Nevada offers a case study of how states can successfully attract new employers.
Nevada has a reputation as a one-horse state, relying primarily on the leisure and hospitality industry. For example, in 2019, accommodation and food services accounted for 26% of Nevada’s workforce. For many years, policymakers and analysts have argued that Nevada should diversify its economy like its neighbors Arizona and Utah. This notion has proven relevant many times, such as during the Great Recession of 2008 and the COVID-19 pandemic, when Nevada, and in particular the Las Vegas metropolitan area, became ground zero for a national economic crisis.
Former Governor Brian Sandoval, along with the Nevada Legislature, placed economic development decisions within the Governor’s Office of Economic Development (GOED) in 2011, bringing that authority into the Governor’s office for the first time. . The main purpose of this move was to prioritize and accelerate the diversification of Nevada’s economy, particularly around the state’s major metropolitan areas, Reno and Las Vegas.
Progress since then has been a tale of two cities.
In the north, Reno attracted the Tesla battery gigafactory into the Tahoe-Reno Industrial Center (TRIC) in 2014, which drew in other companies in the gigafactory supply chain and related fields. The development of TRIC has resulted in a significant reduction in Reno’s reliance on the leisure and hospitality sector for economic activity, as evidenced by its performance during the pandemic and its aftermath. The unemployment rate in Reno was 2.6% in May 2022 and has recovered quickly from its unemployment peak of 18.3% in April 2020. Today, the accommodation and food services sector represents a smaller percentage of the workforce (13%) than 20 years ago, although Reno has added approximately 48,650 workers.
Down south, Las Vegas saw hope for similar activity in 2015 from Faraday Future, an electric car company that had planned to build a large assembly plant in the Apex Industrial Park. Unfortunately, shortly after work began on the Apex site, Faraday Future pulled out in 2017 due to financial shortfalls despite tax incentives and rebates similar to those of the Tesla gigafactory. Since then, no major electric vehicle company has moved into the state. The unemployment rate in Las Vegas in May was 5.3%, which took much longer to come down from a peak of 31.2% in April 2020. Today, more than one in four workers in southern Nevada works in accommodation and food services, which is up from one in three 20 years ago, but still much higher than in Reno.
Generally, states can attract businesses through tax breaks and other incentives. This competition can be modeled as a simple two-state game, where both states are better off by cooperating and not offering incentives. But the most common outcome, known as a Nash equilibrium, occurs when both states offer incentives out of fear of losing if the other state “doesn’t cooperate” and offers incentives. Each state tries to improve the profits it could have made from the cooperative result. But this non-cooperation leads to the worst result because the conflict is costly.
Who benefits from the use of economic development incentives? Economist Timothy J. Bartik has developed a simulation model to examine the effects of economic development incentives, such as tax allowances and other incentives, on the incomes of local residents. His study concludes that incentives produce positive net benefits only under certain conditions, such as in sectors with high job creation. Negative net benefits can occur if, for example, incentives reduce spending on K-12 education.
Policymakers considering tax incentives should take note of political philosopher John Rawls’ “difference principle”, which argues that the extent of inequality should only benefit the most disadvantaged member of society, in this case most vulnerable to tax cuts. collection.
Back in Nevada, GOED offers a menu of possible tax abatements for taxes, including sales and use tax, modified business tax, personal property tax, and property tax for recycling abatements. The Nevada Legislature has implemented performance contracts on its tax abatement agreements, which means that the recipient company only receives the agreed-upon benefits once it has met certain program benchmarks. For example, when Tesla and Panasonic set up their gigafactory in northern Nevada, their performance requirements included $3.5 billion in capital expenditures over 10 years. Additionally, to get the maximum value of certain tax credits, the state incentive program required Tesla to pay a salary of $22 per hour. The total amount of tax breaks given to Tesla and Panasonic is estimated at $1.25 billion if they use them all. Today, Panasonic and Tesla together employ around 7,000 workers in the gigafactory.
Southern Nevada has not been completely left behind when it comes to economic diversification. Haas Automation, one of the world’s largest machine tool manufacturers, announced a $327 million, 2.5 million square foot manufacturing facility in southern Nevada in 2019 that will create 1,400 new jobs. during the first five years. Beyond the tax incentives and relief, what marked the project was the local authorities’ commitment to a dedicated workforce. Together, GOED, Haas Automation, the city, and the local community college built a workforce training center to initiate training programs for Haas, particularly around computer-controlled machine operations and ensuring what the workers are mostly from Nevada.
This model could be a source of hope for future economic development agreements.