When a company like Facebook or Apple (or pick your big name) decides to build a data center—particularly in a more rural area—local and state governments see dollar signs, as well as new high-tech jobs and even some boasting points. Although the most important site features for companies may include cheap, abundant land and low energy prices, tax incentives can be the difference between choosing one state or locality and another. In an effort to tap into some of the data center construction dollars flowing into neighboring North Carolina (which offers tax incentives), South Carolina has followed suit by offering similar tax breaks.
South Carolina Tries to Lure Tech Companies
House of Representatives and Senate have approved elimination of the sales tax on electricity for data centers involving an investment of more than $50 million and 25 employees, according to HeraldOnline.com (“SC House OKs tax break for data centers”). The tax exemption would also extend to computer-related purchases such as servers and software. The bill was amended by the House to limit the scope of the tax breaks to companies currently in the state, but it is likely to pass in its amended form in the Senate as well, at which point it would go to the governor for approval.
Many states, suffering under debts and deficits and seeing little hope of relief in a stagnant economy, are looking to the data center industry as a means of buoying their fiscal prospects. Data centers are a symbol of technology, and although they generally do not involve many jobs (often less than 100, even at a large facility), they are large projects—ranging into the billions of dollars in some cases. Some governments are encouraging data center construction in hopes that these facilities will “seed” further development, leading ultimately to increased revenue and economic progress. These governments are making a down payment through lost revenue (tax incentives) on the assumption that the returns will be much greater in the long term.
South Carolina offers similar benefits relative to North Carolina, but it has been passed by for a number of large data center construction projects—and the state government believes this is the result of a tax disadvantage. The new legislation is intended to remedy this situation.
States Picking Economic Winners?
One potential complaint about tax incentives for data centers (or for any particular industry) is that it amounts to states—or whatever the government level—picking certain sectors to support at the expense of others. Although a tax break for one industry doesn’t necessarily reflect on the taxes of another industry, it does give the former an advantage. A counterargument is that other sectors—such as manufacturing—are already waning in the U.S., so giving tax breaks to certain industries (as opposed to, say, an across-the-board tax cut) doesn’t really do any significant harm. In fact, it is just investment in the future.
HeraldOnline.com notes that in the case of South Carolina, “The result, lawmakers hope, is companies like Facebook, Apple and Google will build S.C. data centers, which some view as the successor to the state’s disappearing textile industry and a symbol of the changing economy.” Many manufacturing industries are seeing a similar gloomy future in the U.S. as they move overseas to nations like China.
Data Center Industry Burgeoning, But It Won’t Help States
Many states are still seeking to remedy their debt problems by finding new revenue sources—meaning more taxes, which does nothing to spur the economy. But this is simply a reflection of the same policy at a national level, which seeks to maintain government growth without consideration for the effect that it has on the economy. (Of course, an occasional stimulus is granted in an attempt to encourage economic growth, but these have not had the desired effect.) And this entire government spendthrift phenomenon is simply a reflection of the broader cultural obsession with a constant increase in wealth (meaning a constant increase in spending).
Many states are thus aiming to lure data centers in hopes of being pulled to fiscal solvency by the industry of the future. Ultimately, the problem is that this approach does not address runaway spending, such as in government schools (which are a resounding failure, and everybody knows it—hence the incessant calls for more money to solve the problems with these institutions). Tax breaks for data centers will eventually give way to some form of tax directed specifically (or effectively so) at data centers to help cover budget gaps. Such levies are most likely to come in the form of an energy tax, possibly under the guise of preventing climate change.
Unfortunately, states have limited ability to do much to remedy their local economies, as so much of the taxes collected from a typical area goes to the federal government. States like South Carolina (whose budget for fiscal 2010–2011 consisted of almost 40% federal monies) are at the mercy of the federal government because so much of their budgets depend on federal contributions. Any major policy deviation from the federal government threatens that flow of money.
Tax incentives are likely to put South Carolina back into contention with North Carolina for major data center projects. Many large companies are looking for inexpensive locations to build their data center facilities, and South Carolina’s relatively cheap land and energy make it a distinct possibility. Until now, however, North Carolina has lured companies with a tax edge that South Carolina didn’t offer. Ultimately, however, even the growing data center industry will likely be unable to significantly aid states and localities in their budget woes. Data centers bring a few high-tech jobs and may spur some development, but the overall flagging economy and governments’ unwillingness to rein in profligate spending means that states like South Carolina are fighting a losing battle—pending some meaningful policy change. Sales tax incentives, such as those South Carolina may soon pass, could lead to overall increased tax revenue, but in the face of the state’s deficit (to say nothing about its debt), this will do little to help.
Nevertheless, by luring more companies to build data centers in the state, South Carolina may convince other companies (even beyond the data center industry) to view it as a hospitable environment for high-tech business.
Photo courtesy of DonkeyHotey