Tuesday, February 12, 2008

High-tech giants seeking massive tax break

Eastern Washington server farms could get $1 billion state exemption


OLYMPIA -- Microsoft and a handful of other tech giants are quietly securing a state tax break that could be worth more than $1 billion through legislation forged amid corporate threats and an interstate bidding war for computer server farms that have become the backbone of the Internet.

With its low-cost land and abundant clean power, Eastern Washington has the basic attributes to support the huge data centers companies such as Google, Yahoo and Microsoft are building for their online services.

But the companies say they need more tax breaks from the state to continue building.

"States such as Iowa and others have come on board with very attractive tax incentive packages to get data centers to locate in their communities," said DeLee Shoemaker, Microsoft's state government affairs director. "These other states that are in tough economic times and are looking to attract new business and new investments ... Washington state is no longer competitive for this type of business."

Microsoft and Yahoo already have server farms in Eastern Washington and had planned to build more. But when the state Department of Revenue recently determined that the server farms aren't eligible for an existing tax exemption for rural manufacturers, both companies halted new construction and began pushing for a new tax break.

Eager to shore up the flagging economy, lawmakers led by Gov. Chris Gregoire have taken up the issue. The server farms generate many temporary construction jobs and a small number of full-time positions. They also reduce the tax burden on local communities by expanding the property tax base.

Gregoire requested an exemption in Senate Bill 6666, which would eliminate half the state sales tax on replacement equipment for the mammoth computer server farms in Eastern Washington.

But even if her proposal passes, it might not be enough.

The proposed legislation "is a good starting point," Shoemaker said. "It's not us wanting more; it's us saying we have to make a business decision."

That's a story state governments have been hearing far too often, said Michael Mazerov of the Washington, D.C.-based Center on Budget and Policy Priorities.

"Companies are getting very sophisticated and aggressive at playing the states off each other and of course when the economy is turning down like it is now, they are even more successful at it because policymakers are very anxious to stimulate economic development," he said.

Is it worth it?

But Mazerov says there's a trade-off.

"That revenue could be used to improve education and make other investments that also have major economic development benefits."

Mazerov said in some ways, Washington could be a smart place to locate a server farm, even without a tax break.

"Washington has huge natural advantage, in terms of clean electricity, which is what these companies are looking for," he said. "The question with any tax incentive is: Are you rewarding companies for investments that they are going to be making anyway?"

The proposed exemption is moving forward with little public attention because it's structured in a way that shifts its fiscal impact two years into the future. With a line-item cost in this year's budget at zero, it stands outside much of the give-and-take that comes with balancing the state budget.

Faced with declines in projected revenues, Gregoire has told lawmakers that this year's budget must be frugal. She describes the tax exemption measure in two lines of her 38-page Budget and Policy Highlights manual as a "tax incentive for businesses to expand ... (no fiscal impact this biennium)."

Cost versus jobs

But in the next biennium, the incentive is worth $32 million, and $43 million in the next, according to Department of Revenue estimates. If viewed in the same 24-year time frame that generated the $3.2 billion cost estimate attached to Boeing's 2003 aerospace exemption, the new high-tech tax break could easily be worth more than $1 billion, according to Department of Revenue estimates.

Senate Ways and Means Committee Chairwoman Margarita Prentice, D-Renton, said the bill's price tag "gives one pause," but she'll support it because of what it represents for Eastern Washington.

"It is an opportunity to bring some really good jobs, jobs that pay well and an educated population that will be there permanently," she said, noting that the influx would be beneficial to rural schools and businesses.

"Jobs come a lot easier in Western Washington," Prentice said. "I'm really convinced we will be able to provide some of the same quality jobs to Eastern Washington."

E-mailing, blogging and downloading require massive computer banks or servers to store, move and process the information that most Internet users take for granted. Server farms are huge buildings full of computers that get so hot, companies spend as much to power the air conditioning as they do the computer processing. Access to cheap power alone can save companies millions each year.

