Updated on March 5 at 8:34 a.m. PST with additional information about space companies located in the Los Angeles area and the benefits of industry clusters to employers and employees.
by Douglas Messier
The state of New Mexico has proposed that Virgin Galactic establish a production facility at Spaceport America, which is where the company plans to begin flying tourists on suborbital space rides later this year. KRQE TV reports:
The New Mexico Economic Development Department says they have a proposal to bring Virgin Galactic’s manufacturing to the Spaceport. Right now, the manufacturing location is in the Mojave desert. Spaceport America has five permanent tenants that are conducting a variety of experiments; including one company that uses laser technology to help land on the moon.
Details of New Mexico’s proposal are not available. However, a deal might include financial incentives, such as tax incentives, paying for construction of the new facility, or covering the cost of relocation. The state has already spent about $225 million building Spaceport America for Virgin Galactic, which serves as the facility’s anchor tenant.
Virgin Galactic builds SpaceShipTwo and WhiteKnightTwo vehicles and tests rocket engines at the Mojave Air and Space Port at Rutan Field in California. Virgin Orbit, a sister company spun off from Virgin Galactic, bases its Boeing 747 Cosmic Girl carrier aircraft and tests engines for its LauncherOne rocket at the Mojave spaceport.
Virgin Galactic’s production hangar in Mojave has limited space for one WhiteKnightTwo and up to three SpaceShipTwo vehicles at a time. During a Feb. 22 earnings call, company officials said they are closing in on a decision about where to locate a new production facility capable of building six SpaceShipTwo vehicles per year.
Virgin Galactic plans to eventually conduct 400 suborbital tourism and research flights annually from Spaceport America. With each SpaceShipTwo vehicle flying an estimated 50 times per year, the company would need at least eight spacecraft and two or three WhiteKnightTwo carrier aircraft. Virgin Galactic is also looking to establish spaceports in Italy, United Arab Emirates and other locations that would each host 400 flights annually.
Is New Mexico Facing Long Odds?
While relocating production to Spaceport America would help Virgin Galactic consolidate more of its operations in New Mexico, the move has a number of potential drawbacks for the company. A key one involves the ability to attract and retain top talent.
Virgin Galactic and other companies operating out of Mojave have had a difficult time with this task due to the facility’s remote location and harsh desert climate, which can range from 110 degrees F (43.3 C) in the summer to subfreezing in the winter. Local housing is limited; many workers commute in from Lancaster and Palmdale, two desert cities that are subject to the same climatic conditions.
Located in the New Mexico desert, Spaceport America is arguable even more remote than Mojave. The city of Las Cruces, located about an hour’s drive away, has a population of 102,000, about one third of the combined population of Lancaster and Palmdale. The two California cities have the advantage of being not far from the many attractions and activities available in the greater Los Angeles area. But, still employee retention is a challenge.
During the earnings call, Virgin Galactic CEO Michael Colglazier said that employee recruitment was a factor in Virgin Galactic’s decision to locate a new research and development center south of Los Angeles in Tustin, Calif.
“Our design and engineering team has been located at our facility at Mojave. We’ve strong roots at Mojave. It’s a great facility for us and we will been a great facility for us and we will continue to maintain our presence there. But we also recognize that growing the business requires us to be in locations where we can access additional talent at scale,” Colglazier said.
“We’ve made the decision to locate our Center for Design and Engineering in the southern LA Basin where there is a strong aerospace corridor, ranging from El Saputo all the way to San Diego,” he added. “Just recently, we leased a location in the heart of this aerospace quarter that will serve as the primary hub for R&D and the design and engineering of our new vehicles specifically the Delta Class spaceships and our next generation of motherships. We expect to ramp up engineering and support team talent against these programs over the coming three quarters.”
The Los Angeles area is home to major space companies, including SpaceX, Rocket Lab, Virgin Orbit, Relativity Space and The Aerospace Corporation. The U.S. Space Systems Command is located at the Los Angeles Air Force Base.
