Tesla Is No Success Story

Tesla is only profitable thanks to politics and tax subsidies.

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This June 22, 2012 file photo shows a Tesla Model S outside the Tesla factory in Fremont, Calif. Tesla Motors Inc. on Wednesday, July 25, 2012 said that its second-quarter net loss nearly doubled as it invested heavily to launch its second vehicle, the Model S.

Christopher Koopman is a research associate at the Mercatus Center at George Mason University.

Tesla Motors, the California-based electric car start-up, has been the subject of a great deal of hype. With the recent news that it repaid its $465 million low-interest loan from the Department of Energy, it's now being heralded as a success story worthy of redeeming the failures of a green-energy subsidy program that has included the likes of Solyndra, Abound, Ener1, and Fisker Automotive. Since then, Tesla's stock value has more than doubled and the company is currently valued at around $12 billion.

Tesla's success is ultimately a case study in the perils of government-granted privilege, its financial success demonstrating a reliance on political favoritism more than an ability to create value for customers. Tesla Motors would not have been created were it not for the generosity of politicians – if generosity is the right term for spending taxpayers' money.

The company began with a loan funded through the Advanced Technology Vehicle Manufacturing program, which was signed into law by President Bush; the loan was later awarded after President Obama took office. In Tesla's press release announcing that it had paid back this low-interest loan, the company was careful to thank all of those who made it possible, including "the Department of Energy and the members of Congress and their staffs that worked hard to create the ATVM program."

[See a collection of political cartoons on the economy.]

Along with the federal loan, Tesla also relies on support from politicians through a complex series of federal and state subsidies. For each purchase of a new Tesla acquired for personal use, the federal government offers a $7,500 federal tax credit. In addition, various states offer additional income-tax credits, including $6,000 in Colorado and $7,500 in West Virginia.

These subsidies have become so central to Tesla's business model that it advertises them to customers as a way to cover the cost of a down payment. And for states that do not yet offer subsidies for electric cars? Tesla's website provides links to help consumers encourage state and local legislators to subsidize the purchase of such vehicles. The company's site even goes so far as to recommend consulting a tax professional.

Even with the support of federal and state politicians, Tesla would still be reporting losses were it not for its ability to profit off of other auto manufacturers in California. In the first quarter of 2013, Tesla reported its first-ever quarterly profit by using special credits from California's Air Resources Board, which rewards auto manufacturers for the production of "zero-emission" vehicles. So far this year, Tesla was able to turn what would have been a $57 million loss into an $11 million gain by selling $68 million worth of these credits to other auto manufacturers in California.

[Read the U.S. News Debate: Should the Government Invest in Green Energy?]

Mercatus Center economist Matt Mitchell has explained why privileges such as these are such a problem. Mitchell notes that "when governments dispense privileges, smart, hardworking, and creative people are encouraged to spend their time devising new ways to obtain favors instead of new ways to create value for customers."

The green subsidy program's most successful investment to date is an electric car manufacturer that has yet to profit solely from the sales of its product. Instead, it is a company built on loan guarantees, sustained on subsidies and profitable only through a system of credits designed to benefit electric car manufacturers at the expense of their competitors. Take away all of the recent hype surrounding Tesla's recent loan repayment, and you are left with a company built to cash in on the privilege and favors from politicians.

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