Billy Hamilton is the deputy chancellor and CFO of the Texas A&M University System. In 2015 Hamilton led Texas Republican Gov. Greg Abbott’s Strike Force on the Health and Human Services Commission to complete a management analysis of the agency. Before that, Hamilton was the deputy comptroller for the Texas Office of the Comptroller of Public Accounts from 1990 until he retired in 2006. He is also a private consultant, advising on numerous state tax matters.
In this installment of State Tax Merry-Go-Round, Hamilton examines how Elon Musk and his companies have leveraged the potential location of factories and jobs to extract incentives from states.
Texas has a crush on Elon Musk. The multibillionaire has the sort of larger-than-life personality and flare for the outrageous that sells well in Texas, with its history of larger-than-life cattle and oil empires — not that many Texans live that sort of life today, but they still admire it when they can watch from a safe distance. Some even enjoy his recent adventures in tweeting.
So far, Musk has returned the adoration with major investments in South Texas and in the Austin area. His company SpaceX has a rocket launch facility at Boca Chica on the very southern tip of the state and a rocket development facility near McGregor in central Texas.
His best-known company, Tesla, has a massive vehicle assembly plant just outside Austin. In 2021 Musk moved Tesla’s headquarters from Palo Alto to Austin, and this January the company started construction on a $375 million lithium refinery near Corpus Christi. The Wall Street Journal recently reported that Musk had purchased thousands of acres of land outside Austin to build a small new city where employees of his various companies can live for below-market rents.1
What is known from his comments is that Musk likes Texas for several reasons. It has relatively light business regulations, something he complained about in California. In fact, Tesla’s move to Texas was announced during an ongoing battle with Alameda County public health officials over his desire to reopen the Fremont, California, manufacturing plant during the height of the pandemic. Texas also offers cheaper land than California, and Austin has a booming population and skilled workforce.
Texas, in its never-ending competition with California for bragging rights, is thrilled with the billionaire’s attention, and not just because of the economic benefits. As a recent column in the Austin American-Statesman explained: “Carping on California is the unofficial pastime of Texas, especially among GOP leaders who relish our state’s contrasts with the woes of the Left Coast.”2
Musk pushes that button. “‘Elon Musk knows what’s up,’” Gov. Greg Abbott (R) tweeted in January 2021, rejecting the idea that politically, Musk and other Californians moving to Texas would turn the state blue or at least purple. “He consistently makes comments . . . that push back against liberal political correctness. He’s a true believer in freedom & less government.”
The governor also said Musk’s presence was proof that “the Lone Star State is the land of opportunity and innovation” and that “Elon had to get out of California because, in part, of the social policies” in the state.
Musk himself joined in the California baiting, saying at a Wall Street Journal CEO Council summit: “If a team has been winning for too long, they do tend to get a little complacent, a little entitled and then they don’t win the championship anymore. California has been winning for too long.”3
Gone to Texas
Before anyone thinks the arrangement between Musk and the state is strictly a match made in free-market heaven, it’s important to remember that Musk and his companies also have their eye on the bottom line — and another reason for being in Texas is taxes.
I’m not aware of any rankings of companies that have been the most aggressive — or most effective — in playing the business tax incentive game, but Musk and his companies haven’t done too badly. Tesla’s 2014 deal with Nevada to locate a battery “gigafactory” near Reno ranks 22nd on Good Jobs First’s list of the largest state and local subsidy deals of all time. SolarCity’s deal with New York for a solar panel manufacturing plant in Buffalo also ranks in the top 50.
With his eclectic collection of companies, which includes SpaceX, the Boring Co., Neuralink, Starlink, Tesla, and now Twitter, Musk has become a very rich man, and in my experience, tax and other government benefits are never far from the minds of very rich people — or at least from the minds of their accountants.
In a 2015 investigation, the Los Angeles Times reported that Tesla, SolarCity, and SpaceX together had benefited from an estimated $4.9 billion in government support at the federal, state, and local levels, a total that’s only grown since then.4 “The figure underscores a common theme running through his emerging empire: a public-private financing model underpinning long-shot start-ups,” the article said. The Times figures included “grants, tax breaks, factory construction, discounted loans and environmental credits that Tesla can sell.” They also included tax credits and rebates to buyers of solar panels and electric cars.
