Case Study: Server Farms
Although the Internet revolution has generally been portrayed as a matter of ideas and intellectual property, its existence rests on a bed of wires, power plants and vast numbers of intermediate servers. These computers range from a single unit in an office, to vast arrays called server farms or data centers, often sited far from either the organizations which employ them, or the final users.
Although there have been data centers since the 1960s, real growth began with the rise of the Internet, and especially with the profusion of high-bandwidth, memory-intensive transactions and applications.
Unlike auto plants or other factories that produce shipped goods, server farms generally employ fewer than 100 full-time employees – and many of them are engineers brought in from elsewhere. Server farms do use a lot of electricity, however, both to run the computers and to cool the rooms they occupy, so they seek places with cheap power and often demand exemptions from utility taxes. And while most locales are indifferent to low-employment, energy-draining plants like data centers, others are anxious to have a prestigious high-tech installation in their community. As a result, said John Rath of Rath Consulting:
Attracting data centers to cities and states is big business. Cities go all out to offer whatever they can to companies that will bring this type of business to their area. Internet companies have received unprecedented incentives and tax breaks to locate their data centers throughout the U.S.
So intense is the competition, that subsidy offerings frequently exceed any projected wages or taxes. Moreover, these are some of the most profitable growth companies in the country, ones with billions in profits that have no need for the millions that hard-strapped communities are shelling out. For instance:
WASHINGTON. In spring of 2010 a new set of tax incentives cleared the legislature allowing a 15-month sales tax exemption on the purchase and installation of computers and energy for new data centers in 32 rural counties. Other incentives will run until 2018. These incentives apply to Microsoft, Yahoo and Intuit, which who are all building massive centers in Quincy, a town in central Washington. While the centers will add to city revenues, all told, these installations will employ fewer than 200 full-time workers, and require government investment in new water systems.
NEW YORK. In late 2010, Verizon was still negotiating with the state of New York and the Niagara County Industrial Development Agency over the exact wording of its estimated $614 million in tax breaks for a $4.5 billion data center in Somerset. According to The Buffalo News, “Verizon would get $330 million in sales tax savings, $188 million in property tax savings and a $96 million break on its power bills.”
NORTH CAROLINA. In 2007 Google won more than $200 million in state and local subsidies over 30 years for a server farm in the small town of Lenoir. In 2010 Apple got half-price electric power, as well as generous tax breaks, for locating a $1 billion data center in the town of Maiden.
OREGON. In 2010 social networking giant Facebook expanded its planned Prineville data center from 147,000 to over 300,000 square feet. Facebook will be excused from paying up to $2.8 million per year in taxes, as long as Facebook maintains an average staff of 35 or more people at the site during that period.
UTAH. Online auction and shopping website eBay is opening a $300 million data center in the Salt Lake City suburb of West Jordan. Although the center will employ only about 50 people, the state offered tax breaks worth $27.3 million over a 10 year period.
There are, unsurprisingly, conflicting analyses of the costs and benefits of subsidizing data centers. But several things can be said for certain: like other high-tech industries such as microchip fabrication, they are capital-intensive and receive enormous subsidies on a per-job basis. They are being built by extremely profitable companies, create few jobs, and need locations with cheap electricity. Server farms are prime candidates for a campaign by states and cities to say “no” to outrageous subsidy demands.
Learn more about subsidy practices and controversial deals in this resource covering each of the 50 states and Washington, DC.
The first national compilation of company-specific information on economic development subsidy awards from around the country. Search the database here.