Tesla's Government Handouts Are the Gift That Keeps On Giving

The company is profitable, yet keeps receiving tax subsidies.

A Tesla Motors Model S charging at a public parking garage.
A Tesla Motors Model S charging at a public parking garage. 

Tesla Motors, the fast growing electric car company, just received yet another handout from the government. The gift comes in a form of a $34.7 million tax break from the state of California to increase the company's production capacity, and it isn't the first set of subsidies that Tesla has obtained from federal and state authorities.

Tesla received a $465 million loan from the U.S. Department of Energy as part of the 2010 Advanced Technology Vehicle Manufacturing Program, or ATVM. The company has also benefited from a variety of federal and states tax breaks, as my colleague Christopher Koopman reported earlier this year.

So why should Tesla Motors be provided such generous advantages by the government? In Tesla's case, it is not because the company is doing poorly. In fact, Tesla managed to survive without help from the federal government for the first nine years of its existence. Recently it has been booming and its stocks soaring, making its billionaire CEO Elon Musk even richer than he was before.

[2013: The Year in Cartoons]

And therein lays one of the main problems with these handouts. While the demise of Solyndra and Fisker Automotive — and the loss of millions of taxpayer dollars through another DOE 1705 loan program — rightfully made headlines for weeks, another outrageous aspect of these programs is that the money often goes to companies that would have been just fine without the government's help. In the case of the loan guarantee programs (whether the 1705 or ATVM program), most of the recipients could have raised capital on their own.

For instance, who has any doubt that NRG Energy, the energy giant and the biggest recipient of the DOE's 1705 loan program, could have raised capital without the government's help? I don't. The same is true for the second-biggest recipient of the 1705 loan, Prologis. Ditto Congentrix, which received a $90 million loan guarantee from DOE, even though the company is backed by Goldman Sachs. You may also remember that when SolarCity was approved for a DOE loan but was later denied (perhaps because of closer scrutiny over the political connections of DOE-loan recipients in the aftermath of Solyndra), the company then proceeded to get Bank of America to lend it the money

What am I upset about, you ask? So the private sector doesn't need the government to lend money to these companies, but what is the harm? If the loans are repaid, as was the case with Tesla, or if the loans are low risk to taxpayers, maybe the program is a great idea.

[See a collection of political cartoons on energy policy.]

The problem is that the government shouldn't be in the business of lending money to private companies or encouraging banks to lend money to companies – whether the money will be repaid or not. First, as I have mentioned, many of the companies getting money from the government would be doing fine without it, even though they certainly enjoy the perks of government loans or tax credits that lower the prices of their product for costumers at no cost to them. Second, there is something unseemly when so much in government subsidies goes to produce a car that only a few Americans can afford. A new 2013 Tesla Model S ranges from $59,900 to nearly $100,000 before tax credits and rebates (like the $7,500 federal tax credit and the $2,500 California rebate).

Third, it is no better when the government subsidy goes to companies that couldn't do it on their own. If the company can't convince consumers to buy their product at a given price, these same customers shouldn't essentially be forced to buy it anyway when their tax dollars pay for a subsidy or an unpaid government loan.

More importantly, government meddling in the market introduces serious distortions and destroys the level playing field, putting companies that are not getting a government handout at a disadvantage. Take loan guarantee programs, for instance. Companies that receive government backing are likely to get better financing terms than if they did not have the government's help. They get lower interest rates than they would on their own and lower rates than their competitors will get. In addition, government-supported businesses will likely be able to raise more money and attract more private-sector capital than their competitors that don't have government backing.

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

Furthermore, loan guarantees from the federal government open the door to many other subsidy sources, from state governments and elsewhere. These distortions are important and unfair. Because a loan guaranteed by the federal government offers a considerable advantage to a business over its competition, many companies that could get capital on their own are eager to get their hands on government-subsidized loans. Musk has even acknowledged that government subsidies are generally bad policy and that he could have done it without them.

Tesla, I am told, produces fantastic cars. As long as consumers are willing to pay for them, the company should be fine. However, the government should not distort the market and create incentives for people to buy a Tesla. And there is no reason for federal or state taxpayers to help keep a company afloat to sell cars that taxpayers don't want to buy at the price it is offered.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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