Musk himself pays attention to taxes, as one widely reported story from a couple of years ago illustrates. Musk’s compensation package with Tesla, approved in 2018, provided nearly all his pay in the form of generous stock options if the company hit certain targets. As Insider reported in 2021: “Musk notably does not take a salary for his work for Tesla, instead taking out loans against his roughly $300 billion fortune to live off of and avoid paying income tax.”5
But looking ahead, Musk faced a dilemma. He apparently wanted to sell some Tesla shares and had valuable stock options that were expiring. As Forbes explained: “He owns 17 percent of Tesla’s shares, plus some $92 billion worth of stock options that allow him to buy more shares at a steep discount. One set of these options expires in August 2022, meaning Musk will have to exercise his right to purchase the stock before that date or the options — currently worth $23 billion — will expire and he gets nothing. The issue: cash-poor Musk will owe taxes when he exercises the options.”6
Speculation abounded about the precise reasons for the sale — to repay past loans, to free up cash for new ventures, to take advantage of the expiring options, or simply because he, as he said at the time, thought Tesla shares were overvalued and wanted to realize gains while the ride lasted.
With typical showmanship, Musk polled his 63 million Twitter followers in November 2021 asking them to vote on the issue: “Much is made lately of unrealized gains being a means of tax avoidance, so I propose selling 10 percent of my Tesla stock. Do you support this?” (Fifty-eight percent of those responding voted yes, but it was later revealed that Musk had long since filed the planned sale with the Securities and Exchange Commission.)
The sale could mean as much as $3.6 billion to federal taxes, Forbes reported. That would add up to roughly eight times more than the $455 million he paid in 2014 through 2018 combined, according to ProPublica.7 In December 2021 Musk himself tweeted: “For those wondering, I will pay over $11 billion in taxes this year.”
Whatever Musk paid in federal taxes, state tax liabilities also were involved. California, where Musk had resided since 2002, has a top income tax rate of 13.3 percent, and Musk could save hundreds of millions of dollars in personal taxes on the sale of his stock, and even more over time, by establishing residency in a state that didn’t have an income tax. To be exempt from taxation under California tax rules, Musk needed to show that he would “remain in the new locality permanently or indefinitely.”
There were, of course, several options. Nine states don’t have income taxes, but the choice he made was Texas, where he had already established his rocket facilities and was starting a prospective new Tesla factory. In late 2020 Musk confirmed publicly that he was moving to Texas.
Let’s Make a Deal
Tax considerations for his businesses also played a role in moving some operations to the Lone Star State. Interestingly, but probably not accidentally, state officials and SpaceX first discussed a potential rocket launch facility in the spring of 2011 during an economic development visit by Texas officials to California. Then-Gov. Rick Perry met with Musk and provided letters in support of SpaceX’s efforts to get the company interested in Texas, where it already had the McGregor test facility.
The talks apparently were successful, and in 2014 Cameron County officials gave the company a 10-year property tax abatement package in exchange for locating its $85 million launch facility at Boca Chica. The state later chipped in $13 million from a special state incentive fund, called the Spaceport Trust Fund, to pay for facility infrastructure. It also received about $2.3 million from another economic development fund, the Texas Enterprise Fund, although the company later gave up that incentive.
SpaceX created its rocket test facility in McGregor in 2003 on city-owned land previously used for rocket engine tests and had remaining facilities for that purpose. In 2021 the company received about $6 million in incentives from nearby Waco and McLennan County for a $150 million expansion of the facility to produce its new Raptor 2 engines.
That incentive doesn’t touch the incentives Tesla received for locating its $1.1 billion SUV manufacturing facility east of Austin. In 2014 the Travis County Commissioners Court approved an agreement that will save Tesla around $14 million in property taxes over 10 years. At the same time, the Del Valle school district, in which the factory is located, approved close to $50 million in tax rebates over the same time frame. The difference is explained by the relative importance of school and county property taxes in Texas. School taxes make up the largest share of property taxes statewide.
