's maximum of 182,100. Indeed, Iceland's unemployment rate has fallen to a mere 4.4% in July 2014, compared with 6.2% in the United States -- and 11.5% in Ireland.
So the lesson, if I have haven't pounded it into your head enough already, is that Ireland's austerity measures are not paying off, as it has failed to regain its pre-crisis employment level and has seen its unemployment rate fall only by reverting to its historical solution of exporting people, as in the 1980s.
Cross-posted at Angry Bear.
Tuesday, September 16, 2014
Tesla Deal Even Worse Than First Thought
Via an email from Greg LeRoy of Good Jobs First, we learn that the Tesla deal, as enacted by the Nevada Legislature, is even worse than announced. Aside from the widely touted 6500 jobs only being 6000 jobs for which the state is paying for, it turns out that Tesla doesn't even have to create the jobs itself!
You read that right. Tesla gets to receive tax credits for investment and job creation not only for itself, but for any of its suppliers ("participants," in the law's language) that locate on the project's huge location. Theoretically, Telsa does not even have to create half the jobs for which it will receive subsidies.
Why does this matter? Isn't Tesla still responsible for bringing all those jobs (assuming they all come, which Richard Florida doubts) to Nevada? Yes, but it tells us that all the figures bandied about for indirect and induced jobs are just malarkey. The state claims that there will be a total of 22,000 jobs ultimately due to the project, but that depends on Tesla itself creating 6500 jobs. If the state is instead paying for some of the indirect jobs it claims would be due to the project, it is admitting that the Tesla base of direct jobs is smaller than 6000; therefore, 22,000 jobs would no longer be supported (assuming you buy into that methodology in the first place, which you shouldn't). These multipliers are easily manipulated, and we have just gotten an object lesson in how to do that.
Amazingly, the media is not paying much attention. As far as I can tell from searching the Web and the premium Nexis news service, the only place that has picked up LeRoy's statement is the Las Vegas Sun's blog. Really, this is no time for the media to be letting us down!
I encourage you to check the link to the legislation above. It is a sight to behold, and proof once again that bad economic deals are a dime a dozen, leaving the average taxpayer to pick up the slack.
Cross-posted at Angry Bear.
You read that right. Tesla gets to receive tax credits for investment and job creation not only for itself, but for any of its suppliers ("participants," in the law's language) that locate on the project's huge location. Theoretically, Telsa does not even have to create half the jobs for which it will receive subsidies.
Why does this matter? Isn't Tesla still responsible for bringing all those jobs (assuming they all come, which Richard Florida doubts) to Nevada? Yes, but it tells us that all the figures bandied about for indirect and induced jobs are just malarkey. The state claims that there will be a total of 22,000 jobs ultimately due to the project, but that depends on Tesla itself creating 6500 jobs. If the state is instead paying for some of the indirect jobs it claims would be due to the project, it is admitting that the Tesla base of direct jobs is smaller than 6000; therefore, 22,000 jobs would no longer be supported (assuming you buy into that methodology in the first place, which you shouldn't). These multipliers are easily manipulated, and we have just gotten an object lesson in how to do that.
Amazingly, the media is not paying much attention. As far as I can tell from searching the Web and the premium Nexis news service, the only place that has picked up LeRoy's statement is the Las Vegas Sun's blog. Really, this is no time for the media to be letting us down!
I encourage you to check the link to the legislation above. It is a sight to behold, and proof once again that bad economic deals are a dime a dozen, leaving the average taxpayer to pick up the slack.
Cross-posted at Angry Bear.
Wednesday, September 10, 2014
Understanding Piketty, part 5 (conclusion)
Thomas Piketty's Capital in the Twenty-First Century is the first book to make a data-driven examination of economic inequality. Based on hundreds of years worth of data, it attempts to determine the long-term trends in inequality and the social and political consequences that follow from them.
In this final post, I want to highlight the most important points of the book, including a few I have not yet discussed. Beyond that, I want to consider parts of the book that are perhaps a bit less persuasive.
First of all, the data has been almost unchallenged. The one person who claimed substantial flaws in it, Chris Giles of the Financial Times, is road kill.
Second, three major results emerge from the data bringing dearly-held economists' views into question. A) There is no Kuznets Curve: Developed countries do not keep getting more equal; rather, the data show that they have become less equal since about 1980. B) There is no fixed share for capital and labor income, as assumed by the Cobb-Douglas production function: Capital's share of national income has risen since 1975. C) Franco Modigliani's view that most savings was for retirement, not inheritance, is wrong. Depending on the country, no more than 20% of private wealth is in the form of annuitized wealth that ends at death.
