Michigan House, Senate Pass Controversial Tax Breaks for Data Centers

The bills are intended to put Michigan on the leading edge of a new technological advancements and could help attract other economic development on things like autonomous vehicles.

by Kathleen Gray, Detroit Free Press / December 16, 2015

(TNS) -- Tax breaks for data centers in Michigan cleared the House and Senate Tuesday , but the sales and use tax exemptions still face significant opposition from some in the business community, local governments and the administration of Gov. Rick Snyder.

The legislation is geared toward the Nevada-based Switch corporation, which has data centers in Las Vegas and Reno. The company wants to move to Michigan, but said it won’t unless the state exempts the company from sales, use and personal property taxes.

Some legislators said the bills would put Michigan on the leading edge of a new technological advancements and could help attract other economic development on things like autonomous vehicles. Others said the bills unfairly benefitted one sector of the economy to the detriment of other businesses.

"I want Michigan to get more investment and jobs in this industry. By reducing taxes we’ll attract new jobs," said state Rep. Robert VerHeulen, R-Walker. "To those who say this is special treatment, I ask are you willing to ignore this opportunity and disarm in competition with other states."

But state Rep. Earl Poleski, R-Jackson, said he wants all business and taxpayers in Michigan to be successful.

"I’m as pleased as anyone of filling an empty space. I wish their potential customers and employees happiness and prosperity and if I have the chance to reduce taxes I’m all over it. But this package is the wrong approach," he said. "Tax breaks are granted are only when existing tax and business structure are inadequate to attract and retain business here in Michigan. To pass these bills is to surrender to the notion that our efforts over the last five years have been inadequate."

The bills, which ended up passing on 61-45 votes in the House and 26-12 in the Senate, were the result of bi-partisan agreement when Democrats got amendments to the bills that would require that data centers create 400 new jobs in the first four years and 1,000 new jobs within the first 10 years. Another amendment also required that legislators ensure that any losses to the school aid fund are covered.

"There’s nothing certain in this world except that data is growing faster than anything on the planet," said Rep. Jim Townsend, D-Royal Oak. "This represents an oppotunityr to take a chance on this and to hold the industry accountable and to make sure there are at least 1,000 jobs created."

Backers of the plan say they can’t ignore the prospect of a $5 billion investment in a data center by Switch. But that investment would come at a cost. In order to drum up more legislative support for the proposal, the bills were amended in the House to include all of the state’s data centers, exempt only the sales and use taxes and dropping the personal property tax exemption. There are nine Michigan companies that operate data centers in 38 locations across the state.

Republicans in the House noted that instead of a blanket personal property tax exemption, individual data centers can still get property tax abatements from local units of government that would exempt up to 50% of personal property taxes for five years. Distressed cities can offer up to 100% abatements. Local municipalities could also include job requirement criteria with those abatements.

The administration and House Fiscal Agency estimated that it could cost the state between $15 and $20 million in annual lost revenue for the school aid fund and local governments from existing data centers. That amount rises to more than $156 million in annual lost revenue from the Switch investments.

The Michigan center under Switch's plan would become home to the company's 2-million-square-foot data center campus employing as many as 1,000 workers either directly or indirectly. The construction budget on site could be as high as $400 million, according to Jason Mendenhall, executive vice president of cloud at SUPERNAP, a Switch company,

Up to 500 would work directly for Switch, according to Mendenhall. Its clients are expected to "co-locate" hundreds more working there who could be drawn from elsewhere and may or may not end up being based in Michigan.

It would serve as a central hub to store and process data for some of the nation's biggest users of the Internet, according to officials.

Switch executive vice president for strategy Adam Kramer said in a statement that the company is grateful for the legislative action on the bills and will begin construction work at the center in Kent County's Gaines Township immediately. A project team is on the ground in Michigan, a site plan is finalized and contractors have been selected, the company said.

The bills now go to Gov. Rick Snyder for his signature. He told the Free Press editorial board Monday that he has some concerns about the potential for lost revenues to the state and whether the tax breaks mesh with his philosophy of not wanting to pick winners and losers with state tax policy.

“We’ve just done roads and that’s going to affect the general or school aid funds. So if people are talking about lower revenue, how do we make sure we stay fiscally responsible,” he said.

Snyder noted, however, that industrial processing plants also are exempt from the state’s sales and use taxes.

“So when they’re building cars or manufacturing things. Is this somewhat akin to industrial processing in the high tech world,” he said, adding he’ll have to review how the legislation ended up before deciding whether to sign it.

©2015 the Detroit Free Press Distributed by Tribune Content Agency, LLC.

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