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Tax breaks for Facebook raise hard questions

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Data centers such as this one in Michigan feature rows upon rows of servers.

By Jon Cassidy | Watchdog.org

Tarrant County taxpayers are spending $2.3 billion on a water pipeline from East Texas just for additional capacity in the event of a drought.

At the same time, state and local officials have granted Facebook more than $150 million in tax breaks to locate a water-intensive data center in Fort Worth, a dry spot in a very dry state.

Government officials tout the deal as a chance to attract more tech jobs to the region. But Facebook’s data center – the latest and biggest deal in the region – doesn’t do much of that.

So the question is: What do local officials think they’re getting in exchange for giving away so much?

“It is a magnet that shows that high-tech companies are welcome to the state of Texas,” Gov. Greg Abbott said at the groundbreaking last month.

But similar deals around the country have created few additional jobs beyond those needed to build and run a data center.

Data centers do create tremendous demand for water and power, though.

“It’s staggering for most people, even people in the industry, to understand the numbers, the sheer size of these systems,” Peter Gross, a data center designer, told the New York Times. “A single data center can take more power than a medium-size town.”

To power the center, Facebook has reached a deal with Citigroup and Alterra Energy to build a 17,000-acre wind farm 100 miles away in Clay County.

Server farms can face massive air-conditioning costs for cooling all those heat-generating computers; one solution Facebook tried was building a data center near the Arctic Circle.

Now that the company is on a green kick, Facebook is going to air-cool its Fort Worth server farm with a misting system. Similar systems require hundreds of thousands of gallons of water per day.

Fort Worth is one of the most drought-prone regions in the country. The plan, however, allows Facebook to reach for green energy goals, increasing consumption of water in order to decrease consumption of power that is cheap and plentiful.

It’s one thing when organic economic growth strains infrastructure. It’s another when state and local officials subsidize businesses that, on their own, would seek out cooler and wetter climes.

It’s even more peculiar when a group of leading state lawmakers who’ve spent years pushing for more investment in water infrastructure are the ones passing subsidies to companies that drain those resources.

There’s no way to measure yet whether the business Facebook will bring Fort Worth – an estimated 40 jobs and $2.4 million per year in tax payments to the city – will outweigh the costs of luring the company to the region, but some of those costs can be tallied.

Local officials put together a package of tax breaks and incentives worth $147 million over 20 years. On top of that, at the state level, Rep. Charlie Geren, R–Fort Worth, got a bill into law that extended from 15 to 20 years the sales tax exemption for large data centers, and exempted them from local taxes as well as state.

Geren admitted during the session that Facebook brought him the bill, but its effects could go far beyond the one development.

Texas already has hundreds of data centers, and as new developments replace existing centers, more of them will qualify for Geren’s tax exemption.

“The future economic growth opportunities related to data centers and data warehouses are staggering,” Fort Worth Mayor Betsy Price said when the deal was announced.

She’s right about the market. Data centers are basically warehouses for the servers and routers that handle internet traffic, and the demand for them is projected to grow along with internet usage.

But Texas already had favorable conditions for attracting data centers, according to industry reports. Now that the legislature has passed two major tax breaks in two years, companies that would have been coming anyway are entitled to pay less in taxes, and that’s before they negotiate special treatment.

“I guarantee that the companies that follow Facebook will be seeking hefty incentive programs as well,” said state Sen. Konni Burton, R–Colleyville.

Traditionally, economic development programs target job-creating industries. Data centers create few jobs beyond the temporary construction jobs needed to set them up.

North Carolina, Oregon, and Iowa, for example, have attracted large clusters of data centers, with little to show for it.

The tech site Gigaom ran a four-part look at Carolina’s data centers in 2012:

“Economic development groups and the local utility in North Carolina, starting at least back in 2005 and 2006, began targeting tech companies with the promise of cheap, reliable power and tax breaks, in an effort to replace lost manufacturing jobs. Beyond Apple, Google and Facebook, North Carolina is home to data centers for Disney, Wipro, AT&T, Charlotte’s banking community, the state’s own data center, and other facilities by major companies.

