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Activists warn of 'race to bottom' as states battle for Tesla plant

Scott Cohn | CNBC Special Correspondent
Bloomberg/Contributor | Bloomberg | Getty Images

A coalition of government watchdog groups is urging states to stand firm against Tesla Motors' demand for millions of dollars in incentives to win its so-called "Gigafactory" — a $5 billion facility that will supply all the batteries for the company's electric vehicles.

The plant, which Tesla says will employ some 6,500 people when it is complete in 2020, is one of the most sought-after economic development trophies in years. But the activists call the competition "a race to the bottom from which no real winner may emerge."

The comments came in an open letter to officials in California, Nevada, Texas, New Mexico and Arizona—the five states vying for the Gigafactory—from watchdog groups in each state as well as from Good Jobs First, a Washington DC-based non-profit group that tracks government subsidies to business.

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"It is time to break the harmful pattern of one state 'winning' a high-profile competition, with other states left believing they need to offer even larger tax breaks to win future deals," the letter says.

In a conference call last month on Tesla's second-quarter results, co-founder and CEO Elon Musk said he expects the winning state to put up roughly ten percent of the plant's cost, or around $500 million. It was that figure — which equals about one-fifth of Nevada's fiscal 2014 budget for K-12 education — that sparked the activists' campaign.

"If Tesla is going to run a public auction, let's make it a public auction," said Good Jobs First Executive Director Greg LeRoy in an interview.

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The letter demands that any deal to win the Tesla plant be "fully transparent."

"No law requires you to negotiate with Tesla or any other company behind closed doors," the letter says.

But so far at least, none of the states appears willing to take the groups' advice. Officials in all five states have either not responded to requests for a comment, or have declined to discuss the letter, some citing confidentiality requirements by Tesla.

Vying for Tesla's gigafactory
Vying for Tesla's gigafactory

LeRoy, who says he has gotten no responses from the states either, says he is not surprised.

"They have decades of training to keep their mouths shut," he said.

Indeed, Tesla is following a well-worn path of companies pitting states against one another to get the best possible incentives, from General Motors' multi-state competition for its Saturn plant in the 1980s (won by Tennessee) to Boeing inviting Chicago, Denver and Dallas to bid for its headquarters more than a decade ago (Chicago won thanks to a $63 million incentive package offered by the city and the state of Illinois).

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States are eager to compete for the projects because of the jobs they bring, not to mention the bragging rights. But victory can come at a hefty price. A Good Jobs First study last year found a rash of so-called "mega deals" in recent years, costing an average $456,000 per job.

Based on Tesla's projections for the Gigafactory, the winning state will spend considerably less—around $76,000 per job. But LeRoy believes the high-profile nature of both the project and of the company offer an opportunity to rewrite the rules.

"We don't look at Tesla antagonistically," said LeRoy of the company's attempt to get the best possible deal. But he says a deal that unites multiple states instead of dividing them "would be a great legacy" for Musk and the company.

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For its part, Tesla is still keeping its options open.

A spokeswoman declined to comment on the activists' letter, saying the company would instead stick to its comments in the July 31 conference call.

At the time, Musk said the company had broken ground on a possible site in Nevada, but would also be breaking ground on sites in other states so that full-blown construction can begin quickly once the winning state is chosen.

"I do want to emphasize that Tesla is not going to go for a deal that is unfair to the state, or unfair to Tesla," Musk said.