Tesla gigafactory one year later: Economic boost but lagging transparency

Just about a year ago, Gov. Brian Sandoval stood on the steps of the state Capitol with Tesla CEO Elon Musk and announced a project he prophesied had the potential to send Nevada’s economy into ludicrous mode.

With the help of an unprecedented package of tax incentives, Tesla would build a $5 billion battery gigafactory expected to more than double the world’s production of lithium-ion batteries — batteries that will not only power the Tesla Model S’s 0-to-60 in 2.8 seconds Ludicrous Mode, but also the battery packs necessary for home solar storage.

The giant $1.4 billion tax incentive package awarded to the car manufacturer also came with a promise: Unlike other tax abatements given to companies that never really had to prove they’d deliver on their economic impact numbers, the Tesla package would be the most accountable and transparent use of tax breaks to spur economic development in the state.

Now, 15 months later, a slew of economic indicators are on the upswing in the region and construction on the first phase of the gigafactory in Storey County’s Tahoe-Reno Industrial Center is ahead of schedule.

Also, a Reno Gazette-Journal analysis of Storey County’s business license activity shows a significant increase in new filings since the project’s announcement. Whether that is attributable to the gigafactory or the general economic rebound isn’t yet clear.

On the flip side, however, the promised transparency of the tax incentive has lagged. No dollar amount has yet been attached to the savings Tesla has accrued on the tax revenue Nevada is forgoing in exchange for the project.

An audit of the company’s reported job creation and value of its investment was due on Oct. 1, according to the law passed in a two-day special session last year. But the Governor’s Office of Economic Development granted Tesla’s request for an extension of that deadline. The report is expected any day now, according to GOED.

And, although it’s required by the law, Storey County has yet to do a complete analysis on the cost to the tiny local government of meeting the addition service demands created by the project. County Manager Pat Whitten, however, said he is working to improve that reporting.

Meanwhile, state legislators are keeping a close eye on the project that most agree has jump-started an economic revival in Northern Nevada.

“The information I’ve been watching is whether they’ve been making the investments we were promised and whether they are employing Nevadans like they promised,” Sen. Ben Kieckhefer, R-Reno, said. “And we see from the reports from GOED that those thresholds are being met.”

The transparency promise

Burned in the past by tax incentives that weakened the state’s ability to deliver services for an economic promise that wasn’t met, lawmakers vowed in 2014 to hold Tesla and its partner Panasonic accountable for their projections.

The tax incentive package lawmakers handed Tesla was 13 times larger than the state’s previous record-breaking deal awarded to Apple for a data center project in 2012. The deal included:

$725 million in sales tax abatements over 20 years.

$332 million in real and personal property tax abatements over 10 years.

$195 million in transferable tax credits.

$27 million in payroll tax abatements over 10 years.

$8 million in electricity rate discounts over eight years.

If all goes to plan, Tesla will operate essentially tax free for a decade and at a substantial tax discount for another 10 years.

The actual value of the incentives will depend on how many jobs are generated and how much the company actually invests.

To that end, state lawmakers required GOED to file quarterly reports on the dollar value of the tax abatements, how many jobs have been created and value of the investment made by the two companies in the project.

GOED has been filing those quarterly activity reports, but the job numbers in those reports have fluctuated and the agency has yet to put a dollar figure on the tax abatements awarded to Tesla as required in the law.

So far, Tesla has received an $800,000 rebate check from Storey County on sales taxes it paid before the state approved a certificate freeing the company and all of its subcontractors of paying sales tax at all. The amount of the state sales tax rebate hasn’t been reported, nor has a running value of the abatements Tesla receives with the certificate.

“It’s not really possible to report the value of the abatements other than to ask for an audit,” GOED Director Steve Hill said.

That audit is coming, he said.

Without it, Tesla won’t be eligible for an estimated $10 million of transferrable tax credits that are available to it based on its investment so far, Hill said.

The audit also is necessary to ensure Tesla is meeting the requirement that at least 50 percent of those working gigafactory construction jobs are Nevadans. According to the quarterly reports, the project is employing a weekly average of 583 construction workers, 73 percent of whom are Nevadans.

Tesla and Panasonic also have so far hired 82 permanent gigafactory employees. The companies’ total quarterly payroll was $2.9 million last quarter.

The companies have invested $238 million so far in the project.

All of those figures must be verified by the expected audit.

Cost to local government?

Lawmakers also wanted to make sure the project didn’t pose a significant burden to local government services such as police, fire and education. They required Storey County to file two annual reports detailing the cost to local government posed by the project.

Storey County missed its first two deadlines for those reports, filing them only after a reporter called the Legislative Counsel Bureau looking for them.