Industry clusters are beneficial in that they attract smaller companies that can provide equipment, parts and support services. Workers have the opportunity to move to new companies if they are unhappy with their current jobs or their employers lay them off or go out of business. These benefits help explain the success of Silicon Valley in attracting companies.
Virgin Galactic and Spaceport America have helped to expand aerospace in southern New Mexico. But, the impact has been limited, in large part because the company and spaceport have delivered only a fraction of the promises officials made when they announced plans to build the spaceport more than 16 years ago.
A Massive Investment with Minimal Return
In December 2005, Virgin Group Chairman Richard Branson and then-Gov. Bill Richardson announced the state would spend $200 million to construct a purpose-built spaceport in the desert for Virgin Galactic to use. Officials projected commercial flights would begin as early as 2009, with a fleet of SpaceShipTwos carrying up to 50,000 people on suborbital spaceflights during the first 10 years of operation.
New Mexico officials projected that Spaceport America would become a nexus of a thriving aerospace sector that would bring high-tech jobs, well-heeled tourists, and millions of dollars in economic activity and tax revenues to the state and local governments.
More than 16 years later, Virgin Galactic has yet to fly a single paying customer. It has managed only four suborbital test flights, two of which were flown from Spaceport America last year. (The first two were flown from Mojave.) Virgin Galactic plans to complete suborbital flight tests this summer with commercial service beginning in the fourth quarter of 2022 — 13 years behind the original schedule.
The question for New Mexico is: would spending money to bring Virgin Galactic’s manufacturing operations to Spaceport America be a wise investment? Or would it simply be throwing good money after bad given Virgin Galactic’s history of over promising and under performing?
Continuing Subsidies for the Spaceport
While Virgin Galactic’s schedule has moved to the right, New Mexico taxpayers have been spending millions of dollars annually just to keep Spaceport America operating for the space tourism company and a handful of other tenants.
Residents of Dona Ana and Sierra counties continue to pay a half-cent gross receipts tax they voted to impose on themselves to help fund development of Spaceport America. (A gross receipts tax is similar to a sales tax.) That money, which has been collected since 2009, has been used to pay off construction bonds and to fund operations of the spaceport. The counties keep part of the money to fund education programs.
Dona Ana County officials protested that the gross receipts taxes were not intended to pay for operational expenses. In Feb. 2021, the New Mexico Attorney General’s office agreed. Chief Counsel Matt Baca wrote that the statutes governing the tax stipulated that 75% of the revenues would be “the financing, planning, designing, engineering and construction of a regional spaceport,” with 25 percent retained by the local county governments.
The decision has resulted in a $2 million hole in the budget of the New Mexico Spaceport Authority (NMSA), which runs the facility. That funding would need to come from the state’s General Fund, which was already subsidizing NMSA’s budget by nearly $2 million.
If the additional funding isn’t provided, NMSA would need “to make severe cuts to the operational budget, staff, and onsite services. These cuts will directly affect obligatory contractual services, and negatively impacting tenant operations,” CEO Scott McLaughlin said in a presentation to the New Mexico Science, Technology and Telecommunications Committee in November.
KRQE TV reports that the proposed budget got a frosty reception from the Senate Finance Committee. Legislators proposed cutting $300,000 from the spaceport’s nearly $11 billion budget request.
Virgin Galactic pays $5.5 million annually in rent and fees, covering just over half of the spaceport’s $10.95 million budget for fiscal year 2023. Revenues from other tenants and users of the facility total $1.3 million, increasing spaceport revenues to $6.8 million.
Tax Proposal Rejected
Taxing travelers is a popular way for governments to bring in money. For example, a Virgin Galactic ticketholder flying suborbital from Spaceport America will pay taxes on the airline tickets and rental car they will use to get there, the hotel room they will stay in during three days of training, and on meals, drinks and almost everything else they buy during their trip.
