When state officials opened the spigot to lure Tesla and its battery factory to the Reno area, how many Nevada taxpayers realized that a significant helping of the financial “incentives” that attracted the electric car maker would actually be used by casino giants to reduce their tax obligations?
Probably not many.
The online site This is Reno reported Sunday that Tesla recently sold $20 million in transferable tax credits to MGM Resorts International. The casino company will apply the money to its Nevada gaming license fees.
Transferable tax credits, relatively rare just a decade ago but now common in many states, are the incentive of choice for the Governor’s Office of Economic Development. But the little secret surrounding this mechanism is that the credits “may wind up in the hands of businesses that don’t need government help,” the Wall Street Journal reported two years ago.
Businesses that receive these credits — which often exceed the recipient’s tax liability — have the option of selling them to other entities. For instance, if the state gives Company A $10 million in tradable tax credits, but the business owes only $4 million in taxes, it can sell the remaining $6 million to Company B for $5 million. Company B saves $1 million on its tax bill, while Company A pockets $5 million.
The Tesla deal included $195 million in transferable tax credits. Meanwhile, the Faraday package includes $38 million of them and Hyperloop Technologies received $750,000. Film production companies have also collected these types of subsidies from Nevada taxpayers, although that program is currently tapped.
Proponents of transferable tax credits point out that the cost remains the same to the state, regardless of who eventually cashes them in. That’s true. But critics argue they are deceptive and end up financially benefiting interests that were never intended to receive them.
The Nevada Economic Forum estimates that the redemption of transferable tax credits could cost the state as much as $100 million during the 2015-2017 fiscal cycle. Tesla’s linkup with MGM is almost certainly just the first of many similar deals to come.