During the first four-month construction phase, a data center employs about 600 construction workers. The next phase employs 500 workers.

Once the building is completed, the buildings employ 20 to 30 full-time workers.

Asked if the legislation was a gift to a huge corporate interest, Prentice said: "We gave another corporation (Boeing) a tax break," adding that other states are vying for the server farms.

"Those jobs are going to go somewhere -- better they should come to us," she said. Sen. Eric Oemig, D-Kirkland, isn't so sure.

Oemig said it doesn't make sense to cut taxes for an industry that is a drain on state resources. Server farms require a massive amount of constant electricity.

"You really have to look at the economic cost of (new industry) coming in," he said. "Maybe one thing they do is chop down a lot of trees, or create a lot of pollution or use up a lot of electricity."

Washington provides incentives for business even without more tax breaks.

"Right now we attract business because we have an excellent business climate," Oemig said. "Part of doing business in the state is paying rent. These server farms kind of want to come in here and have a reduced rent and I fail to see what the extraordinary value is that they are creating for Washington state that we should discount their rent."

Yahoo co-founder David Filo made his company's case for the tax break in a letter to Prentice.

He said the company has greatly expanded its presence in Washington, notably with a 115,000-square-foot software development facility in Bellevue and the construction of two "megadata" centers in Eastern Washington, but has halted new construction because of the Department of Revenue ruling.

"An unexpected requirement to pay sales tax will destroy the competitive advantage that led Yahoo to select Quincy as the location for our latest facility, and in fact swings the decision strongly in favor of freezing construction in Washington, and building instead in Oregon (which has no sales tax), as some of our competitors are already doing," he said.

Staying competitive

Gregoire sees the tax break as part of the cost of expanding top-tier tech companies in Washington, said her legislative liaison, Marty Brown.

"Proponents say that if we keep the server farms here, we will probably grow our base business in the state, too, because we will be closer to the server farms," he said. "Yahoo and Google may say we'll keep growing in Washington state because we've already done that in other state's where we've got server farms."

Brown said the tax exemptions are not just gifts to big-money business interests.

"They are going to do this someplace," he said. "It's sort of the industrial incentives similar to what folks did in the '70s to get industries to their state. It's what legislatures do."

The fact that Microsoft and the other companies with server farms are paying property taxes is a big selling point for them in the rural counties where they are located. Because of the high value they add to the taxing districts, the property tax burden is shifted away from individual payers and onto the megacompanies, proponents say.

Microsoft representative Shoemaker said the company has lobbied for a 100 percent sales tax exemption.

"Part of the reason why Washington state isn't suffering like many of the other states in this country is because the state has been smart enough to make these investments to diversify the economy," she said.


0 Line-item cost in this year's budget for a sales-tax exemption for computer server farms.

$32 million Cost of the tax break in the 2009-2011 biennium.

$43 million Cost of the tax break in the 2011-2013 biennium.

$1 billion Cost of the tax break when viewed in the same 24-year time frame that generated the $3.2 billion cost estimate of Boeing's 2003 aerospace exemption.

P-I reporter Chris McGann can be reached at 360-943-3990 or chrismcgann@seattlepi.com.


Gerald said...

Great blog! I guess the poor and the middle class will always have to pay the bills. We are only cannon fodder for the Nazi rich and Nazi American corporations. They want us to fight in their endless wars.

Gerald said...


Dear Posters:

In this open letter I would like to address the current phenomenon of change that seems to hysterically caught Americans. Obama is credited for this current phenomenon. For me change takes place everyday in our lives and Obama has not invented the word, change.

The change that I hope for in America can be heard in Bishop Thomas Gumbleton’s recent homily. Please listen to his words! His words are the change that we need for a better America and a better world.

Please type in this link to listen to Bishop Gumbleton’s words - http://ncrcafe.org /node/1602.

