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Clandestine Corporate Subsidies Undermine Community Participation in Local Economic Development

Last week, the Nevada legislature approved $1.25 billion in tax breaks for Tesla Motors to establish a  lithium battery “Gigafatory” for electric cars. Optimists like Nevada Governor Brian Sandoval believe that the facility will create 22,000 new jobs, while others, including urban theorist Richard Florida, caution that such expectations are idealistic at best, contending that the factory will create not more than 10,000 jobs. The wide variance in the factory’s expected economic impact points to a greater problem (one among many) in megadeal-directed economic development: lack of transparency and accountability. Recent state jockeying over the location of Tesla Motors’ facility highlights the need for corporate subsidy disclosure laws, which require states and localities to make public the terms and expectations of corporate tax incentives. These laws can be used to hold corproations’ feet to the fire and, by publicizing how taxpayer dollars are being used (or abused), are a step in the direction of empowering communities to advocate for more community-sustaining economic development practices.

Over the last year, California, Arizona, New Mexico, Texas, and Nevada have been vying to establish a battery facility to power Tesla Motor’s electric cars. While the official incentive packages were kept confidential, it is known that states had to contribute at least $500 million to be considered and each of the five states had a range of tantalizing incentive packages they considered offering. For example, California could potentially have waived environmental review laws, Arizona could have offered a property tax break of up to 80 percent, Nevada could have deferred sales tax, New Mexico could have paid up to 75 percent of salaries for six months, and Texas could have exempted Tesla from taxes on electricity and natural gas use.

States courted Tesla with extravagant entreaties. Journalist Justin Pritchard reports, “Texas Gov. Rick Perry drove to California’s state Capitol in a Tesla and California state Sen. Ted Gaines delivered a gold-painted shovel to Tesla headquarters… Tucson, Arizona sent the company a preapproved building permit.” And despite the devotion shown to Tesla Motors, only one location would be chosen.

Community advocates in all five states, which included the Arizona PIRG, the California Budget ProjectProgressive Leadership Alliance of NevadaSouthwest Organizing Project (New Mexico), Texans for Public Justice, and Good Jobs First (Washington, DC) urged states to cooperate rather than compete. In their open letter, they implored state officials to begin a multi-state dialogue, stating:

Overspending on Tesla – or any other company – could be a net-loss game in which fewer public resources are then available for investments in areas that benefit all employers, such as education and training, efficient infrastructure, and public safety. All state and local taxes combined equal less than 2 percent of a typical company’s cost structure, but lost tax revenue comes 100 percent out of public budgets.

What’s needed are smarter deals, recognizing that all of our states could potentially spend $500 million on other vital public services. Any agreement struck must be fully transparent – no law requires you to negotiate with Tesla or any company behind closed doors – and, furthermore, should include robust provisions for disclosing actual costs and benefits over time. Our states’ residents should feel confident that there are strict performance requirements and money-back guarantees to ensure Tesla delivers what it promises.

“Evidence Counts: Evaluating State Tax Incentives for Jobs and Growth”

Despite their warnings, state officials remained tight lipped. Had public disclosure laws been in place across the five states, it is unlikely that Nevada would have ultimately agreed to a $1.25 billion public subsidy. Strong corporate subsidy disclosure laws enable communities to critically evaluate whether a subsidy, in proportion to the loss of tax revenue, would actually advance community interests, like fostering a stronger local economy. A new Good Jobs First report titled “Ending Job Piracy, Building Regional Prosperity” outlines successful transparency programs in the metropolitan areas of Denver, Colorado and Dayton, Ohio.

For a state like Nevada, which relies heavily on sales tax and lacks a personal income tax, franchise tax, estate tax, inheritance tax, gift tax, corporate income tax (Nevada is one of just three states without it), and taxes on corporate shares, the loss in state revenue will weigh disproportionately on the poor who rely on the state for support services. At the same time, over the next 20 years, $1.25 billion dollars will be diverted from investments in locally-owned business, education, workforce development, sustainable infrastructure, and other critically needed development strategies that lift all boats.

States and localities can work together to prevent future community-debasing megadeals as a form of economic development, and bulwark themselves against corporate acts of “economic terrorism” – as one city council member of Seattle termed it – by adopting public disclosure laws. By requiring the disclosure of corporate subsidy packages, communities reaffirm their ability to choose what kind of economy they want to build.

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