“But landing this slate of elite tech companies so far hasn’t really moved the needle on the state’s overall longterm employment. Data centers can create hundreds of construction jobs in the building phase, but tend to only create a couple dozen longterm jobs once the facilities are built — and these jobs are often for highly trained engineers rather the typical local resident.”

Data centers flocked to Oregon, not just for the cooler climate, but because the state has no sales tax, and has created market-distorting “enterprise zones” where companies are exempt from most property taxes.

Google for example, has invested $1.3 billion in data center infrastructure in Wasco County, yet pays the county just $250,000 a year, according to the Oregonian.

“The deal that this community got wasn’t that great,” County Commissioner Scott Hege told the paper. “It wasn’t that great at all.”

The Wall Street Journal examined the economic impact of data centers in Iowa, which turned out to be minimal.

“For the tax breaks they often receive, the centers produce few jobs or spinoff benefits,” David Swenson, an associate scientist in the economics department at Iowa State University, told the paper. “It is kind of a one-off. It doesn’t necessarily link to anything else in our regional economy.”

Unlike commercial concerns, data centers have little economic impact, because they don’t sell anything (other than server space, at most), or buy much of anything from local businesses other than power and water.

Yet politicians figure there’s an upside to that. These businesses don’t create traffic, or demand schools and other services for their workers, yet they pay property and sales taxes on the rows and rows of expensive computers inside.

That’s why some 19 states have passed laws since 2005 offering incentives to data centers.

Even with all the tax breaks, Facebook will be paying a lot more in taxes than the $2,720 the city was getting annually for an empty field, Geren argues.

In all, proponents project that if all goes well and Facebook builds out to a $1 billion facility, the company will pay something on the order of $220 million over 20 years in taxes to various agencies, including $150 million for the local school district. That’s less than other $1 billion operations, but a lot more than an empty field would pay.

It’s also tens of millions more than the company would pay if Geren had gotten his way. Geren’s original bill would have let Facebook qualify for a partial exemption from taxes for the local school district, Northwest ISD. Facebook was already in the process of applying for it, when the Senate amended Geren’s bill to close the loophole.

Ironically, when Burton wrote an op-ed decrying the deal as crony capitalism, Geren joined liberal journalists Scott Braddock and Bud Kennedy in a strange attack on Burton, saying that she’d wrongly claimed that the bill would exempt Facebook from paying taxes to Northwest ISD.

Burton hadn’t made any such claim, but Geren’s original bill would have done just that.

Indeed, the problem with a multitude of tax exemptions is that they end up cancelling most of the supposed benefits of attracting these companies.

An analyst for CBRE who specializes in incentives for data centers lists those taxes that data centers pay (with our notes added in parentheses on whether they apply in Texas for large data centers):

“Sales taxes on construction materials (exempt), sales/use taxes on equipment purchases (exempt), sales taxes or franchise fees on power consumption (exempt), personal income taxes from construction and permanent jobs (already non-existent), unemployment taxes from construction and permanent jobs (applicable)… local income taxes from construction and permanent jobs (non-existent), real estate taxes on a newly constructed or renovated building (reduced), (and) personal property taxes on computer servers and furniture (reduced).”

Now that the Environmental Protection Agency has unveiled its Clean Power Plan, and will begin imposing some of the most onerous emissions regulations on power plants that the country has ever seen, state officials may need to rethink their approach to economic development.

Simply put, if electric power is going to become more scarce and expensive, it makes less sense to artificially inflate demand for it.

These data centers were consuming roughly two percent of all electricity produced in the United States in 2010, according to a study by Jonathan G. Koomey, a research fellow at Stanford University.

Depending on the ultimate cost of those federal regulations, local officials may one day look at these giant, nondescript boxes found off their country highways, where nobody ever seems to enter or exit, and wonder why they ever paid for them to set up shop.

Contact Jon Cassidy at [email protected] or @jpcassidy000.

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Jon Cassidy was a former Houston-based reporter for Watchdog.org.