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If tax sweeteners go sour....

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US states are competing for data center business, offering inexpensive power and tax breaks. But are these sweetheart deals too generous?

Hey, governments – have I got a deal for you! You give me millions in tax breaks that extend over the next decade or more. Make sure I don’t pay property tax on millions of dollars’ worth of equipment I’ll be buying. Negotiate a sweetheart deal with the local power company, and smooth the permitting path for construction and operation of my business.

In return you’ll get some short-term construction jobs, a few high-paying tech jobs, and twenty or so midrange tech salaries. Presuming, of course, I don’t decide to go lights out with my facility, in which case you’ll get a bunch a security jobs and very few tech jobs. But, most importantly, you get to tell everybody that, for this deal, I picked you!

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Source: Thinkstock

Sweetened Apple

To many standing on the outside of recent data center location decisions, this certainly seems to be the process – communities giving away the near term, hoping to cash in on the end benefits of building a data center in their locale. But if – as many politicians and community leaders justifying these deals will say – the greatest benefits are in the intangibles, then what’s the point in mortgaging the future tax base of your community in the hope of an ephemeral benefit?

Supporters can point to a number of projects that have drawn significant attention. When Apple started building in North Carolina, it was likely attracted by the region’s relatively inexpensive power, but was persuaded to sign by real estate and property tax reductions for very little in return. Using the Apple deal as leverage with the local government, Google and Facebook also built data centers in North Carolina. Even non-technology companies have selected North Carolina: housewares retailer Bed Bath & Beyond announced a project worth almost $40m that would open in 2018.

Cheap power

Inexpensive power has helped to attract data centers to other locations, such as Oregon, which has also drawn in Google, Apple and Facebook. Iowa’s tax breaks – along with potentially inexpensive power and proximity to the fiber connection that runs cross country – have attracted Microsoft, Facebook and Google.

But even with all this building, new data centers are not contributing greatly to solving unemployment, and due to the rural nature of many of the communities selected for development, unemployment is always a major issue.

Missouri: show me the money

Every state has its own approach to attracting business. To qualify for state and sales tax exemption in Missouri, a data center operator must provide at least $25m in new investment, creating 10 new jobs, lasting at least three years, and paying 50 percent more than the county average.

It’s not just for new builds – upgraded data centers have to put in $5m of new investment and create at least five higher-paying jobs, lasting for two years.

One of the few data center buildouts that has seen a direct impact on employment figures is Amazon’s building in central Ohio. Amazon promised 1,000 jobs when the project was finished; it has not reached that goal, but there are far more Amazon jobs available in the region now than there were before the decision to build there was made.

But Amazon has an advantage that almost no other data center builder can meet: it also builds huge warehouses to meet customer demand for product. It is currently focused on same-day and two-day delivery, and the central Ohio region where the data centers are being built turned out to be quite suitable for the construction of warehouse facilities to serve this.

Amazon has an advantage that almost no other data center builder can meet: it also builds huge warehouses to meet customer demand for product. 

It should also be noted that the tax abatements offered by state legislatures differ widely, often because of existing regulation. Iowa, for example, does not automatically assess property tax on business furnishings and equipment. Neither do 10 other states, but of those only Ohio has seen significant data center development.

Many of the statutory tax abatements have specific sets of rules, almost all defining the minimum investment necessary to qualify for the abatement offered, but not all require job creation as part of the project. Of those that do, even the most onerous only require the creation of 50 jobs. And of those that do require job creation, almost none provide direction as to the type of job created.

Some States don’t need to try…

On the flip side of the coin, there are locations that have done little or nothing to attract data center development yet see more than their fair share. California has done little to make the state a desirable place to build a data center, yet there are quite a few significant facilities, primarily owned by tech companies with significant local presences, that want to keep a data center close at hand.

New Jersey, one of the 11 states that exempts assessments of business furnishings and equipment, is seeing quite a data center renaissance, driven primarily by its location in the center of the famed, heavily urbanized Boston-Washington corridor, and its ability to deliver primary and secondary data center services to one of the most densely populated business regions in the world.

Phoenix has used tax breaks to make itself a mini New Jersey, from the perspective of data center operators. The city’s tax breaks for data centers make it attractive to develop there, but even with the tax abatements, it is the proximity to California businesses, and their need for primary and backup/disaster recovery facilities, that made this high desert location most suitable.

Loudoun County, Virginia, made similar inroads to getting data centers built; it offers tax breaks and a location that offers convenient access to the Washington, DC area, and to the US hubs of major international network connectivity points.

Though rarely spoken of in the glowing terms as the headline investment, we do find one consistent benefit. Data centers have very little negative impact on the locations where they are built, and often provide significant infrastructure upgrades that are required for construction or operations. More than one data center location has had to build improved roads and supply an upgraded electrical grid.

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Source: Thinkstock

Few negative impacts

They also have a smaller ongoing impact; they aren’t running 40-ton trucks over the roads on a regular basis, they don’t contribute to local traffic problems, nor do they add to potential overcrowding in local schools since the employment may only bring in a few new people to the area for ongoing operation.

If anything, the most difficult thing about data centers and tax breaks will be how politicians explain to voters why they granted the seemingly huge amount of corporate largesse. When the facilities are complete and the construction hubbub has died down, local residents see buildings occupying huge swaths of land, with little or no traffic, which makes them a major contrast to the large manufacturing concerns of yore.

The numbers that are thrown around relating to data center investments are huge; the funds that make it into these smaller rural communities, where many of these projects end up, are minuscule by comparison.

No tax breaks, we’ll move

The tax incentives are what made some of these locations the preferred choice; should they dry up, however, corporations won’t hesitate to move, placing their data centers in the optimal locations for performance and efficiency. For most of these heavily abated installations, those locations will be elsewhere.

This article appeared in the July/August 2015 issue of DatacenterDynamics magazine


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