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Rising worries about giant tax breaks for Tesla

Is the slobbering over Tesla Motors' (TSLA) new gigafactory getting to be a bit much? That's what a coalition of budget watchdog groups is saying this week.

The electric-car company's planned $5 billion battery factory would be a big win indeed, and five states are competing to land it. The public isn't privy to most of the discussions between state officials and the company, but it's fair to say the competition is intense to lure the plant and all the jobs and revenue it will bring.

The coalition of five policy groups is warning state officials to take a deep breath, however. "Our states have been pitted into a race to the bottom from which no real winner may emerge," the groups wrote this week in an open letter to Arizona, California, Nevada, New Mexico and Texas.

They worry that the winning state will offer Tesla a deal that sacrifices the best interests of residents. Giving Tesla an abundance of tax breaks, for example, means fewer tax dollars left for education, infrastructure and public safety.

This is familiar territory to one of the main groups in the coalition. Good Jobs First even has a "Subsidy Tracker" that shows the tax breaks different corporations receive from state governments. The companies scoring the biggest deals are Boeing (BA), Alcoa (AA) and Intel (INTC), each receiving billions of dollars in subsidies from state governments.

The coalition says the opening bid to get the gigafactory has been set at $500 million in subsidies. That appears to come from comments that Tesla CEO Elon Musk made in a July 31 conference call to discuss his company's quarterly results.

The gigafactory will cost about $5 billion through 2020, Musk said. Tesla will probably provide 40 percent to 50 percent of that total. Its major partner on the project, Panasonic, will provide about 30 percent to 40 percent and other industrial partners could pony up between 10 percent to 20 percent.

The state, Musk said, could be expected to provide 10 percent. Well, 10 percent of $5 billion is indeed a $500 million taxpayer investment, and that estimate from Musk set tongues wagging around the five states bidding for the gigafactory.

"I would not start counting jobs on Tesla now," Senate Majority Leader Harry Reid said earlier this month. "I'm not sure they aren't playing us." Reid is from Nevada, and Tesla has gone so far as to break ground on the gigafactory just outside Reno while at the same time saying it could just as easily pull up stakes to relocate somewhere else.

Breaking ground on multiple states for a single factory is very unusual, but Tesla said it doesn't make sense to sit around losing time on developing its upcoming mass-market car, the Model 3, which could start at around $35,000.

Tesla CEO Elon Musk in the Toyota Green Room

"Any potentially duplicative investments are minor compared to the revenue that could be lost if the launch of Model 3 were affected by any delays at our primary Gigafactory site," the company said in a July 31 letter to shareholders. Tesla said it expects to choose the final location within a few months.

So, will states heed the coalition's warning and dial back the incentives? The gigafactory's promise of 6,500 new manufacturing jobs -- plus additional hiring from any suppliers that spring up nearby -- is hard for any elected official to ignore, particularly in this economic climate.

"The real losers here will be the taxpayers, who will be providing the ammunition for the latest salvo in a battle between the states that no one can ever win," wrotes Pat Garofalo, a columnist at U.S. News & World report.

Tesla is adamant, however, that it won't drain away valuable state dollars. "Tesla is not going ... for a deal that is unfair to the state or unfair to Tesla," Musk said in the July 31 conference call with analysts. "We want to make sure it's compelling for all parties."

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