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Data Storage Government The Almighty Buck

Do Tax Breaks For Data Centers Make Sense? (datacenterfrontier.com) 94

1sockchuck writes: Does it make sense for state to offer tax incentives to lure huge data center projects? After an extended debate, legislators in Michigan have approved tax breaks for a $5 billion data center in Grand Rapids. The project from Switch, which previously built the SuperNAP in Las Vegas, brought the debate into stark relief due to the size of the project — an estimated 2 million square feet of data center space. States competing for projects often find themselves in a bind, since the highly-automated facilities create a limited number of permanent jobs, but many states already offer juicy incentives. Michigan ultimately sought a middle path, tying the tax breaks to job creation goals. If the data center jobs don't materialize, the breaks disappear.
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Do Tax Breaks For Data Centers Make Sense?

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  • No (Score:3, Insightful)

    by Anonymous Coward on Friday December 18, 2015 @12:37AM (#51141787)

    Tax them. Do more with less. Data centers are a drain on natural resources.

    • Yes (Score:5, Insightful)

      by ShanghaiBill ( 739463 ) on Friday December 18, 2015 @12:58AM (#51141823)

      The tax breaks make sense for each individual state. Just like when you are arrested, and offered a plea deal to rat on your partners, it makes sense to do so: This is the Prisoner's Dilemma [wikipedia.org]. It would be best if the states would all agree to mutually stop the tax breaks, but in the absence of such an agreement, it makes sense for an individual state to defect, and offer a break.

      It is unfortunate that the courts don't ban these special tax breaks under the constitution's equal protection clause. No company should get a "special deal" that is not available to any other company. They should all be treated equally.

      • Re:Yes (Score:4, Interesting)

        by mwvdlee ( 775178 ) on Friday December 18, 2015 @02:19AM (#51141973) Homepage

        This.

        Datacenters are profitable companies and are not a necessity of life for the citizens.
        I see no reason why they would deserve a tax break.
        The only reason they do is because they push states (or other local governments) into bidding wars.

        If you could decide country-wide on which types of companies would get what type of tax incentive under what conditions, you'd save a lot of tax money.

        • Re:Yes (Score:4, Insightful)

          by dbIII ( 701233 ) on Friday December 18, 2015 @03:09AM (#51142045)

          The only reason they do is because they push states (or other local governments) into bidding wars

          Right down to the lowest bidder that either has an unrealisticly optimistic idea of the "trickle down" benefits or is getting a personal kickback.
          Funny how Vegas was on the list before - souls of honesty in politics down that way I've heard :)

        • Re: (Score:2, Interesting)

          by Anonymous Coward
          My county has an aggressive policy of cutting sweet tax deals to convince companies to locate here, particularly manufacturing. And honestly, it's been pretty successful in that regard. The irony is that they've had to jack up residential property tax rates to make up for it (we pay some of the highest in the state), meaning the smartest thing to do for the people that move to the area is to actually live in the next county or state (I'm right on the border) and accept the short commute to work here.
      • The tax breaks make sense for each individual state. Just like when you are arrested, and offered a plea deal to rat on your partners, it makes sense to do so: This is the Prisoner's Dilemma [wikipedia.org].

        This is simply not true. Since the datacenters create only a tiny number of permanent jobs, there is no benefit in defecting (in this case, offering a tax break).

        • This is simply not true. Since the datacenters create only a tiny number of permanent jobs, there is no benefit in defecting (in this case, offering a tax break).

          In this case it may well be true. The deal is 400 jobs by 2022 and 1000 jobs by 2027. That's greater than tiny by my reckoning. If they don't follow through, they lose the tax breaks. I'm not sure why a pure data center needs 400 people, much less 1000, but perhaps it is more than just a data center.

          • Well if Slashdot in hires an extra receptionist, and uses a server there it would be 1 out of 1000, it's the data center, colocated businesses and contractors.

            Switch’s 1,000 clients include eBay, Intel, Shutterfly, Machine Zone (Game of War), Amgen, Dreamworks, HP, Intuit, Hitachi, JP Morgan Chase, Sony, Boeing Cisco, EMC, Google, Amazon, Time Warner, Eli Lilly, Activision (Call of Duty) and Fox Broadcasting, among many others.