Third, the big theoretical payoff is that some economists' happy stories about how everyone earns their marginal productivity are simply incorrect. These bedtime stories may make the rich feel like their high incomes and wealth are deserved. The fact of the matter, though, is that high incomes are not the result of merit but of bargaining power. The increase of capital mobility since the 1970s is one element in disciplining labor, while the reduction in the top income tax rate gave top corporate executives more incentive to push for large wage increases and exploit the large uncertainty regarding their individual contribution to corporate success.
Fourth and most obviously, r>g* is no historical necessity, but it has held true virtually everywhere for all of human history. As long as it is true, there is a tendency for inequality to worsen.
Moving on to aspects of the book I have not previously covered, one discussion that stood out was Piketty's discussion of the weakness of measures of gross domestic product (p. 92). In particular, he notes that there are no good quality measures for adjusting GDP:
As I discussed before, Piketty advocates a global annual tax on wealth as the solution to the problem of inequality. However, he relegates an alternative global tax, on financial transactions, to a single paragraph plus a single footnote. He claims that an FTT would "dry up" "high frequency transactions," and for that reason would not raise much revenue. Of course, this would depend on which transactions are taxed (James Tobin had originally proposed taxing foreign exchange transactions) and what the tax rate is. A balance can be struck between "throwing sand in the wheels," as Tobin described it, and raising revenue. Contra Piketty, I don't think it is something that can be rejected out of hand, and I plan to discuss an FTT more fully in the future.
So what's wrong with the book? Honestly, not much. I mentioned before that I wasn't fully persuaded by Piketty's evidence that bigger fortunes necessarily earn higher rates of return. However, this is not a big issue, especially as the claim does seem fairly plausible.
At times, however, Piketty's political arguments seem almost ad hoc. He attributes (p. 509) the rise of Reaganism and Thatcherism in part to a feeling people had that other countries were catching up to them. He presents no evidence for this claim, which does not strike me as particularly plausible. Similarly, he lectures the leaders of large EU countries (p. 523) for their failure to align taxation among the Member States, rejecting their leaders' point that EU institutions (unanimity is required for changes affecting direct taxation) and other Member States (read: Ireland) can block fiscal coordination indefinitely. But it's true! It's right there in the Treaty! So he's a little too glib about politics for my tastes; but then, I'm a political scientist, so perhaps I'm not the most neutral of sources.
Bottom line: You've already bought the book, so take it off the coffee table and read it! It may take you a few weeks, or a few months, but you'll be glad you did.
* r>g means that the rate of return on investment, r, is greater than an economy's growth rate, g.
Cross-posted at Angry Bear.
In this final post, I want to highlight the most important points of the book, including a few I have not yet discussed. Beyond that, I want to consider parts of the book that are perhaps a bit less persuasive.
First of all, the data has been almost unchallenged. The one person who claimed substantial flaws in it, Chris Giles of the Financial Times, is road kill.
Second, three major results emerge from the data bringing dearly-held economists' views into question. A) There is no Kuznets Curve: Developed countries do not keep getting more equal; rather, the data show that they have become less equal since about 1980. B) There is no fixed share for capital and labor income, as assumed by the Cobb-Douglas production function: Capital's share of national income has risen since 1975. C) Franco Modigliani's view that most savings was for retirement, not inheritance, is wrong. Depending on the country, no more than 20% of private wealth is in the form of annuitized wealth that ends at death.
Third, the big theoretical payoff is that some economists' happy stories about how everyone earns their marginal productivity are simply incorrect. These bedtime stories may make the rich feel like their high incomes and wealth are deserved. The fact of the matter, though, is that high incomes are not the result of merit but of bargaining power. The increase of capital mobility since the 1970s is one element in disciplining labor, while the reduction in the top income tax rate gave top corporate executives more incentive to push for large wage increases and exploit the large uncertainty regarding their individual contribution to corporate success.
Fourth and most obviously, r>g* is no historical necessity, but it has held true virtually everywhere for all of human history. As long as it is true, there is a tendency for inequality to worsen.