Last year Tesla received one of the final incentives approved under the state’s chapter 313 school property tax abatement program before the program expired. The abatement was for a $375 million lithium hydroxide refinery conceived amid the increasing demand for battery-grade lithium hydroxide for use in electric vehicles. Between June 2021 and June 2022, the price of the lightweight metal increased more than sixfold.
The incentives were approved by the Robstown Independent School District in Nueces County near Corpus Christi and have been estimated to be worth about $16.2 million over 10 years. The company also applied for county tax incentives but later withdrew the request.
‘Who Is Gonna Pay?’
Texas isn’t the only state that’s been the object of Musk’s affections. He’s cut similar incentive deals in several states in recent years, as his web of companies spreads out from California.
Musk’s biggest score to date is the $1.3 billion incentive deal he received from Nevada for locating a $5 billion lithium battery plant in an industrial park in Washoe County, about 20 miles east of Reno. On September 11, 2014, then-Nevada Gov. Brian Sandoval signed a package of four bills to provide $1.3 billion in tax breaks and other incentives for Tesla. When he signed the bills hours after they passed both legislative houses, Sandoval said the agreement had “changed the trajectory of our state forever.” The governor said, “Nevada has announced to the world — not to the country, but to the world — that we are ready to lead.”
The governor’s office estimated the 5-million-square-foot factory would create an immediate 3,000 construction jobs, plus 6,500 factory jobs and 16,000 indirect jobs once completed.
Tesla decided to locate its factory in Nevada after negotiating with several states, including Arizona, California, New Mexico, and Texas. The incentives will be available for up to 20 years, assuming certain targets for hiring and investment are met.
The biggest chunk of the deal gives Tesla sales tax exemptions for 20 years with an estimated value of $725 million. The company would also save more than an estimated $300 million in payroll and other taxes through 2024. Lawmakers also agreed to buy rights of way to build a road connecting Interstate 80, which the factory would be located near, and U.S. 50, a project estimated to cost $43 million that is intended to improve access to the facility from other regions of the state. The deal required the company to hire Nevadans, although waivers are allowed in some cases.
Few things on this scale are accomplished without creating winners and losers. To help pay for the large incentive package, lawmakers eliminated a tax credit for insurance companies and significantly scaled back a tax credit program for film and television production that was passed only the year before, freeing up about $70 million.
On March 2 Tesla added to the tax incentives it will receive from the state as part of an expansion of its operations at the facility.8 Under the new agreement, the company can receive an estimated $330 million in incentives for investing more than $3.6 billion over 10 years to build two new factories to join the first one. According to the Governor’s Office of Economic Development, the company would be required to create 3,000 new jobs at an hourly wage of $33.49.
The bulk of the new incentives comes from an abatement of real and personal property taxes. Tesla will receive a full property tax abatement worth more than $246 million over 10 years. It also will pay sales tax at a reduced 5.35 percent rate over 20 years on tangible personal property, including equipment. The state is providing a 100 percent exemption for 10 years from the state’s modified business tax, which is paid by all businesses subject to the Nevada Unemployment Compensation Law at a rate of 1.378 percent on wages after deduction of health benefits paid by the employer with some exclusion. The incentive is estimated to be worth $17.6 million.
As with most large incentive deals in recent years, this one isn’t free of controversy. While supporters of the new Tesla project touted its economic benefits, some also raised concerns about the speed with which the deal was completed and about its impact on northern Nevada’s already stressed infrastructure. In a public meeting before the Governor’s Office of Economic Development board, opponents complained of problems already created by the existing facility, including housing affordability, steeply rising home values and rents, a shortage in child care services, and stress on the area’s “abysmal” transit and transportation infrastructure. Traffic congestion was a particular problem.
“Who is gonna pay?” one person asked during his testimony. “I know it’s not Elon [Musk].” Referring to the 2014 deal, he added: “This game is rigged. Tesla pitted us against California and Texas in a bidding war and they made Gov. Sandoval and the Legislature think that we had to sell the farm.”9
On the Gravesite of the Old Economy
Finally, in November 2013 New York state announced that it planned to invest $225 million in Buffalo to build a facility for high-tech and green energy businesses. Two tenants were identified — Soraa, a California-based manufacturer of LED lighting, and Silevo, which made solar panels. The investment was part of a commitment by then-Gov. Mario Cuomo to revitalize Buffalo and the surrounding region.