The reports eventually filed by the county were barely half a page long and contained few details required by lawmakers.

“Without that additional information, I believe it will be hard for the legislative commission to determine whether Tesla is fairly compensating the county for its loss of revenue from the abatements and the additional costs that Storey County may have incurred as a result of the business being located within its jurisdiction,” Legislative Counsel Bureau Director Rick Combs said.

Under the law, Tesla agreed to an annual payment to Storey County to compensate the local government for the increase in government services. The first annual payment negotiated by the county was $881,203.

Whitten said that amount covers the cost of staffing a fire station at the industrial center, as well as the debt payments for a new ladder truck necessary to protect the building. The payment also covers the cost of an additional sheriff’s deputy to patrol the area.

But Whitten acknowledged the county hasn’t done a detailed analysis of police calls, fire calls and other local government services required as a result of the project.

“I don’t know that we can put our arms around it for the first year,” Whitten said. “I do know that once we re-opened our fire station out there, the calls essentially tripled in that whole river corridor.”

Whitten said the county is working on a better way to quantify the costs for the next report.

“From our perspective, they are paying their own way,” Whitten said.

Whitten acknowledged the project also presents its challenges to the tiny county.

"This is a huge project, even for a large county, but especially for a small county that wants to stay small," Whitten said, describing hours and hours of plan reviews alone. "The other challenge is just by its nature, Tesla is an extraordinarily dynamic company and the project itself is equally dynamic. We went in certainly thinking we would be a car battery manufacturing plant, now there's home energy storage and commercial energy storage."

Assemblywoman Theresa Benitez-Thompson said the county needs to do better in backing up that claim.

“My intuition would be that there’s been progress in the general community and that the community is happy about what’s going on (since the project began),” she said. “But we really do need these reports to give us more finite detail on what’s happening with these abatements and what revenue we are not collecting.”

An economic boost

By all accounts, the true economic impact of the gigafactory project won’t be felt until it is fully constructed and turning out batteries. While construction jobs provide a temporary boost, it’s the manufacturing jobs that provide a true return on investment, Hill said.

“Given that their schedule has been accelerated, I would say we are ahead of where we expected to be,” Hill said. “But we are still early in the process. Most of the real economic impact will be driven by the employment and that is still in the future.”

“Everything on the site has exceeded certainly what they committed to do during the session,” he added. “They’re moving faster than planned. They’re well ahead of schedule.”

Tesla company officials did not respond to two requests for comment.

According to their website, battery production is scheduled to begin in 2017. But Hill said production could begin as early as next year at the current rate of construction.

That doesn’t mean the project has been without its economic benefits so far.

Hill said his agency no longer has to actually recruit businesses to the state. His calendar is full of companies reaching out on their own after hearing about the Tesla project.

“We met recently with a really large company — a very household name — looking at an opportunity in Northern Nevada,” Hill said, declining, as is typical, to name the business. “They said if Tesla hadn’t picked Nevada they wouldn’t even have considered it. That opened their eyes.”

Such anecdotes are common in the economic development community.

Whitten said Tesla comes up at every site selection meeting he goes to.

Economic indicators are also on the upswing, though economists can’t really pinpoint Tesla as the sole catalyst for that.

Home values in the surrounding “bedroom communities” of Sparks and Fernley have jumped 18 percent and 15 percent respectively since the project was announced.

The unemployment rates in Storey, Lyon and Washoe counties have also dropped in the past year, though Lyon County’s unemployment rate is still at 9.4 percent.

Business activity in Storey County has spiked since the Tesla project began, according to an analysis of new business licenses filed in the past three years.

This year, the number of new business licenses in Storey County jumped 41 percent compared to last year. The vast majority are in the construction and trade industries.

But TRIC is also becoming a happening spot for food trucks and caterers, looking for an opportunity to cater to construction workers who have few food options to choose from.

“Obviously there’s opportunity out there,” said Fred Dutter, owner of Papa Fred’s catering, who was recently licensed to provide catering and service from a portable food shed in Storey County. “There’s a lot of construction workers. But it’s hard to get into some of the places, like Tesla. It’s just a process.”

What's coming

Hill said the project will continue to generate both buzz and tangible economic benefits as construction nears completion.

"We certainly pay more attention to this project than any other project," Hill said. "It's such a significant thing from a general economic development standpoint."

In two years, Tesla's promised $7.5 million for public education will start flowing to the state and the company will remain involved in workforce development projects at the higher education level, Hill said.

"We'll see continued construction as well as a ramp up of the number of people employed there," he said.

By the numbers:

Average weekly construction workers: 583

Percent of workers who are Nevadans: 73 percent

Total permanent employees: 82

Total third quarter wages: $2.9 million

Total investment value so far: $238 million