How Other States Attract Datacenter Projects

29 May


Last week, the news broke that Yahoo! was in negotiations to build a large dataenter somewhere in Western New York.  While Yahoo! has not yet agreed to build the datacenter in New York, it sure as hell didn’t stop Governor Paterson and other state politicians from patting themselves on the back for getting NYPA to agree to a huge subsidy for the project.  Much was made of the deal in the political realm as it is a symbol for attracting more high technology companies to New York State.  I took issue with the plan as did Jim Heaney of The Buffalo News.

The New York Power Authority has offered hydropower discounts worth $809,940 in an effort to lure a Yahoo! data center to Western New York.

I’ve built a database that tracks allocations of low-cost hydropower the Power Authority has made since 2006. The value of the discounts has worked out to an average of $12,446 per job, per year.

The richest of the deals worked out to $32,733 per head.

Yahoo! would come in at $53,996.

Multiply that by the 15-year contract and you’re at $800,000 and change.

That is an astonishingly large subsidy that we would be giving Yahoo! in exchange for a datacenter they haven’t yet to agreed to build.  I’m not as focused on the size of the subsidy, I am more concerned with what our requirements are for Yahoo! in order to receive such a benefit.  Also, what’s the plan for building on that investment?

After thinking about it for a couple of days, I did a little research on how other states recruit technology companies and court datacenter projects.  Rather than looking to California or Massachusetts (which have a tremendous number of home-grown technology firms), I decided to look at two high growth states who are recruiting companies to set up shop within their borders; Virginia and North Carolina.

First we’ll look at a similar recruitment initiative to our courting of Yahoo! to see how it’s done elsewhere.

In North Carolina, the legislature and economic development authorities are courting Apple as a relocation target for a datacenter.  North Carolina does not have discounted hydropower incentives to throw around, so they approached the issue from a different angle, changing the laws to favor large scale technology investment.

At issue is the way North Carolina calculates income taxes for companies with operations in more than one state. The formula takes into account property, payroll and sales, with each receiving a different weight in the calculation.

The bill, as approved by the House Finance Committee, would consider only the sales portion of the formula for a qualified company, significantly cutting the tax bill for a business with a large investment in North Carolina but comparatively smaller sales.

To qualify for the perk, a company would have to invest at least $1 billion over nine years in one of North Carolina’s more distressed counties.

If the measure passes the legislature, North Carolina will miss out on $3 million in revenue per year in the early stages of the investment and about $12.5 million annually after the full $1 billion is spent, according to an analysis by the General Assembly’s Fiscal Research Division.

That’s a pretty large giveaway of tax revenue for what will amount to 50-100 jobs from Apple.  However, in a previous courtship of a Google Datacenter, state fiscal authorities estimated a project of this scope would generate $1 billion to the state’s gross economic product over 12 years, and produce a net state revenue benefit of more than $37 million.  A positive development.  The difference between the proposals to Apple and Google being made in North Carolina and the Yahoo! proposal in New York is that North Carolina is requiring a level of investment which would make it difficult for the Apple or Google to walk away without significant harm to the business.  The authorities demand a $1 billion investment in order to receive the tax breaks.  Not so in New York, nothing of the sort.

Virginia is also in the game for the Apple datacenter project.  They already have a favorable tax structure for technology companies and recently passed legislation which would provide tax incentives to datacenter business in the state.

The new measure offers an exemption from the Virginia Retail Sales and Use tax for computer equipment bought or leased between July 1, 2010 and June 30, 2020 for use in a data center. The facility must be located in Virginia, generate capital investment of at least $150 million and create at least 50 new jobs that pay one and one half times the prevailing average wage in the locality.

Both states offer access to educated workforces and large university communities.  They also offer favorable tax structures for business and have shown a willingness to offer additional, targeted incentives when the project is right.  In New York State, we offer a similarly talented workforce, but we are home to one of the most unfriendly business climates in the country.  We can offer cheap power, but little else besides an intransigent legislative body which is more interested in turf battles than growth.

In states like North Carolina and Virgina, a common theme is a coordinated plan of attack and unified effort to recruit business to the state.

For instance, in 2003 Virginia launched the Mid-Atlantic Broadband Cooperative designed to offer low-cost broadband access throughout the state.  They carefully identified the locations of their broadband network nodes, identified greenfields and shovel-ready sites near those network nodes and began marketing a comprehensive suite of incentives to companies small and large to locate their technology business in counties around the state. With proper planning and coordination, they can achieve scale and generate spinoff enterprise, which is the purpose of luring large anchor corporations.  In North Carolina, there is a technology collaborative amongst different regions of the state which feature coordinated development, planning, recruitment and workforce investment.

In New York, we have an amalgam of agencies fighting one another for symbolic political victories rather than launching a coordinated plan to recruit technology business to the state.  If things are going to change in New York, we need to start planning for our future rather than throwing together ad hoc plans and incentive packages.  It’s not always taxes, taxes, taxes.  We can compete in New York and leverage our positive resources if, and only if, we demonstrate we have a coordinated vision for growth.

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