Investors and Taxpayers: Beware of Corporate Welfare

Last week, Tesla analysts at Goldman Sachs reiterated their sell rating of the stock, citing decreased delivery projections of its Models S and X, and slower production of its mass market Model 3 (see: that’s what I want!).  Goldman analyst David Tamberrino believes that the slowdown may mean that the Model 3 is a lot more difficult and expensive to manufacture than company executives originally thought.  One can only wonder — if the 15-year old company hadn’t been propped up by taxpayer subsidies, would Tesla still be in business?

In 2015, the Los Angeles Times crunched the numbers and estimated that Elon Musk made his fortune by making electric cars, solar panels, and rockets with the help of $4.9 billion in government subsidies.  The LA Times wrote, “Musk and his companies’ investors enjoy most of the financial upside of the government support, while taxpayers shoulder the cost.” Indeed, MoneyWatch reported last week that Elon Musk will receive a $2.6 billion pay package if certain milestones are met.

Musk is not the only one benefitting from the subsidies.  Based on the PRI study Costly Subsidies for the Rich by PRI senior fellow Wayne Winegarden, nearly 80 percent of the federal tax credits for electric vehicles go to households with incomes of more than $100,000.  A Californian can receive up to 36 percent in total credits as a percentage of the price of a car (see: that’s what I want!).

Luxe cars, solar panels, rockets and spacecraft aren’t the only industries enjoying corporate welfare.  The recently signed budget deal in Washington was loaded with what the Washington Examiner called “a perfect piece of bipartisan swampiness.” Here are just some of the highlights – or lowlights — reported by the Examiner:

  • Motorsports entertainment complexes (NASCAR tracks)
  • Films and TV shows produced in the U.S.
  • Green energy – fuel cell property tax credits, solar electric, solar water heating, small wind energy, and geothermal heat pumps
  • Fuel-cell two-wheeled vehicles (a.k.a. plug-in scooters)
  • Biodiesel

How have these industries faired? For starters, Goldman’s price target for Tesla is $205 – which implies a 36 percent decline from its closing price of $304 (3/26/18).  PowerShares WilderHill Clean Energy ETF (PBW), which invests in basket of U.S. companies in the business of advancing cleaner energy, had an annualized return of negative 11.99 percent over the last 10 years. Contrast that to my good ol’ T. Rowe Price Blue Chip Growth Fund, which crushed that fund with an annualized return of nearly 13 percent over the same period.  Of course, it wouldn’t surprise me that some companies in that blue chip growth fund take advantage of government subsidies and credits.

The great investor Peter Lynch warned, “Behind every stock is a company.  Find out what it’s doing.”  That’s good advice for investors and taxpayers alike – especially if what’s behind the company is the government.

Rowena Itchon is Senior Vice President at the Pacific Research Institute

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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