If you're thinking that a 1% discount sounds pretty negligible in the grand scheme of how much Tesla (NASDAQ:TSLA) and battery partner Panasonic are investing in the massive Gigafactory -- you're absolutely right.
"Lame" or "meh" are both entirely appropriate responses to a 1% discount. But more often than not, the tax incentives that Tesla scored from the state of Nevada back when a handful of states were bidding for the Gigafactory site are portrayed as much larger proportionally. The headline figure is $1.3 billion worth of tax incentives, which sounds like a pretty meaningful portion of the $5 billion combined total that Tesla and Panasonic plan on spending on constructing the world's largest battery factory.
Except that it's not.
"Because it's lame"
The $1.3 billion figure represents the grand total of tax incentives that Tesla would receive over 20 years, assuming that the electric-car maker hit all of the necessary performance incentives. These are tax breaks on sales and use of equipment that Tesla is purchasing and installing -- equipment that wouldn't otherwise be in the middle of the desert.
At Tesla's annual shareholder meeting earlier this week, CEO Elon Musk defended the Gigafactory and clarified the situation. To date, Tesla and Panasonic have invested over $2 billion in the Gigafactory. To date, Tesla has received $20 million from the state of Nevada. Furthermore, to realize the full $1.3 billion, the Gigafactory must generate $100 billion in revenue over the 20-year time frame. Either way you slice it (amount invested so far to date or long-term revenue requirements), we're talking about a 1% contribution.
Almost all of the Nevada incentive consists of alleviation of sales and use tax on factory equipment over 20 years -- sales and use tax on equipment that wouldn't otherwise exist. So if the factory wasn't there, it's not like money that they would have otherwise received. It's money they never otherwise would have received. They're giving away nothing. It was just basically bushes and desert.
In order for Tesla to earn that money over 20 years, the Gigafactory has to generate over $100 billion in revenue. It's basically a 1% discount. It's helpful to have that, and it's appreciative to have that, but it's not...
If someone in the press were to write "Tesla receives 1% discount on Gigafactory," that would get no clicks. Because it's lame. But that's actually the situation. If we don't have that equipment, Nevada doesn't still pay us money. It's a no-lose proposition for Nevada.
The point here is that the story behind Nevada winning the Gigafactory site in part due to tax incentives really isn't as interesting as the broader media sometimes skeptically portrays it. It's also not as if Nevada is wiring Tesla cold, hard cash. Meanwhile, Tesla will be creating tons of local jobs along the way.
Well, let's see how many clicks I get.
Evan Niu, CFA owns shares of Tesla Motors, and has the following options: long January 2018 $180 calls on Tesla Motors. The Motley Fool owns shares of and recommends Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.