Tuesday, August 16

State Incentives Attract Data Centers

In Kansas City, MO, there is an old limestone mine that had seemed perfect to house a data center. With numerous benefits to give the potential center, it seemed they were the best choice, and yet they lost the project.

Why? They lost because they didn’t provide tax breaks.

Several huge companies have turned down the potential site in favor of going to Kansas, or in one case, North Carolina. They lost these major projects because of the simple factor of not having tax breaks.

“There were people who wouldn’t even come and look,” said Ora Reynolds, president and chief executive of Hunt Midwest Enterprises Inc., which has been marketing its SubTropolis caves. She says she has learned that financial incentives were “absolutely crucial.”

This competition between states has been happening across the nation, as companies look for sites for large projects. In response, states have been offering larger and larger incentives to attract them, according to the Associated Press. Analyzing state revenue and economic development records, AP found that governments of various states have offered almost $1.5 billion to hundreds of projects involving data centers over the past decade.

However, these incentives may be costing taxpayers more than first meets the eye. In fact, many states did not disclose how much they waived in taxes, saying it was confidential. They say in many of those cases, millions more in local taxes have been waived.

The benefits of these incentives are inconclusive. On one hand, they are costing millions to build and equip, all the while not employing many residents. They may provide an increase in property and sales taxes, but the lack of workers means less income tax. But many governments are waiving those property and sales taxes.

Many officials say that the tax breaks are actually worth it though, because while they may affect one community negatively, it will help states cover costs to help schools, lower the cost of college tuition or pay for roads and other infrastructure.

“Does it make sense to pick winners and losers for a massive statewide subsidy for, in effect, one county?” said Washington state Rep. Reuven Carlyle, who leads the House Finance Committee and voted against an extension of the data center sales tax break.

Many people don’t generally notice data centers, but they are integral to everyday life. Their energy use grew by 36% between 2005 and 2010 because more were needed. When someone shops online, streams a movie, or uses a smart phone app, they’re using data centers, which store and process huge amounts of information in long rows of computer servers and hard drives.

Individual data centers are often run by major companies such as Apple, Amazon, Google, Microsoft, and Yahoo. Many others are run by one person and then rented to smaller companies.

Currently, 23 states have specifically drawn up incentives for data centers within the last five years. About 16 more have general programs to help them. These incentives will likely only grow due to increasing digital demand. Cloud computing and an increased reliance on technology as a whole are fueling more data center projects.

“Historically, states have offered a lot of exemptions for manufacturing,” said Randy Hilger, a principal at the tax services firm Ryan LLC. “But as we become more and more of a service economy, you’re seeing states react with their exemptions.”

Despite all of these incentives, not all data centers are getting government subsidies. Many instead rely on locations, such as Silicon Valley. However, with the rise of technology, it is more possible than ever for them to build anywhere, meaning that tax breaks may continue to play a large part in where they’re built.

“I don’t believe it’s fair,” said Morrow County Assessor and Tax Collector Mike Gorman. “It’s just kind of a loophole in the system that may allow them to continue on into perpetuity” without paying much tax.

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