Tax Breaks for Data Centers? Not in Idaho

Idaho has struggled to make the state competitive when it comes to attracting new, big ticket data centers. Meanwhile, states like Iowa are using sales tax breaks to lure in the server farms.

by David Staats, The Idaho Statesman / February 20, 2018
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(TNS) —The server rooms at Fiberpipe Data Centers in West Boise are giant vaults full of machines. Black metal cages with combination locks house towers that hold rows of Cisco servers — 500 in all. Their lights blink, their little internal fans whir as banks, title companies and other Fiberpipe customers from Idaho and elsewhere send their data across the internet to the servers for safekeeping.

These computers are the cloud.

More precisely, they are a few hundred droplets in the diffuse clusters of computers around the globe that process and store data for all the things people do on the internet. That cloud will grow in the next few years. Big companies like Facebook and Apple already have built giant server farms, or data centers, to store tens of thousands of these servers. They plan to build more.

But they’re not building any in Idaho.

Fiberpipe, a small, locally owned business, is at the forefront of a campaign to change that. Its president, Matthew Klinger, joined forces with the state Commerce Department and the Boise Metro Chamber of Commerce to persuade the Legislature to give companies that build server farms a break on the sales taxes they pay on servers and related equipment. So far, they have not succeeded.

With the tax break, proponents say, Idaho finally would compete effectively for new capital investment that could total millions, possibly billions, of dollars. That could boost property-tax revenue for schools and local governments.

“It will help attract new businesses to the state,” Klinger says. “It will help promote existing businesses as well.”

The proposal passed the Idaho House last year. That encouraged proponents to try again this year. The chamber intensified its effort, using its annual start-of-the-session legislative forum in January – a luncheon to which the entire Legislature was invited (and which the Statesman presented) — to make its case. The Idaho Technology Council, an industry group, joined the campaign.

Five weeks later, they gave up. Maybe next year.

The tax break has proved to be a hard sell partly because it embodies the fight over whether government should dangle tax breaks to lure, or keep, businesses.

“It’s kind of like IBM showing up and asking for a tax break when Steve Jobs is just around the corner working in his garage,” says Wayne Hoffman, president of the conservative Idaho Freedom Foundation. “He [Jobs] would never have been given any kind of help from the government.”

Hoffman says Idaho already has plenty of incentives to attract investment, including its low costs of living and doing business. And the state should not distort the free market by favoring certain businesses with tax breaks that other businesses don’t get.

Supporters counter that tax breaks have worked elsewhere to Idaho’s disadvantage.

“We are missing out on an industry that wants to come here,” Bobbi-Jo Meuleman, Gov. Butch Otter’s commerce director, told the Idaho Statesman. She is the campaign’s leader. “But when it comes to putting pencil to paper, they go places that offer tax relief on the equipment in these data centers. This equipment is typically replaced every three to four years, and it’s very expensive.”

Iowa, the new server-farm state

One metropolitan area that has attracted server farms with sales-tax breaks is Des Moines, Iowa. The city is about the same size as Boise, with a population of 215,000 in a county of 468,000.

Iowa passed a tax break on servers in 2009. The Des Moines area now has two Microsoft megafarms that cost $2 billion, with a third on the way; three Facebook farms with a fourth on the way; and a planned $1.4 billion farm announced last year by Apple to support Siri, iMessage, Apple Music and other services, according to the Greater Des Moines Partnership, the area’s chamber of commerce.

Microsoft is now the largest property-tax payer in Polk County, says David Maahs, the partnership’s executive vice president of economic development.

“Those are huge infrastructure investments,” says Bill Connors, president of the Boise Metro Chamber of Commerce, which brought Maahs to the January luncheon to tell legislators what a tax break can do. “This is the way things are going in terms of important infrastructure. The future is in these data centers.”

Yet data centers employ few people. Facebook, Google and Microsoft combined employ about 700 people in Iowa, the Des Moines Register reported in September. And they do little to foster local tech cultures or startups.

“It’s a big warehouse with a fence around it and hardcore security,” Yevgeniy Sverdlik, editor in chief of Data Center Knowledge, an online publication, told the Register. “It’s not a hub of activity.”

Fiberpipe has just eight full-time employees, including Klinger. But Klinger notes that companies like his also hire contractors to provide security and maintain equipment. Customers also employ people who visit periodically to maintain the servers they own in the cagfibes.