The homily is about fifteen minutes but it is well worth the time listening to it.

The change we need is in the words of Bishop Gumbleton.


Gerald said...

Churches of Peace

Gerald said...

Anyone who believes in the church enough to see it as a meaningful human community (in all of its varied forms from huge mega-churches to small Quaker meetings) is able, on reflection, to see that the church should be the focus of an effort to make the third way of human relationships which Jesus revealed as the foundation of peacemaking and world renewal. It is time for the church to truly live what Jesus lived and taught. As Christians we must ask ourselves--Are we really following in the footsteps of Jesus? Are we working for peace or are we promoting war? Jesus’ third way is the hard way but it is the only way to true peace.

Gerald said...

Why Am I Always Right?

Gerald said...

8.Even with the Republicans at the bottom of the polls and Bush/Cheney scraping the bottom they seem to behave as if they fully expect a Republican in the White House in 2009--them. Other similar signs include the huge embassy in Iraq, and the permanent bases (denied by Bush). Only a Republican neocon in power will need these things. For these reasons i expect that our two term limit will not apply to Bush and that he fully intends to stay. All he has to do is declare a national emergency and his EO will apply and allow martial law. Oops, i forgot, he has already declared a national emergency in his EO of august 1, 2007 (Syrian meddling in Lebanon constitutes an “unusual and extraordinary threat to the national security and foreign policy of the United States,” Bush asserted, adding, “I hereby declare a national emergency to deal with that threat.”

If McCain wins in November, and he might if the Republicans, the moral family oriented party, can throw Florida, Ohio and now Pennsylvania, I suspect he may leave peacefully knowing he has a clone in office.

As horrible as this will be a Democrat win may be even worse. It certainly may be possible that Bush may see this as the National catastrophe requiring martial law and then we will have a full fledged dictator for life, no functioning Congress or SOTUS.

Gerald said...

We must always follow in Jesus' path

Gerald said...

Unless Nazi Americans have a conversion of the heart, we will never change our evil, vile, and wicked ways.

Gerald said...

Hitler Bush makes me puke

Gerald said...

Bush started a war, and now to avoid losing it Bush pays Iraqis not to attack U.S. troops!

Gerald said...

If the U.S. now needs foreign troops to save its bacon in these two lost wars, it should demand them from Israel. Israel is why the U.S. is at war in the Middle East. Let Israel supply the troops. The neocons who dominated the Bush regime and took America to illegal wars are allied with the extreme right-wing government of Israel. The goal of neoconservatism is to remove all obstacles to Israeli territorial expansion. The Zionist aim is to grab the entirely of the West Bank and southern Lebanon, with more to follow later.

Gerald said...

Remember "mission accomplished"? Remember all the strutting neocons with their promises of a "cakewalk war"? Remember all the ignorant bragging about having "defeated the Taliban"? All of these lies were designed to tie American down in interminable wars in the Middle East for Israel's benefit. There is no other reason for Bush's invasions. We know for certain that Bush and his entire administration lied through their teeth about the Taliban and about weapons of mass destruction in Iraq.

What a total crock of ignorance and deception the Bush regime represents. Bush, defeated in Iraq, defeated in Afghanistan, with Pakistan crumbling in front of his eyes, is now reduced to begging the French, whom it was such grand sport for his neocon officials to denigrate, to send soldiers to save his ass in Afghanistan.

What a laughing stock Bush has made of America. What ruination this utter idiot and his supporters have brought to America. What total traitors the neoconservatives are. Every last one of them should be immediately arrested for high treason. Neonconservatives are America's greatest enemies, and they control our government! All Americans have to show for six years of Bush's "war on terror" is an incipient police state.

Now standing in the wings is mad John "Hundred-Year War" McCain. Will the American electorate wipe out the Republican Party before this insane party wipes out America?

David B. Benson said...

Thanks for posting this.

I'll complain, as best I can.