Some 27 states have established incentive programs specifically for data centers, according to a report from Good Jobs First. Here's what that means for local economies.
The data center industry is booming, and tech giants are increasingly receiving large incentives packages from state and local governments in exchange for building their data centers in the area. But whether these centers create jobs and benefit local economies remains in question, according to a recent report from national policy resource center Good Jobs First.
Google, Microsoft, Facebook, Apple, and Amazon alone have been awarded more than $2 billion in subsidies combined, according to the report "Money Lost to the Cloud: How Data Centers Benefit from State and Local Government Subsidies." While the number of construction jobs generated for each facility is comparable to building a factory or distribution center, an operating data center creates an average of just 30 to 50 permanent jobs, the report stated. For larger facilities, that number rises to up to 200 jobs.
"The question is, how many long-term jobs are being created, and how many are accessible to people from the region? Do people from the region have skills to apply for them?" said Kasia Tarczynska, a research analyst at Good Jobs First and the author of the report.
The US is home to 44% of the world's data centers, leading every other country, the report found. And 27 states have established incentive programs specifically meant to draw data centers in, the report found.
"The incentive packages can be quite outlandish--far exceeding any reasonable economic justification," Todd L. Cherry, director of the Center for Economic Research and Policy Analysis at Appalachian State University, told TechRepublic for another story on data centers and job creation. "This is a form of what we call 'the winner's curse.' When governments engage in a competitive bidding process over an uncertain benefit, the one that wins is the one that overestimates the benefit."
Tax breaks and transparency
The most important factors for companies considering creating a data center are a stable climate, and access to inexpensive energy, Tarczynska said. That means any area of the country prone to earthquakes, tornadoes, or hurricanes is out, and many rural areas are in.
Electric power is the largest operating expense for data centers, reported at 70% to 80% of the operating budget, the report stated. Increasingly, companies including Facebook under pressure from environmental groups are looking to access renewable energy for their data centers, Tarczynska said.
A large data center can cost up to $1 billion to build, the report found. That cost might include land acquisition, facility construction, infrastructure upgrades such as utility hookups, and servers and other equipment. Purchase of mechanical equipment such as computers and cooling rooms, and power equipment such as generators and transformers, are the biggest initial costs. Construction can average $1,000 to $2,000 per square foot, the report found.
Therefore, the amount of property and other taxes the company pays could be very large. The problem is many of those taxes are being abated, Tarczynska said.
Companies might chose two locations in different states, and have each government bid against each other. For example, in September, Facebook engaged in a bidding process between New Mexico and Utah for the opportunity to host its new data center. The New Mexico town of Los Lunas agreed to give up property taxes for 30 years in exchange for annual payments from Facebook starting at $50,000 and going as high as $500,000. In June, the town approved an ordinance allowing for the issuance of up to $30 billion in industrial revenue bonds in efforts to draw the company's business.
"These facilities receive a huge amount of tax breaks from state and local governments," Tarczynska said. "There are public costs to those facilities."
Only 15 states provide easily available online reporting of costs for data center-specific programs, the report found. Many states do not consider these to be economic development incentive programs, but rather something written into the tax code, which invokes various confidentiality laws, Tarczynska said.
But that will soon change: A new Governmental Accounting Standards Board rule will require states, cities, counties and school districts to release fiscal reports on tax incentives, starting in 2017. New York City released its findings early: The city lost $3 billion in 2016 to corporate tax breaks for housing and economic development projects.
"It's quite a big development, and will help the public and researchers understand what is going on when it comes to tax breaks," Tarczynska said.
The growth of "megadeals"
The report also examined 11 "megadeals," or economic development incentives of more than $15 million, that states and local governments offered to tech companies.
The average cost of one job in those deals was $2 million in tax breaks. "This is a huge amount of money being paid for the creation of each individual job," Tarczynska said. "It's important to think about the opportunity cost--what else could be done with that money?"
However, Mehdi Paryavi, chairman of the International Data Center Authority (IDCA), argues that it's incorrect to compare the size of the data center to the number of jobs created. These data centers are similar to farms, in that they take up a lot of square footage, but don't require hundreds of employees.
Benefits of data centers
Tech companies building data centers in rural areas purchase land and develop it, and employ both contract and long term employees--a benefit for those areas, said Paryavi said.
"When the Apples and Googles step into a troubled economy, the only thing they can do is help it," Paryavi said. "These guys are coming in and investing millions of dollars. Trusting that your county and state has legislation that protects that investment, why not have their business? It's revenue you didn't have before."
Though the quantity of people working at data centers is less than at a factory, the quality of the positions and work is much higher, Paryavi said. There are also a number of jobs created indirectly, such as those for architects, for the companies that manufacture cooling supplies, and those that maintain generators and replace batteries. "Those companies are all prospering because of new investments these companies are making with their data centers," Paryavi said.
International competition is also a large reason why states should encourage data center development, Paryavi said. "We have already lost all of our manufacturing to abroad, because incentives outside our borders were better than incentives within the borders," Paryavi said. "Do we want to give away or data center business as well, or provide the right incentives so the Apples and Facebooks will be loyal and have long term plans with us?"
The average lifespan of a data center is 10 years, Paryavi said.
One thing is certain: It's unlikely that we'll see data center construction stop any time soon. "It's an industry in a growing mode--data centers are necessary facilities for companies to operate," Tarczynska said. "There are going to be more and more of them as the need for providing backup on data grows."
The 3 big takeaways for TechRepublic readers
- Some 27 states have established incentive programs specifically meant to lure data centers, according to a recent report from Good Jobs First.
- While tech giants Google, Microsoft, Facebook, Apple, and Amazon alone have been awarded more than $2 billion in subsidies for data centers, each facility creates under 200 jobs on average, the report found.
- Data center proponents argue that the jobs created are high quality and high salary, and that tax breaks for these facilities help keep these jobs in the US.
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