The one part of the trip a Virgin Galactic ticketholder will not be taxed on is the flight to space, which the company is selling for $450,000. In 2019, the New Mexico Taxation and Revenue Department ruled that passengers on SpaceShipTwo would be treated essentially as freight and exempt from GRT. They would be no different from scientific experiments launched on SpaceShipTwo research flights or aboard suborbital sounding rockets launched from Spaceport America’s range.
State Reps. Jason Harper, R-Rio Rancho, and Matthew McQueen, D-Galisteo, sponsored a bill, H.B. 72, that would close the tax loophole relating to Virgin Galactic’s passengers while keeping in place the exemption for science payloads.
The taxes brought in on a $450,000 ticket would depend on whether the tax was levied in Dona Ana County, where Virgin Galactic has corporate offices in Las Cruces, or in Sierra County, where Spaceport America is located. The state government would receive most of the tax revenues, with the county receiving a smaller portion.
|County||Ticket Price||County Gross Receipts Tax||Total Tax||Total Cost|
|Dona Ana County||$450,000||8.3125||$37,406.25||$487,405.25|
The Las Cruces Sun News reports that two analyses of the impact indicated the tax would bring in millions of dollars annually while having little effect on ticket sales.
A legislative fiscal analysis projected the policy would have brought in $3.7 million in annual state and local tax revenue, using the GRT rate that would be applied in Las Cruces and Doña Ana County, where the company is headquartered.
The state Tax and Revenue Department stated in the fiscal impact report that demand for tickets with Virgin Galactic, currently priced at $450,000, was strong enough that a tax break was likely not necessary to maintain demand for the service.
However, the proposal to tax ticketholders was likely at cross purposes with the effort by the New Mexico Economic Development Department to get Virgin Galactic to locate its manufacturing facility at Spaceport America.
The measure went nowhere as opposition from Virgin Galactic, local officials, chambers of commerce and other legislators combined to kill it. The House Commerce and Economic Development Committee tabled the bill by a 9-1 vote.
Virgin Galactic has had no problem charging its wealth customers ever higher prices for their suborbital flights. The company raised prices from $200,000 to $250,000 in 2013, and then again to $450,000 last year. But, the company drew the line at taxing them.
Sirisha Bandla, Virgin Galactic’s vice president of governmental affairs, claimed the company decided to become the anchor tenant at Spaceport America in 2005 due to the tax exemption. Bandla, who flew to space with Branson on a flight test last July, further argued that a tax would punish a company bringing jobs to the state.
The bill’s supporters denied the state had committed to not taxing tickets in 2005. They pointing out the New Mexico Taxation and Revenue Department didn’t grant an exemption until 14 years later in 2019. Co-sponsor McQueen expressed amazement at Virgin Galactic’s position.
Following the vote, McQueen stated in an emailed comment, “It’s remarkable to me that Virgin Galactic talks about what a great partner they are for New Mexico and in the same breath hints that they might have to up and leave if their special treatment ends.”
Opponents also argued that the tax, which would apply only to Virgin Galactic, would make New Mexico appear less business friendly, break a previous commitment to providing a tax break, and deter the development of aerospace in the state.
Las Cruces Mayor Ken Miyagishima argued against the tax, saying it was unfair that the state would take the bulk of the money and benefit even though only Dona Ana and Sierra counties taxed themselves to pay for it.
In an interview before the hearing Monday, Miyagishima argued it would be unfair to institute a GRT benefiting the state as whole: “The state wants to tax it so that they can spread it out to all 33 counties? That’s not right.”
“I just want them to get going first, instead of just throwing things at them,” he continued. “Why now? Help them. Be a little more friendly towards getting here and getting literally off the ground.”
With the defeat of the tax bill, the state still has to find money to fill the $4 million hole in Spaceport America’s budget. The cost will be spread across the entire state.
Bill co-sponsored Harper expressed exasperation over the defeat of the bill.
“It perplexes me that we would invest over $200 million in building the facility and then also decide the activity for which the facility was intended needed to operate tax free,” Harper said.