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Nevada wins Tesla gigafactory, but at what cost?

In choosing Nevada for its $5 billion gigafactory, Tesla Motors apparently did not check CNBC's 2014 rankings of America's Top States for Business. If company officials had, they would have found a state that finished 29th overall, with the second worst education system in the country (behind neighboring Arizona).

But Tesla had other priorities, including a generous incentive package from the winning state. Nevada delivered that—and then some.


A battery awaits installation in a Model S sedan at Tesla's assembly plant in Fremont, California
Noah Berger | Bloomberg | Getty Images
A battery awaits installation in a Model S sedan at Tesla's assembly plant in Fremont, California

In July, company co-founder Elon Musk said he expected $500 million in assistance from the state where the battery plant would be located. Nevada more than doubled that—$1.25 billion over 20 years, including a near total tax break for the first decade. One watchdog group that tracks state subsidies to business says it is the latest step in a race to the bottom, with states spending big money for trophy deals.

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"All too often, tax breaks aren't worth it because you're taking money away from other things that matter to all the other employers," said Greg LeRoy, executive director of Washington, D.C.-based Good Jobs First. "Small businesses in Nevada will have less money in the education system, the job training programs and infrastructure—things that matter and benefit all employers."

But Republican Gov. Brian Sandoval said the long-term benefits to Nevada far outweigh the cost of nearly $200,000 per job.

"Tesla will build the world's largest and most advanced battery factory in Nevada, which means nearly 100 billion dollars in economic impact to the Silver State over the next 20 years," Sandoval said in a statement.

Under the agreement, Tesla promised at least $3.5 billion in direct investment in the state. The company has said the plant will eventually create about 6,500 mostly high-paying jobs.

But LeRoy is unimpressed.

"I think they are exaggerating on ripple effects. Certainly, Gov. Sandoval's 80-to-1 cost-benefit claim is off the charts wrong. No deal generates anything like that," LeRoy said in an interview.

Gambling on a state's future

Other states have gambled much more than Nevada to win or retain big employers.

Last year the Washington State Legislature approved a massive $8.7 billion subsidy package—the largest in U.S. history—to win a Boeing assembly plant for the extended-range version of its 777 aircraft. Lawmakers took just three days to approve the package of tax breaks and incentives, allowing Washington to beat at least 10 other states bidding on the facility.

The record package was actually an extension of an earlier state subsidy to the company—$3.24 billion in 2003—which ranks as the third largest in U.S. history, according to Good Jobs First.

The big bets sometimes don't pay off.

In 2010, Michigan provided $125 million in incentives to attract battery manufacturer A123. The company built two plants in the state but filed for bankruptcy in 2012. The company was eventually acquired by a Chinese group and still maintains operations at the Michigan facilities—but nowhere close to the 5,000 jobs the company promised.

Nevada's winning package for Tesla ranks as the tenth-largest incentive package in U.S. history. But Musk told CNBC's Phil LeBeau the dollar figure the state offered was not the deciding factor.

"The biggest single factor was time to completion, because unless the gigafactory is ready when we need to produce the mass-market, affordable electric car, then the vehicle factory would be stalled. So time to execution was extremely important," Musk said.

The state has touted its streamlined permitting system as a big advantage for facilities like Tesla's, a factor considered in our Top States study's Business Friendliness category. Nevada ranked 22nd in that measure for 2014.

By Scott Cohn, CNBC
@ScottCohnTV