When Incentives Don't Work Out

Tax incentives have become the table stakes in data center site location. The growing number of states offering incentives has expanded the geography of the data center industry, and made it difficult for local governments to win major projects without generous tax packages.

The poster child for this movement has been the state of North Carolina, which has wielded tax breaks to bring two tech titans to virtually unknown small towns. In 2007 Google picked Lenoir, N.C. as the location for a $600 million data center, and earlier this year Apple Inc. chose Maiden, N.C. as the site of a $1 billion data storage site. Customized incentive packages were key factors in the decision process for both companies.

Dell Announces Plant Closing
But not all of the state's incentives for tech firms have worked out. This week Dell Inc. announced that it is closing a computer manufacturing plant in Winston-Salem, and will pay back the incentives it has collected as part of a $280 million package of tax breaks used to sweeten the 2004 deal.

The incentives for Dell and Google attracted scrutiny as some North Carolina residents and legislators wondered whether these development deals would deliver on the promised benefits. Google has already told the state that it won’t meet the job creation criteria for a $4.7 million state grant for its data center project in Lenoir. The grant required the company to create 200 jobs in four years, but Google has slowed the pace of construction in Lenoir as part of a broader initiative to manage capital expenditures during the economic slowdown.

The Economy Takes Its Toll
North Carolina isn't the ony state to see the economic crisis blunt the benefits of development deals. Iowa made headlines by winning projects for Google and Microsoft, but budgets cuts soon led Microsoft to apply the brakes on its plans to build a $500 million project in West Des Moines. Google has similarly postponed a $600 million project in Pryor, Oklahoma.

Tax incentives are designed to spur investment and create high-paying high-tech jobs. That doesn't necessarily mean that the marquee name attached to the deal will be doing the hiring. Microsoft said this month that its new data center in Chicago will be staffed by 45 workers, but that only three or four of those workers will actually be full-time Microsoft employees, with the remainder working for vendor partners that provide site security and facility maintenance.

Closer Scrutiny Likely
When we last assessed the environment for data center incentives back in January, we noted that "states lusting after data center projects will have plenty of time to track the progress of postponed projects and evaluate whether the math and politics of data center projects still add up to a win."

The Dell plant closure and data center project slowdowns will prompt additional contemplation of the math behind these tax incentives, and that's a good thing.

But in the economic development arena, data centers represent far more than bricks and mortar. They have become symbols of the new economy, a tangible sign that a community is making a successful transition to the digital economy. These aspirations are driven by politics as well as economics. Governors and local legislators understand the value of a press conference to announce a new project from Google, Microsoft or Apple. That aura will intensify as the Internet continues to transform our economy, and ensure that tax incentives for data center projects are here to stay.