Moving on to aspects of the book I have not previously covered, one discussion that stood out was Piketty's discussion of the weakness of measures of gross domestic product (p. 92). In particular, he notes that there are no good quality measures for adjusting GDP:
For example, if a private health insurance system costs more than a public system but does not yield truly superior quality (as a comparison of the United States and Europe suggests), then GDP will be artificially overvalued in countries that rely mainly on private insurance.Parenthetically, it seems to me that any high-cost low-quality system would overstate GDP, whether it's private or public. But the point to remember is that we are talking big bucks here: if the United States were spending merely what the #2 country (Netherlands, in terms of percent of GDP) does, we would be spending almost $1 trillion less, so presumably this means U.S. GDP is overstated by $1 trillion. That's still a lot of money!
As I discussed before, Piketty advocates a global annual tax on wealth as the solution to the problem of inequality. However, he relegates an alternative global tax, on financial transactions, to a single paragraph plus a single footnote. He claims that an FTT would "dry up" "high frequency transactions," and for that reason would not raise much revenue. Of course, this would depend on which transactions are taxed (James Tobin had originally proposed taxing foreign exchange transactions) and what the tax rate is. A balance can be struck between "throwing sand in the wheels," as Tobin described it, and raising revenue. Contra Piketty, I don't think it is something that can be rejected out of hand, and I plan to discuss an FTT more fully in the future.
So what's wrong with the book? Honestly, not much. I mentioned before that I wasn't fully persuaded by Piketty's evidence that bigger fortunes necessarily earn higher rates of return. However, this is not a big issue, especially as the claim does seem fairly plausible.
At times, however, Piketty's political arguments seem almost ad hoc. He attributes (p. 509) the rise of Reaganism and Thatcherism in part to a feeling people had that other countries were catching up to them. He presents no evidence for this claim, which does not strike me as particularly plausible. Similarly, he lectures the leaders of large EU countries (p. 523) for their failure to align taxation among the Member States, rejecting their leaders' point that EU institutions (unanimity is required for changes affecting direct taxation) and other Member States (read: Ireland) can block fiscal coordination indefinitely. But it's true! It's right there in the Treaty! So he's a little too glib about politics for my tastes; but then, I'm a political scientist, so perhaps I'm not the most neutral of sources.
Bottom line: You've already bought the book, so take it off the coffee table and read it! It may take you a few weeks, or a few months, but you'll be glad you did.
* r>g means that the rate of return on investment, r, is greater than an economy's growth rate, g.
Cross-posted at Angry Bear.
Friday, September 5, 2014
Nevada is Biggest Loser of Tesla Auction UPDATED
On September 4, Nevada Governor Brian Sandoval announced that electric car-maker Tesla had chosen Nevada for the location of its much sought-after Gigafactory. Contrary to its claim that it wanted $500 million, Tesla in fact wanted speed plus the highest bidder. As I analyzed last month, a $500 million subsidy would have been relatively low as measured by the benchmarks of cost per job and aid intensity (subsidy divided by investment).
Instead, Nevada gave Tesla subsides worth $1.25 billion over 20 years. This is not a good deal, as I will detail below.
First, of course the cost was far higher than Tesla had hinted; it clearly was just trying to squeeze extra incentives out of the "winner" by conducting a five-state auction. Using a discount rate of 2.5% (the 10-year Treasury bond yield on Sept. 4 was 2.45%) the $1.25 billion in nominal value has a present value of about $1.1 billion, by my calculations. In fact, it is probably quite close to the full $1.25 billion because the sales tax breaks based on the actual investment in plant and equipment will be heavily front-loaded, not spread evenly over the 20-year period.
According to the Reno Gazette-Journal article linked above, the incentives break down as follows:
$725 million in sales tax abatements over 20 years
$332 million in property tax abatements over 10 years
$120 million in investment tax credits
$75 million in job creation tax credits for up to 6000 (note: not 6500) jobs
$27 million in a 10-year business tax abatement
$8 million in discounted electricity rates for 8 years
Note by the way that we should, in this instance, count the sales tax breaks as a subsidy. Because Nevada does not have either personal or corporate income tax, sales tax becomes more important to the state, though of course not as much as for a state lacking Nevada's taxes on gambling revenue. More specifically, though, this is for sales of plant and equipment to be used in the factory, so it is directly tied to the investment.