            1,000 new jobs by 2026 collectively from "the data center industry"

        • I was starting to think that maybe our Nerd Governor [wikipedia.org] did something right, then I realized that "Switch [wikipedia.org] is a privately held company based in Las Vegas, Nevada.", Nevada a state with no income taxes, was getting a Sales and Use tax, tax exemptions. This means Switch a company that pays no income taxes, will be able to sell Disk space and CPU cycles and collect no sales taxes from it's customers, and very probably have some very sweet property tax abatements to boot from the township they're locating in retur

          • Ouch! No income tax! Income tax is the best type of tax ever invented--because all taxes are income tax. Sales taxes just take part of your income later. There are some interesting side-effects [wordpress.com] produced when implementing income taxes.
            • Yes no individual or corporate income tax [taxfoundation.org] in Nevada, that's why Microsoft [seattletimes.com] sells through there. You know if you actually crunch the numbers, you find that Corporate Income taxes shield people from individual taxes, we'd be better off not taxing corporations, so individuals would pay more individually and put a 25% tax on dividends to non-US taxpayers.

              • You know if you actually crunch the numbers, you find that Corporate Income taxes shield people from individual taxes, we'd be better off not taxing corporations, so individuals would pay more individually and put a 25% tax on dividends to non-US taxpayers.

                Taxing individuals more individually is a way to increase the cost of labor, thus raising the cost of products. Raising the cost of products reduces the amount of products that consumers can purchase with their income, thus reducing the amount of products you can profit by producing. Reducing the amount of production reduces the amount of required labor. Reducing the amount of labor means reducing jobs.

                That's a primary feature of my musings on public policy. It's one of the reasons I like progressive [wordpress.com]

        • If they don't reduce the datacenter taxes to zero, they're going to have more tax revenue.
      • You're right: it's a market thing. The states tax these businesses, just not as much as they otherwise would; that means state revenue. If the state has a new facility producing some good or service, that's more production; that production represents the generation (and export) of local buying power.

        Exporting local buying power is trade. You produce things using less labor than a neighboring economy; you send those products out to them, and they trade something they can produce for less than you. In

    • Tax them. Do more with less. Data centers are a drain on natural resources.

      Tax collection should be moved to where it is the least drain on economic resources; the final end consumer. States should reorient their tax collection to final sales and fixed property instead of on income.

  • by Anonymous Coward on Friday December 18, 2015 @12:37AM (#51141789)

    It's rather obvious - the tax code should be simple. Without tax breaks for special interest groups.

    The hodgepodge of tax breaks for this and that makes the tax code unfair, complicated, and leads to a race to the bottom between states, attempting to claw in industry by offering them the best deal.

    American states should unify in some sort of federation, with a common, unified and simplified tax code - which should get rid of every single tax break on offer.

    • Re: (Score:3, Funny)

      by Anonymous Coward

      "American states should unify in some sort of federation..."

      What an amazing concept!

    • by Anonymous Coward

      Unless we enforce a single tax code at the city, local, county and federal levels this will be a problem. Note, I'm not actually advocating that. As complicated as it can be sometimes different areas have different needs and different desires.

      The town I live in refused to bend over for Walmart, who of course wanted a tax-break for a new location here a few years back. They are now just outside of town within a smaller town's city limits and all that sweet, sweet tax revenue now goes to them. Not only

    • It's rather obvious - the tax code should be simple. Without tax breaks for special interest groups.

      The net result is a world designed entirely by corporations for what makes financial sense given the resources. Suddenly you'll be missing on a lot of investment, you drive economic growth to restricted parts of the country and as typically would happen with a country the size of the USA the winners would be states with resources while the losers would lack incentives to bring any form of economic growth to their states.

      What you propose sounds good on paper, but there's a very real reason incentives are giv

      • Re: (Score:2, Interesting)

        by Anonymous Coward

        (I'm the OP anonymous coward).

        I disagree with you. Not because you're flat out wrong - but because a system where special deals are offered individually through 'deals' with states, municipalities etc, is ripe for something rather nasty: corruption.

        Furthermore, as I argued initially - you risk a race to the bottom. Something we can clearly see in the US - but we can also see this with corporate taxes in the EU. Countries 'underbidding' each other to attract investment. This is obviously not sustainable.