In June 2014 Silevo was acquired by SolarCity, which was owned by two of Musk’s cousins. Three months after SolarCity bought Silevo, Cuomo said the state would expand its initial $225 million investment in the Buffalo project to $750 million. SolarCity, it was announced, would be the facility’s sole tenant.10 Tesla eventually bought SolarCity in 2016, and the incentive program came with it.
Before Tesla’s acquisition, the company agreed to set up a solar panel manufacturing facility in a state-owned 1.2-million-square-foot facility on the site of an abandoned steel mill in South Buffalo. “On the gravesite of the old economy,” Cuomo said at the time, “where Republic Steel once stood, now rises a beautiful monument to Buffalo’s future.”
The incentives are being provided over 10 years, and the state has since added yet another $200 million. The incentive package included property tax breaks, factory renovations, state-of-the-art manufacturing equipment, and millions of dollars for local colleges to create programs tailor-made for green technology manufacturing. In return, the state wanted some guarantees — and protection — built into the deal. Instead of a simple package of incentives alone, the state provided renovated factory space and an estimated $400 million of equipment, over which it would retain ownership.11 It also required the company to make an investment of at least $5 billion and create 5,000 jobs, 3,000 of them in western New York, over the term of the deal to receive the full set of incentives.
“The ultimate goal is to get these upstate economies, including Buffalo, off their backs and onto their feet and the real measure of success is private-sector job creation and investment, and I think you are seeing that,” said Howard Zemsky, chief executive of Empire State Development, the government’s economic development agency.12
The Empire Strikes Back
As these cases make clear, Musk and his companies have followed a pattern used even more extensively by other corporate giants, scattering facilities across the country, often provoking a bidding war among several states in the process. The strategy seems to work as well for Musk as it does for companies like Boeing or General Electric. Lately, though, there’s been a disturbance in the force that’s left some people wondering what exactly is going on. But it looks like the California empire is striking back.
In February California Gov. Gavin Newsom (D) and Musk held a joint press conference in Palo Alto to announce that Tesla’s global engineering headquarters will be located in California. The press conference was held in front of the former Hewlett Packard headquarters, which Tesla will take over.
“We’re excited to announce that Tesla’s global engineering headquarters will be right here in the former headquarters of Hewlett-Packard,” Musk said. “This is a poetic transition from the company that founded Silicon Valley to Tesla.”13 He later said that putting the engineering hub in California means it is “effectively a headquarters of Tesla.”
Of course, that raised the question: What’s happened in the last two years? When Musk moved the company’s headquarters from Palo Alto to Austin in 2021, he slammed California for its “overregulation, overlitigation, overtaxation.”
At the press conference, whatever political tensions existed between the company and the state because of the move seemed to have been set aside. “It’s a point of pride for me that Tesla is a California company,” Newsom said. Musk, in turn, thanked the governor for being “one of the first people” to buy a Roadster in the company’s early days. More to the point, Newsom has been a proponent of EVs and revolutionizing America’s energy production, and said he hopes the partnership between Musk and California will allow the state to “dominate in this space and change the way we produce and consume energy in this state, and this nation and the world we are trying to build.” Beyond the good cheer, no details were given about the agreement, other than that it was happening.
That includes no mention of tax or other incentives, but Newsom has repeatedly argued that Tesla became the largest passenger EV maker in the world because of the state’s EV-friendly policies and tax structure. As the Los Angeles Times noted: “That fits into the narrative Newsom pushes of California as an economic powerhouse that outperforms red states Florida and Texas in terms of jobs, productivity, wealth and innovation, while also serving as a bastion of tolerance and progressive social policies.”14
Newsom has bragged that California was the biggest manufacturing center in the nation, but unlike Texas officials, his target wasn’t his rival state. “Eat your heart out, Germany,” he joked, as the news came that Tesla would focus battery cell production in the United States because of federal incentives in the Inflation Reduction Act.
