It’s official. Tesla has broken ground at its new “gigafactory” near Reno, Nevada. While New Mexico appears to have missed out on Tesla and its expected 6,500 jobs, some legislators, when asked, seem willing to spend as much as 500 million tax dollars to lure the company to the state.
While details are by no means firm, it appears that Tesla is looking for an infusion of $500 million, not tax breaks of $500 million. The difference between the two is that tax breaks don’t actually “cost” the state/taxpayers anything because Tesla would have to locate in New Mexico for any tax revenue to result from its activities. When it comes to outright spending of New Mexicans’ tax dollars, those are dollars that come directly out of the pockets of average New Mexicans and the businesses already located here.
This important nuance explains why we at Rio Grande Foundation oppose payments made to the film industry which, according to a new legislative report, paid out $251 million in incentives to the film industry with $103.6 million in state and local tax dollars generated over the same basic time period. In simple mathematical terms, the state spent $147 million more than it generated from the film industry in recent years. That’s called a “loss” in any other industry. Jobs were created, but the net loss really illustrates the inherent problems with the program.
The same reasoning explains why fiscal conservatives should not support outright spending of $500 million to bring in Tesla. Tax breaks are one thing, but if the company goes under, there are no “clawbacks” that will get $500 million in outright spending back.
Long-term, generous subsidies and tax exemptions are not the answer for New Mexico’s economy. In fact, it is no surprise that the company broke ground in Nevada, which, aside from proximity to the company’s factory, is a state with a right to work law and zero income tax.
Recently, site selection expert John Boyd was interviewed about New Mexico’s chances of attracting Tesla. His comments were enlightening. He said, manufacturing companies look for reasons to scratch off states when considering where to build major facilities — and no right to work law is at the top of the list. Boyd again reiterated the need for right to work stating, “I can’t underscore how critical right to work status is.”
“Right to work” is not “anti-union.” It simply states that union membership must be optional and not a condition of employment. “Right to work” must be at the core of efforts to turn New Mexico around. Taxes are a second area in dire need of reform. As economist Steven Moore has illustrated in study after study, having a zero income tax means both stronger economic growth and faster population growth than the national average and the states with the highest rates on personal income. It all goes back to the adage that if you want more of something, tax it less; if you want less of something, tax it more.
Liberals clearly understand this when taxes were raised in a successful effort to reduce tobacco consumption, but they seem not to believe that workers will choose to go where they can keep more of their hard-earned money.
Despite the state’s challenging economy, New Mexico has made some progress in recent years in gradually reducing taxes on productive activity (Bill Richardson reduced the top income tax rate from 8.2 to 4.9 percent and Susana Martinez has made New Mexico a “single sales factor” state, reduced taxes on manufacturing inputs, and is phasing down New Mexico’s corporate income tax).
Unfortunately, decades of reliance on the federal government and a business-unfriendly gross receipts tax, underperforming educational system, and poor regulatory environment mean that the transition away from government reliance and toward prosperity will require greater cooperation and even bigger reforms.