  • it makes sense. (Score:2, Interesting)

    by Anonymous Coward

    The state dose not lose anything by giving tax breaks. It dose not cost the tax payer anything. May cause some expenses in some ways, but once the data center is making profit they will be paying taxes for many years. Jobs or not, the state will still benefit.

    I realize what the author thinks is that that a tax break means the data center is getting tax payer money, which it dose not. The same as an oil company getting a tax break dose not cost tax payers anything.

    With the state tying the tax breaks to havin

    • Re: (Score:3, Interesting)

      by Anonymous Coward

      The state dose not lose anything by giving tax breaks.

      Opportunity costs. If the data center doesn't move in, the land could have been occupied by 200 10,000 sqft businesses. Of course, it could have ended up completely unoccupied, so it's hard to say what would have really happened if the government just told them to pay their taxes like everyone else.

      • by Anonymous Coward

        A data center, after it is built and the machines are in, tends to need only an onsite skeleton crew. You have facility people for HVAC, power, plumbing, and building security, some grunts to rack/unrack machines, plug/yank drives, some junior network techs to make sure server foobarbaz is plugged into port 2112 and getting a signal from the switch, then some security guards to roll around on their Segways, as well as some Knightscope security robots to make sure things are buttoned up tight when the secur

        • Of course, what happens if the data center goes defunct? A large building like that in the middle of nowhere can't really be used for a warehouse, since it isn't on main transportation lines. It can't really be turned into a mall, since the population might not be enough to support it.

          In this case the building already exists, has been vacant for years, is an eyesore, and in need of some expensive environmental clean-up. There is little downside to this move. Perhaps you are right as a matter of principle, but this instance is a poor example for it.

    • by mwvdlee ( 775178 )

      The country as a whole loses money though, as the datacenter would have been build somewhere without tax breaks if it couldn't get tax breaks anywhere.

    • Isn't it amazing how strongly correlated the quality of an argument is with its spelling and grammar?

    • by Anonymous Coward

      So the Infrastructure (water, roads, garbage collection, etc) were free for the data center?

      Taxpayers paid for them..

    • I think lift makers deserve tax breaks more

  • by mark-t ( 151149 ) <markt@@@nerdflat...com> on Friday December 18, 2015 @01:34AM (#51141873) Journal
    The only people that tax breaks make any sense for at all are the poor.
    • "The poor" already don't pay taxes. In fact, "the poor" often get additional benefits in the form of tax credits. So what else ya got?

      • by mark-t ( 151149 )
        I've lived most of my life substantially below what is considered to be the national poverty level, and I was still paying taxes.
  • No (Score:5, Insightful)

    by richardtallent ( 309050 ) on Friday December 18, 2015 @01:45AM (#51141887) Homepage

    Tax breaks by local or state governments to win construction projects NEVER make sense, and should be outlawed as a form of unfair treatment under the law.

    Small businesses hire FAR more employees and put FAR more back into the local economy than large companies who have the political clout to win abatements. Every tax abatement won by a company deciding to do business somewhere is an effective tax INCREASE on every other business and resident of that jurisdiction.

    When a company moves into town, they are taking advantage of the roads, sewers, fire and police protection, schools, and other appurtenance of civilization, and they should pay their fair share for that infrastructure.

    Speaking specifically about data centers -- they hire relatively few people, take up a large land mass, add stress to the local electrical grid, create buildings that drive down surrounding land values (who wants to live next to a windowless building with huge air conditioners?), etc. etc.

    I'm not saying they are "bad" neighbors, but they certainly don't deserve a ticker tape parade, and they should pay their fair taxes like anyone else.

    • by Sique ( 173459 )

      Small businesses hire FAR more employees and put FAR more back into the local economy than large companies who have the political clout to win abatements.

      To be fair: A large share of the higher hiring numbers for small businesses is a statistical fluke. You put the limit between small and large businesses arbitrarily at some number (lets say: 100 employees). Businesses will grow and shrink all the time, and there will be always businesses that cross the line between small and large. Whenever a business adds employes and thus becomes larger than 100 employees, it's a small business hiring. If the same business goes bust or has to fire employees, and thus shri

      • This effect will occur at any limit you set between small businesses and large businesses. It could be 10 people, 100, 250, 500 or 1000. You will always have businesses growing, and if they cross the line, it's a small business growing. And you will always have businesses shrinking, and if they cross the line, it's a large business shrinking.

