Data center tax break ignites political battle in Michigan

computer data center servers
Credit: Top500.org

The data center industry is using its muscle to win tax breaks and pitting states against each other

The U.S. data center industry is now operating just like a sports franchise. When a local NFL football team wants a new stadium, it can threaten to move to a city promising a bigger and better stadium.

Michigan now faces the data center version of this dilemma.

The state's data center industry is growing at about 12% a year, thanks to a shift to cloud computing. Life has been good for commercial data center operators, and they haven't been pushing for tax breaks. But that changed once Nevada-based Switch, a data center facilities firm, arrived with a plan to build a mega data center.

Switch asked the state legislature for tax breaks to help it build a 2-million-square-foot data center costing $5 billion. The company operates large data center complexes in Nevada, with customers that include eBay, MGM Resorts, DreamWorks, Zappos, Box, Intuit and others. But if Switch doesn't get what it wants, it may drop its plan to build in Michigan.

Late Tuesday, lawmakers approved tax breaks for sales and use taxes, but applied them to all of the state's data centers. The legislation now goes to the governor, reported Michigan news outlet MLive.

Switch's request is controversial. Michigan data center operators, organized as the Michigan Data Center Alliance, want lawmakers to treat them fairly, and not provide specific help to an "out of state" firm, as they refer to Switch.

"Our alliance is not asking for tax breaks. We haven't needed them; we got very healthy growth," said Yan Ness, CEO of Online Tech in Ann Arbor and head of the data center alliance. The group represents nine data center firms with 38 data centers in total and more than 1,000 employees.

But if Switch gets takes breaks, they want them, too.

"Heck, if the whole thing falls apart, and there is no tax break for us at all, and Switch goes somewhere else, well that's ok, too," said Ness. "We will just get back to running our businesses."

The bills have been amended to extend some of the tax benefits to other operators. But those changes come with a cost.

The state, in an analysis of the fiscal impact of the tax breaks, said sales, use and personal property data center tax break reductions could cut state revenue somewhere between $20 and $30 million a year. The bill approved by lawmakers Tuesday excluded personal property, which will likely lead to a significant downward revision of this estimate.

Switch says its data center near Grand Rapids will create 1,000 jobs over 10 years. About 40% will be Switch employees; the other 60% will be employees of firms that run, upgrade and manage the racks of equipment at its Michigan data center, said Roger Martin, a Switch spokesman.

Ness called the job estimates "head scratching." There's a reason for that.

Enterprises that move data center operations to a co-location data center will typically manage and run those operations remotely, said Tad Davies, a senior vice president of Bick, a data center consulting firm, who was describiing the industry generally. They mght need personnel to deal with hardware "rack and stack," but oftentimes this work is given to the colocation operation, he said.

"Most folks are interested in a lights-out data center," said Davies.

Getting 1,000 jobs involved in a data center project would have to include trade workers, which are ephemeral in nature, said Uptime Institute CTO Lee Kirby, in an email. That means counting people who "who sink rebar and pour concrete, but are only on site for a limited and specific task."

Having 600 full-time people on-site to address IT operations -- the non-Switch employees - "would be unusual because these folks usually only come to the site to complete task work or during a disruption," said Kirby.

If Switch doesn't get what it wants from Michigan, it has options.

North Carolina, for instance, recently approved legislation -- the Data Center Infrastructure Act -- that makes property and utility sales exemptions available to data center providers and occupants that have collectively invested at least $75 million. The legislation was aimed broadly at colocation providers, such as Sentinel Data Centers, which runs a large facility in Durham, N.C.

Such competition among states pushes aside the broader question about whether this is an industry that even needs government tax incentives. According to research firm IDC, the global growth rate of service provider data centers, in terms of square footage, is 26% at a compound annual growth rate through 2019. Meanwhile, enterprise data center workloads are shrinking about 10% annually as work shifts to the cloud, said Jennifer Koppy, an analyst at IDC.

Unlike manufacturing industries, which can relocate operations to China, data centers will remain in the U.S. for regulatory, privacy, security, latency and customer needs. But data centers have options about where they locate in the U.S. The risk is that states begin to engage in a tax incentive race to the bottom to encourage data center development.

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