Second as pointed out to me by Richard Florida in a draft article for CityLab, while these jobs pay $25 per hour, the facility will be relatively self-contained, and will not create spinoff jobs on the scale that, for example, an automobile assembly facility does. Tesla's research and development will still be conducted at its headquarters in Palo Alto, California, not at the Gigafactory. One way we can tell: Tesla is giving a whopping $1 million to the University of Nevada-Las Vegas for research on batteries. (Professor Florida's excellent article is here.)
In terms of our usual metrics, a $1.1 billion subsidy for a $5 billion investment is 22% aid intensity, certainly not Boeing territory but higher than would be allowed in the European Union. It is lower than the typical U.S. auto assembly plant aid intensity of about 33%. However, the cost per job is $183,333, about 20% higher than an auto plant typically receives in the United States, for a project that is not as good as an auto plant. Thus, while it is hardly the worst deal we've seen, the incentive package is far too high for what the state is getting.
Moreover, this is quite a risky deal, too. As the Reno Gazette-Journal points out, this incentive package is 13 times larger than Nevada's previous biggest incentive, a mere $89 million for Apple. Talk about putting all your eggs in one basket!
Finally, we should note that if the Tesla project is successful, it will mean that we will see job losses at competing facilities (mainly engine plants) elsewhere in the country, so that national net job creation will be less than 6500. This will raise the true cost per job of the project.
Thus, we see yet another bad incentive deal, but at a much larger scale than usual. The package does need legislative approval, so it's not quite a done deal. But assuming it passes, Nevada taxpayers will take on a tremendous burden to lighten CEO Elon Musk's load.
Cross-posted at Angry Bear.
Instead, Nevada gave Tesla subsides worth $1.25 billion over 20 years. This is not a good deal, as I will detail below.
First, of course the cost was far higher than Tesla had hinted; it clearly was just trying to squeeze extra incentives out of the "winner" by conducting a five-state auction. Using a discount rate of 2.5% (the 10-year Treasury bond yield on Sept. 4 was 2.45%) the $1.25 billion in nominal value has a present value of about $1.1 billion, by my calculations. In fact, it is probably quite close to the full $1.25 billion because the sales tax breaks based on the actual investment in plant and equipment will be heavily front-loaded, not spread evenly over the 20-year period.
According to the Reno Gazette-Journal article linked above, the incentives break down as follows:
$725 million in sales tax abatements over 20 years
$332 million in property tax abatements over 10 years
$120 million in investment tax credits
$75 million in job creation tax credits for up to 6000 (note: not 6500) jobs
$27 million in a 10-year business tax abatement
$8 million in discounted electricity rates for 8 years
Note by the way that we should, in this instance, count the sales tax breaks as a subsidy. Because Nevada does not have either personal or corporate income tax, sales tax becomes more important to the state, though of course not as much as for a state lacking Nevada's taxes on gambling revenue. More specifically, though, this is for sales of plant and equipment to be used in the factory, so it is directly tied to the investment.
Second as pointed out to me by Richard Florida in a draft article for CityLab, while these jobs pay $25 per hour, the facility will be relatively self-contained, and will not create spinoff jobs on the scale that, for example, an automobile assembly facility does. Tesla's research and development will still be conducted at its headquarters in Palo Alto, California, not at the Gigafactory. One way we can tell: Tesla is giving a whopping $1 million to the University of Nevada-Las Vegas for research on batteries. (Professor Florida's excellent article is here.)
In terms of our usual metrics, a $1.1 billion subsidy for a $5 billion investment is 22% aid intensity, certainly not Boeing territory but higher than would be allowed in the European Union. It is lower than the typical U.S. auto assembly plant aid intensity of about 33%. However, the cost per job is $183,333, about 20% higher than an auto plant typically receives in the United States, for a project that is not as good as an auto plant. Thus, while it is hardly the worst deal we've seen, the incentive package is far too high for what the state is getting.
Moreover, this is quite a risky deal, too. As the Reno Gazette-Journal points out, this incentive package is 13 times larger than Nevada's previous biggest incentive, a mere $89 million for Apple. Talk about putting all your eggs in one basket!
Finally, we should note that if the Tesla project is successful, it will mean that we will see job losses at competing facilities (mainly engine plants) elsewhere in the country, so that national net job creation will be less than 6500. This will raise the true cost per job of the project.
Thus, we see yet another bad incentive deal, but at a much larger scale than usual. The package does need legislative approval, so it's not quite a done deal. But assuming it passes, Nevada taxpayers will take on a tremendous burden to lighten CEO Elon Musk's load.
Cross-posted at Angry Bear.
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