        That's why there should be a fuzzy line between small and large businesses, rather than a sharp cutoff. Also, any time the company size changes, the weighting should be based on an integral over the range between the old and new sizes. Under 80? 100% small business. Over 120? 100% large business. Growing from 99 employees to 100, or shrinking from 100 to 99? Attribute half of that to small business, and half to large business. From 50 to 120? Weighted more toward small business. Etc.

    • Excellent comment.
  • by ErichTheRed ( 39327 ) on Friday December 18, 2015 @02:05AM (#51141943)

    As people and the article have pointed out, a massive data center build (often in the middle of nowhere) doesn't really benefit the local population of an area. Unless the company is moving a ton of admin jobs along with it, the tax base doesn't even increase when all these incentives are factored in. You'll have security guards, facility engineers (HVAC etc.) and a very small rack-stack-fix type of staff. Also, in the case of public cloud style data centers, everything beyond the physical hardware replacement is software-controlled once the core is built out, so you won't have as many traditional sysadmins employed. Plus, the added power and public utility costs add up as well when you consider generation costs, building or improving roads, etc.

    The thing about these special tax breaks is that states have to play Prisoners' Dilemma with each other. I live in a high-tax state (NY) and we're always hearing large companies with big New York operations threatening to move to North Carolina, Florida, Texas, etc. if they don't get a special tax deal. They do this because they know they can - the low tax states will do crazy deals to get companies to move there. A company I worked for moved to Orlando, and the state and city were practically building the company a new headquarters, building new roads and easing building restrictions to suit their needs. Plus, they got some insane tax abatement for 10+ years and cheap utility rates on top of that. When companies don't have to pay normal levels of tax, the only possible upside is increased property, sales and payroll taxes from employees that move in. The high tax states have to do at least some of this also, but it's an even worse deal for them usually since they have greater expenses to cover. Florida and other low tax states spend a lot less on education, they don't have to remove snow in the winter or perform as much road maintenance, etc.

    • by mlts ( 1038732 )

      It only will backfire on the states giving abatements. Yes, it means that there is someone who will be paying a large electric bill and real estate taxes, but like others said above, there is a large opportunity cost. Even a big box store would be better in some ways, because it would hire a lot more people and being money to the community in sales tax revenue.

      As someone living in the area, given a choice of a data center which blocks out a huge chunk of land for good, versus something like a S-Mart or Gn

    • In addition, there's also a moral hazard problem with the politicians shepherding these deals. They get positive PR for "making big deals", "bringing business to the state", photo ops shaking hands and breaking ground, etc. The fact that in the long run it's a net negative is not a problem for them -- in a few years they'll be gone to another post and the public will be holding the bag of debt, as usual.

  • Well if it makes sense for sports stadiums, then it stands to reason it must work for datacenters.

  • Michigan really should be taken over by the federal government or somebody that can run it. They have a huge amount of revenue but let a little bit of the third world into the USA in the shape of a total lack of government care in Detroit.
    Maybe they should just surrender to Canada again.
    • You really have no idea what you're talking about, do you? The political fight over state control of the Detroit municipal government has been going on for years. Try googling the terms "emergency manager" and "consent agreement".

  • Generally no. Race to the bottom, corporate welfare, etc.

    But I kind of ask "What's the data center for?"

    Is it meant to be a place to house fully automated, large scale, cloud services for companies based elsewhere, where the siting is purely about some kind of risk-management/engineering goal on a continental/global basis?

    Or does it have a significant colocation component to it, where they expect to house servers for a regional base of customers at a price point where it may encourage localized business g

  • From the article ...

    The final package, which passed at 11:30 p.m. Tuesday, would end the tax exemptions if the data center industry does not collectively create at least 400 new jobs in Michigan by 2022 and 1,000 new jobs by 2026. The package now heads to the desk of Michigan Gov. Rick Snyder, who had sought the assurances on job growth for the project.

