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Tesla Gigafactory Incentives Approved by Nevada

Zacks Equity Research

Nevada’s Legislature has approved a package of bills which will allow tax incentives of $1.3 billion spread over 20 years for the construction of Tesla Motors, Inc.’s (TSLA) $5 billion Gigafactory in the state. Notably, four bills were passed by both the legislative chambers to approve all the incentives.

In order to accommodate the tax benefits for Tesla, the Nevada state government has decided to do away with some tax credits for insurance companies. This will free up about $125 million in tax credits over the five years starting 2016. Next, the lawmakers have decided to end the pilot program which provided tax credits to the film industry. This will also free up tax credits worth about $70 million for Tesla.

The third bill stated that about half of the workers hired by Tesla need to be Nevada inhabitants. Further, Nevada has purchased the right to build a road connecting I-80 and U.S. 50 to provide easy access to the Gigafactory. The road construction is expected to cost $43 million.

The tax benefits include sales tax exemptions of round $725 million through Jun 2034. Moreover, Tesla will save payroll and other taxes worth about $300 million through 2024.

The tax incentives will be offered in exchange of a $3.5 billion investment in manufacturing equipment and real estate in Nevada by Tesla. It is estimated that Tesla’s Gigafactory will create 3,000 construction jobs and 16,000 indirect jobs in the state apart from the 6,500 direct positions promised earlier by the company.

Tesla’s factory will support Nevada's efforts to recover its economy, which was adversely affected by the mortgage meltdown and the Great Recession. The Gigafactory construction is expected lead to economic development benefits of up to $100 billion for Nevada over the next 20 years. Nevada Governor Brian Sandoval supports the tax break citing that the returns will be at an 80:1 ratio. Also, he expects Tesla’s factory to attract high-tech industries, which will benefit the economy to a large extent.

Tesla plans to complete the Gigafactory construction by 2017. Further, by 2020, the company expects the annual lithium-ion battery production at the Gigafactory to exceed the global production recorded in 2013. The factory will produce enough battery packs to allow Tesla to build around 500,000 electric cars by 2020. It will also reduce the ‘per kWh’ battery pack production costs by over 30%.

Currently, Tesla sports a Zacks Rank #1 (Strong Buy). Other well-performing auto stocks worth considering include Advance Auto Parts Inc. (AAP), O'Reilly Automotive Inc. (ORLY) and Fox Factory Holding Corp (FOXF). All these stocks have a Zacks Rank #2 (Buy).

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