Here Comes Tesla’s Next Big “Ask” from Taxpayers

Submitted by Capsec Advisors

Amid a laser-like focus on ramping Model 3 production, a new emphasis on cost control and an initiative to eliminate any contractor or consultant that is not absolutely essential to the enterprise, Tesla’s management found the time and resources to commission a consulting firm to prepare a report on Tesla’s contribution to California’s economy. News of this report, along with emailed statements from Tesla and glowing praise from the President of the California Manufacturers and Technology Association Dorothy Rothrock appeared in Silicon Valley Business Journal. A copy of the report, commissioned by Tesla and prepared by consulting firm IHS Markit, can be found here.

Unless the public relations department of a company finds itself sitting around with too much extra money and too much time on their hands, there is only one reason a company commissions a report like this: they want something from taxpayers.

This is a prelude to Tesla’s next big ask of California’s state government. The Federal government is likely a dead end, as a bailout of Tesla would likely outrage many Trump and Congressional Republican supporters. However, California might just be persuadable.

IHS Market Report Claims

The IHS Markit report claims, among other things that

• Tesla’s operations support 51,000 jobs in California, including the 20,000 workers Tesla employs directly in the state.
• Tesla paid its workers a total of $2.1 billion in wages and equity in FY2017 (no mention as to how that equity was valued or what percentage of total compensation it represents).
• Tesla “infused” approximately $4.1 billion into the California economy (this apparently includes the wages and equity mentioned above plus payments to California suppliers.
• Tesla contributed directly $2.0 billion and indirectly $5.1 billion to Gross State Product in 2017.
• Tesla paid $328 million in taxes directly to state and local governments in California in 2017 and the indirect impact was another $345 million in tax payments.

Merits of the Claims

We will not spend a great deal of time on the merits of these claims. These kinds of reports are notoriously loaded with assumptions that are impossible to prove or disprove. However, we would point out a major flaw in these kinds of economic analysis that are often used to support a Keynesian stimulus approach to economic development by government intervention: they assume that the resources used by a given economic activity would not be employed otherwise.

Economic analysis often uses the term ceteris paribus—all other things being equal—but all other things are not equal. The worker Tesla employed might have found employment elsewhere; it may have even been more stable, safer employment that did not entail payment in Tesla equity, that is subject to some uncertainty as to its ultimate value.

To highlight this point, it may be helpful to consider the economic activity generated by Tesla’s competitors in California. These competitors’ operations are being impaired by Tesla’s sale of deeply subsidized cars in the state. While Tesla’s competitors do not manufacture cars in the state, they account for

• 1,366 dealerships
• employing 140,596 jobs (that pay cash),
• accounting for $8.56 billion in wages,
• paying $9.38 billion in taxes, and
• making $50 million of charitable contributions per year.

On a more minor point, the IHS Markit report assumes that the $2.1 billion in “wages” paid to Tesla workers is spent in the California economy. As discussed above, the report includes in these “wages” Tesla equity granted to employees without quantifying what percentage of wages this equity represented. We are skeptical as to how many employees spent their Tesla stock to boost local economic activity.

The Real Point of This “News”

Tesla is getting ready to ask the State of California for a “favor”. Whether it is a major bailout or some additional taxpayer subsidy to help it hang on for a few more quarters only time will tell. As discussed in our article on ZEV Credits (here), Tesla may ask for some reform to that program to produce a more generous subsidy to the company. Musk made his position clear that ZEV subsidies should be increased on an earnings call in 2016 when he reportedly said:

“The California Air Resources Board is being incredibly weak in its application of ZEV credits. The standards are pathetically low. They need to be increased. There’s massive lobbying by the big car companies from increasing the ZEV credit mandate, which they absolutely damn well should. CARB should damn well be ashamed of themselves.”

Will California Cooperate? Maybe. Musk may ultimately raise the specter of Chapter 7 and the loss of the entire enterprise to motivate uncooperative public servants. However, public bailouts of private companies are controversial and governments do not like controversy. Car dealers are not exactly disengaged politically, so any large bailout could encounter some meaningful opposition.