    I know there's a lot of contention here about offering tax breaks but states really are in competition for jobs. Getting past the moral dilemma of it, a dilemma I can't seem to muster, it is hard to see a downside to this. The perspective real estate--the Steelcase Pyramid Complex--has been vacant for some time now. It used to be a furniture manufacturing plant. Whoever buys it has to gut it and clean it up, as there are some nasty pollution problems to be remedied. Switch, the comp

    • The only part I don't get is why a data center needs 400 people, much less 1000.

      It doesn't. They probably included the guy to plow the parking lot in those 1000 jobs. The local news stations are falling overthemselves with how many jobs this will create and bring to West Michigan without understanding how many people it really takes to run a modern data center.

      • Exactly, this is a very common tactic, whenever you hear "X will create Y jobs" without greater detail, you can be sure that Y is a hilariously overinflated estimate that includes anyone who could possibly have anything to do with the setup or running of X, right down to the guy who shows up once to install the sign on the building. This deception benefits everyone except the working class.

  • by trout007 ( 975317 ) on Friday December 18, 2015 @07:13AM (#51142455)

    Economically it doesn't make sense. It would make more sense to lower rates for all then pick and choose.
    Politically it makes sense because a politician can show the actual jobs they had a hand in creating while ignoring the lost jobs that are impossible to identify.

  • The government has a vested interest in having data centers on US soil where they can be easily accessed by various alphabet soup agencies. It only makes sense to incentivize placing them here.

  • Quick example in Ohio "Businesses that received tax credits, loans and grants from the state of Ohio complied with terms of their deals at a record rate last year, the Ohio Attorney General Mike DeWine’s office touted in an annual report of economic development compliance. Of 341 awards with a performance period ending in 2014, 269 were in compliance based on promised job creation and retention, according to the report, which is required to be submitted to the General Assembly."

    It's pretty constant

    • You are missing one assumption, that all states tax loads are the same. There are high tax states, and low tax states - so if you are contemplating moving to a high tax state, and a low tax state comes in to bid on the project - the high tax state has to offer a tax break to be competitive. There is no reason for the low tax state to even start with an offer.

      Then you get into high regulatory compliance states vs. low regulatory compliance states, that is a huge deal as well.

      Now what would be easier is

      • No, I understand there are high and low tax and regulatory states, those types of things apply to all businesses in the state though. I am more thinking two states that have pretty much the same rates etc, some company was founded in state A, and has been there for 50+ years, threatens to leave because state B will give them tax breaks, state A has to lower taxes for this one company to keep them there. In some cases it has nothing to do with high and low tax states, it's just a way for businesses to extort
  • I work for a large hosting/datacenter ISP, and most of the work on the equipment in the datacenters is done remotely. All we really need on-site is some semi-competent remote hands to unbox, rack, and plug in the various pieces of gear into the racks, some security guards to keep the riff-raff out and escort customers into/out of their cages, cleaning staff to keep the dust and debris down, and maybe an onsite engineer who knows all the power, network, and cooling setups enough to fix them when they break,
  • I don't believe the government should ever use tax breaks to encourage anything. Such incentives are often abused, and later we all pay for it. And any mass benefits are dubious to begin with.

    If someone wants solar panels, 'let them eat eat solar panels'. But it shouldn't be on our tax dime the way I see it. Our history is rife with pointless breaks/expenditures.

    Disincentives, I can understand and sometimes support.
  • by DriveDog ( 822962 ) on Friday December 18, 2015 @02:15PM (#51145299)

    "...If the data center jobs don't materialize, the breaks disappear."

    If both of the data center jobs don't materialize, the breaks disappear. FIFY. Most such installations are worse than warehouses. Not only do they employ very few and eat a lot of land per job, but most of them suck a lot of power. Be a NIMBY and let it go somewhere else. You won't be sorry.

  • more poor, more cuts in necessary services, wash, rinse repeat.
    ANYONE hear about wage depression?
    Major router centers only hire during installation and setup.
    After that, it is 100% remote administration with a tiny core of in house rack replacement workers at minuscule wages.
    The tax breaks, however, become the new "normal" and every effort to put the city back on a profit basis becomes "Tax hikes" and here we go again.
    Did you people learn NOTHING from the 2008 crash?

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