More data centers in Boise would lead to upgrades in the local internet fiber network, and that would help other businesses and consumers too, he says.

Boise has one of the world’s top makers of the data storage that these centers use: Micron Technology Inc. CEO Sanjay Mehrotra predicts demand for flash memory will grow nearly 50 percent this year, largely from data centers that will be needed as artificial intelligence grows.

But Boise has no megafarms and just three small data centers that rent space to house other businesses’ data. Involta, based in Iowa, operates a 31,000-square-foot center near Maple Grove and Victory roads in southeast Boise. San Diego-based Datasite runs a 60,000-square-foot center near Maple Grove and Franklin roads. Fiberpipe’s 70,000-square-foot center is set back from West Emerald Street near Five Mile Road.

Idaho is the ‘perfect location’

Klinger says Idaho is “a perfect location” for data centers.

“We have low-cost electricity,” he says. “We have very few natural disasters. We have the ability to use free ambient cooling” — meaning the climate is temperate enough that most of the year, no artificial chilling is needed much to keep servers from overheating. “We have plenty of land.”

But other states have similar attributes. So when companies like Apple look for a place to build a server farm, the taxes they must pay on equipment greatly influence their choices, Klinger says. Some states, including Idaho neighbors Oregon and Montana, have no sales tax at all. Others are giving special breaks to server farms. Facebook has spent more than $1 billion in Prineville, Oregon, and plans to spend more there. Amazon and Google have big Oregon farms, too.

Idaho made a short list of finalists for the Apple farm that will be built in Iowa, Klinger says. Iowa gave Apple more than $200 million in tax breaks. The company responded by agreeing to pay up to $100 million to support public infrastructure projects, such as parks, libraries and recreation spaces, in coming years. The first project is a youth sports campus.

Meuleman says Apple’s decision to pass over Idaho was disappointing. “That would have been a big win for the state,” she says.

The sales-tax break would have applied to existing centers each year they make a $1 million investment. A center new to Idaho would have to make a $25 million initial investment and create at least 20 jobs to qualify.

Idaho Power would benefit, because data centers devour electricity. Megan Ronk, Meuleman’s predecessor as commerce director, now leads new-business development for the utility. She says Idaho Power has the nation’s fourth-lowest large-commercial rates and a surplus of power expected to last until 2026. Ronk calls data centers “a compelling opportunity.”

‘Everybody should pay the same tax’

These arguments don’t sway Hoffman, of the freedom foundation. He argues that government cannot predict what future technologies will accomplish and should not play favorites in taxation.

“Somebody will be injured,” he says. “Something will have an impact. The best answer is to stay out of the way. Everybody should pay the same tax. There shouldn’t be stipulations on who pays what tax because somebody hires a good lobbyist and manages to get a tax-code exemption.”

This year’s defeat makes this the fourth straight year without any new tax incentives for business investment from the Legislature.

The last one came in 2014. The Otter administration and the chamber won a big victory when the Legislature passed the tax-reimbursement incentive, or TRI. The incentive lets companies receive rebates of up to 30 percent of their payroll, sales and corporate-income taxes for up to 15 years. To qualify, companies must create certain numbers of jobs paying at least the average wages in their counties of operation. The Commerce Department says 38 companies took advantage of the break through June 2017, bringing $3.1 billion in new payroll.

The data-center tax break barely passed the House last year, 35-34. It died in the Senate’s Local Government and Taxation Committee, whose chairman, Republican Dan Johnson of Lewiston, would not schedule a hearing. Johnson wants Idaho to reduce its sales-tax exemptions, not add to them.

Hoffman says the bill’s struggle shows that his group has succeeded in convincing legislators that tax-incentive bills hurt more than they help.

“This is the government using tax policy to choose winners and losers and then forcing the losers to pay the tax bill to the winners,” he says. “There’s plenty of economic activity taking place without the government standing in the middle of it. You only hear about the ones the Department of Commerce manages to secure by virtue of tax incentives. It’s completely bogus.”

Meuleman called a halt to this year’s campaign on Friday, Feb. 16, after concluding that it would not work. “We’re just running into the same challenges as last year,” she says.

Still, she declares success: “We’ve started the conversation.”

©2018 The Idaho Statesman (Boise, Idaho) Distributed by Tribune Content Agency, LLC.