Opinion: Lack of Urban Data Center Tax
Incentive Hurts Washington
This article originally appeared in the Feb. 16, 2018 issue of the Puget Sound Business Journal.
By Washington state Sen. Hans Zeiger.
Washington state is blessed with a vibrant technology industry. Our state is a recognized global leader in key sectors, including software, cloud computing, online retailing and global health. These technologies have become the primary driver of our economy, bringing significant job growth and generating taxes to support education and other public services.
Despite these successes, there are weaknesses. The technology sectors that will determine our future depend on strong internet infrastructure to increase productivity and enable the creation of new products, services and jobs — but Washington’s tax structure puts that infrastructure at risk.
Data centers are a key element of internet infrastructure. They serve as the foundation of the digital economy, supporting electronic communications; processing trillions of large and small transactions; enabling new science in health care, logistics and technology; storing records, photos and music; and delivering games and entertainment. With increasing reliance on cloud computing, their importance will only grow in the future.
To maintain and expand a robust technology sector, we must provide a competitive, viable home for data center infrastructure everywhere in the state. As elsewhere in the economy, a lack of infrastructure will ultimately reduce competitiveness.
Unfortunately, Washington currently lags in this critical internet infrastructure because our current tax structure makes large areas of the state uncompetitive for data center investment, fit-out and operation.
Washington is the only state that provides incentives for data centers exclusively in specific geographic areas of the state, primarily rural Central and Eastern Washington. Those incentives have been extremely effective, with large data center construction and tenancy in rural communities ebbing and flowing in direct relation to the incentives offered.
When these incentives were enacted, rural communities like Quincy benefited from the development of a tech industry and resulting large capital inflows. Data center growth has created hundreds of jobs, increased wage rates, and dramatically grown property tax collections — all while reducing tax rates for local residents.
But other data centers — those typically offering co-location services for multiple tenants and hosting applications with higher performance requirements — must be in urban or suburban metro locations to meet their customers’ requirements. That’s where our tax structure becomes problematic.
In a highly competitive market, costs matter. For data center end-users, one of the highest costs is tax on the equipment installed in the center. Washington charges this tax in metro areas; many other states, including Oregon, do not. When deployments cost tens or even hundreds of millions, this is often a determining factor for siting.
Because of this tenant cost advantage and other incentives creating an attractive economic environment for data center investment, the Portland suburb of Hillsboro has had an estimated $1.9 billion in data center investments over the last few years. The Puget Sound region, with its larger population, economic and technology base, has seen less than 10 percent of that figure over the same period.
When data center customers locate elsewhere, their employees, contractors and partners follow. The impact can be felt for years. Washington not only loses out on the initial investment and the resulting family-wage jobs and tax base, but also on future investment, upgrades and equipment installations.
To maintain Washington’s position in the global technology marketplace, we can’t afford to remain uncompetitive for investments in critically important internet infrastructure. We must support data center infrastructure with a new state policy to stem the loss of these investments, and the substantial benefits they bring. Lawmakers should act in 2018 to extend Washington’s existing incentives to include metro-area locations and allow the state to compete for all types of data centers.
Each year that passes without Washington being competitive is a missed opportunity to create jobs and bolster economic growth in our state.