New York State to Build Solar Cell Factory for Elon Musk-Owned Firm

September 25, 2014

Yesterday, New York Governor Cuomo’s (D) office announced that SolarCity, a major solar cell producer partially owned by Elon Musk, would make a $5 billion investment to operate a “gigafactory” in upstate New York. This comes on the heels of another Musk-owned firm, Tesla, announcing a $1.3 billion incentive deal to build a battery-producing “gigafactory” in Nevada. The New York deal involves three major components:

  1. $750 million in spending by New York to build facilities and purchase equipment for SolarCity
  2. Unspecified tax incentives through the Startup New York tax-free zone in which the “gigafactory” will be located
  3. $1 per year plus utility costs which SolarCity will pay to operate the facilities New York paid to build

If SolarCity fails to produce as many jobs as expected, they will owe $41 million a year for 10 years.

Tax incentives are often wasteful and un-transparent, offering huge benefits to select firms, and pushing tax burdens off onto others. New York, with its high tax rates (and one of the worst State Business Tax Climate Index scores in the nation, although recent reforms will improve it somewhat) rather explicitly uses taxes on some firms (especially downstate) to subsidize other firms (especially upstate and around university campuses).

But the SolarCity deal is exceptional even for New York. The state has committed to actually building a facility for a large, private corporation using public money. The firm is in an industry, solar cells, which is highly volatile, and which has seen spectacular failures of public investments in the past, like Solyndra. SolarCity’s deal is such that it could get all the incentives, break its employment promises, and still net hundreds of millions, or billions, of dollars in incentives.

Startup NY gives companies tax-free status for 10 years. In Nevada, a low-tax state, tax-free status for 10 years for a similarly-sized investment meant $1.3 billion in incentives. New York, a much higher-tax state, is almost certainly offering at least as much in tax breaks through Startup NY, possibly much more. Thus, this proposal is almost certainly worth in excess of $1 billion, possibly much, much more.

Moreover, even once the facility is build, SolarCity will use it for free. New York could rent facilities out to other companies, but instead they’re giving the farm (or the robotic solar cell factory, as the case may be) away to one firm. With free property usage, the size of the deal is still larger than the $750 million (plus Startup NY incentives) estimated, but it’s extremely difficult to come up with a precise number.

The reality is that there are costs to having SolarCity locate in New York. The workers will consume local public services, their children will attend schools, trucks going in and out of the factory will put wear and tear on roads, and, like all businesses, SolarCity will consume other miscellaneous government services. Yet the firm will not only pay nothing, but a large part of its capital costs will be paid by the state. It is difficult to see where New York (and especially localities) will get the revenue to pay for all the new spending that will be required. Most likely, somebody else will see higher taxes.

As of now, no public statement has been made providing a complete cost estimate, an economic impact assessment, or a report addressing new revenue needs. For a deal this big, these are all basic transparency questions necessary to ensure that the state gets a good deal, taxpayers aren’t misled, and to ensure that all economic development and policymaking is kept above-board. But, as none of these reports appear to have been provided, in the case of these SolarCity incentives, a little more sunlight could go a long way.

Read more on New York here.

Read more on tax incentives here.

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