Other observers speculated about what was behind the move. “It is a reminder of the advantage of building on success in California and does suggest that Musk made a strategic mistake in moving his HQ to Texas,” said Stephen Diamond, an associate professor of law at Santa Clara University.
Whatever is the case, the move drops Tesla’s anchor square in the middle of the world’s center of technology and innovation, and it puts Musk much closer to the headquarters of Twitter, which he controversially purchased last year. It’s also important to recognize that the company hasn’t exactly vacated California since its move to Texas. The company has 47,000 employees still working in California facilities.
What Musk’s strategic moves seem to illustrate is that, as economists have argued for years, taxes matter, but there’s more to business location decisions than low taxes or relaxed regulatory policies. Transportation matters, location matters, access to resources matters, and, especially in the world of high technology, brainpower matters.
Musk probably would agree with that list. In 2020 he talked to The Wall Street Journal about the Tesla manufacturing plant that was ultimately located in Austin. Many factors, he said, would enter into the final decision, including incentives: “Incentives play a role, but so do logistics costs, access to a large workforce with a wide range of talents, and quality of life.”15
As to the rivalry between California and Texas, it’s always seemed to be more hype than anything else. Yes, several families from California have moved into my neighborhood, and everyone talks about it. And yes, home values have skyrocketed in Austin, and it’s often blamed on Californians. Still, California continues to be a big, prosperous state, just as Texas is. They share many similarities. They’re both Sunbelt states with a Spanish heritage and a fondness for risk-takers and pioneers, whether that’s in oil, the movies, aerospace, or high tech. They do, however, offer two different political models, and their divergent politics generally guarantee they mix about as well as oil and water.
In a 2018 interview, author Lawrence Wright called the two states “mirror image twins.” Mirror-image twins are identical twins who separate relatively late in gestation. According to Wright: “The thing about mirror image twins is that if one is left-handed, the other will be right-handed. One will have a mole on the left cheek, and the other on the right cheek. In other words, they’re genetically identical, but they’re physically different. And I think there’s something like that in the relationship [between] California and Texas.”16
1 Kirsten Grind et al., “Elon Musk Is Planning a Texas Utopia — His Own Town,” The Wall Street Journal, Mar. 9, 2023.
2 Bridget Grumet, “Was Elon Musk Fond of Texas or Just Our Tax Breaks?” Austin American-Statesman, Feb. 27, 2023.
4 Jerry Hirsch, “Elon Musk’s Growing Empire Is Fueled by $4.9 Billion in Government Subsidies,” Los Angeles Times, May 30, 2015.
5 Dominick Reuter and Any Kiersz, “Elon Musk Has a $2.5 Billion Reason to Move to Texas: Avoiding California Capital Gains Tax,” Insider, Nov. 30, 2021.
6 Chase Peterson-Withorn, “Why Elon Musk May Want to Sell 10% of His Tesla Stock — And Why He May Have To,” Forbes, Nov. 10, 2021.
7 Jesse Eisinger, Jeff Ernsthausen, and Paul Kiel, “The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax,” ProPublica, June 8, 2021.
8 Jason Hidalgo, “Nevada Approves $330 Million in Tax Incentives for Tesla Electric Semi Facility. What We Know,” Reno Gazette-Journal, Mar. 2, 2023.
10 Susanne Craig, “Despite Risks, Cuomo Bets on Solar Power to Lift Buffalo,” The New York Times, Oct. 25, 2015.
11 Tim Mullaney, “Elon Musk’s Biggest Challenge Yet: Recharging Buffalo, NY,” CNBC, June 11, 2015.
12 Craig, supra note 10.
13 Dana Hull and Karen Breslau, “Newsom, Musk Dedicate Former HP Headquarters in Palo Alto to Tesla Engineers,” Los Angeles Times, Feb. 22, 2023.
15 Tim Higgins, “Elon Musk Says Incentives, Costs Will Influence Site of New U.S. Tesla Factory,” The Wall Street Journal, Mar. 10, 2020.
16 Michael Schaub, “Lawrence Wright Says Texas and California Are Mirror Image Twins,” Los Angeles Times, Apr. 12, 2018.