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The Tesla File: Government Favors Cut Both Ways

Electric vehicle manufacturer Tesla Motors has become a fascinating case study in economic freedom in recent years, although the narrative is a complicated one. The most recent development for Tesla has come out of Michigan, where the state legislature has banned car manufacturers from selling vehicles directly to the public or from owning dealerships themselves, new restrictions that effectively outlaw Tesla’s entire sales strategy, at least in the Great Lakes State. Michigan is not alone, however, in erecting restrictions on marketing and sales of cars that seem to target or effect only Tesla. Arizona, Maryland, Texas, and Virginia also ban the company from selling its cars in their states, although they can operate showrooms and residents can make purchases online. Colorado, Georgia, New Jersey, Ohio, and Pennsylvania also have restrictions or are in legal disputes with Tesla over what they can and can’t do in those states.

Having to fight for the right to sell an otherwise legal product to willing customers – legislature by legislature – has created what Tesla’s James Chen has referred to as “a game of whack-a-mole in every state.” Just as the company has made its case before one state’s officials, another state comes along and threatens to erect barriers that suspiciously seem to harm only Telsa while protecting market incumbents from increased competition. This can only happen so many times before it begins to seem like more than a coincidence. In this scenario, CEO Elon Musk is cast in the role of the victim of opportunistic legislation lobbied for by bigger, more entrenched rivals – the underdog fighting cronyism between big carmakers and state politicians.

But, of course, Musk is no naïf when it comes to cutting lucrative deals with state politicians himself. In September, Tesla announced that it would be building a new plant in Nevada to manufacture batteries for its electric-powered cars, promising to eventually invest $3.5 billion in the facility outside Reno. That, however, was only after the state agreed to a provide a bundle of tax and other incentives that will be worth $1.25 billion to the company over the next 20 years. Getting a 35 percent discount on a multi-billion dollar plant and equipment investment sounds like a pretty good deal to me. It was a huge win for Tesla Motors’ bottom line, though some of the taxpayers of Nevada certainly look at the deal differently. The Nevada Policy Research Institute, for example, has been extremely critical of the deal, even suggesting that it could violate the state’s constitutional ban on gifts to private companies. And as my former colleagues at the Tax Foundation have pointed out, state tax incentives for business development in general (or for companies like Tesla in particular) are often not all they’re cracked up to be.

These two examples – Tesla being unfairly targeted in some states but landing huge windfalls in others – highlight the pitfalls of operating in a highly politicized economy. While companies like Tesla might be tempted to go after every advantage they can, free market advocates, at least, need to stick to principle when it comes to evaluating such developments. Tesla doesn’t get a pass on lobbying for special favors in one place just because they’re being hounded in another. Elon Musk is a charismatic entrepreneur with a lot of fans in the business and investing world, but he deserves all of the opposition that can be mustered when he asks taxpayers and state politicians to subsidize his financial empire, no matter how cool his cars are.