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Data-Center Fumble Costs Jobs in Washington State – and Maybe Big Money

While Oregon Booms, Gregoire Poised to Sign Bill That Reinstates Tax Break a Year Late

Facebook's $210 million Prineville, Ore. data center -- which opened last year and will soon be doubled in size.

UPDATE, 4 p.m. May 2.—Gov. Christine Gregoire signed Senate Bill 6635 into law, without vetoes. The omnibus tax-preference measure includes the reinstatement of the data center tax break that the Legislature allowed to lapse last year.

OLYMPIA, May 1.—It has been a boom year for data centers – for the state of Oregon. Ever since the Washington Legislature allowed a tax break to expire a year ago, some of the biggest companies on the Web have been flocking to the Beaver State. Projects announced in the last year alone could easily total more than $1 billion in new investment.

One data center is coming to Boardman and three are coming to Hillsboro. Google is planning an expansion that will bring its investment in The Dalles to $1.3 billion. Last month Apple announced a $250 million project in Prineville. As many as four additional companies are looking for new data center sites in Oregon, according to press accounts, and wherever they locate, it’s a shot in the arm for a local construction industry that is in the doldrums, just as it is here.

Meanwhile, on this side of the border? The phone has stopped ringing.

On Wednesday, Gov. Christine Gregoire is scheduled to take action on Senate Bill 6635, a measure that reinstates a tax break an indifferent Washington state Legislature ended a year ago. In Central Washington, where a better-than-$1-billion data-center boom was launched when the state briefly offered the tax break, local officials are hoping Washington might be able to play catch-up. “Now we’re back in the arena competing, and we’re not giving everything away, the way Oregon does,” says Terry Brewer, executive director of the Grant County Economic Development Council.

What happened in the meantime? It appears that a legislative snit over “loopholes” may have wound up costing the state plenty. To this day, it still isn’t clear why House leaders chose last year to kill a bill that would have kept the tax break in place. But hundreds of construction workers lost their jobs. And while there is no way to tell for sure that Washington would have been able to compete with Oregon and other states that are eager for the business, there are many who think Washington lost millions of dollars in tax revenue as a result.

“It was ours for the taking,” said state Sen. Mark Schoesler, R-Ritzville. “There was an incredible amount of interest, and all we had to do was pass the bill. It was one of the stranger things I’ve seen.”

A Booming Industry

Over the last six years, data centers have become big business in Washington and Oregon. Drawn to the region by cheap power rates, the warehouse-sized facilities each house thousands of computer servers, consuming vast amounts of electricity as they provide the backbone infrastructure of the Internet. Costs run in the hundreds of millions. Google flipped the switches on a data center in The Dalles in 2006 and Microsoft did the same in Quincy. From that point the race was on.

Oregon has one big advantage at the get-go, no sales tax – a big plus when one considers that purchases of computer and electrical equipment are among the data centers’ biggest costs. Washington has a unique advantage of its own – lower power costs from Central Washington’s public utilities. That tends to balance things out. But Oregon is able to offer something else – “enterprise zones” that allow local officials to waive most property taxes; the longest-term deals are to be found in rural counties. So for their own reasons, these days both states host data centers operated by some of the biggest names in the business, and many of them are located in the last places you might expect, the small towns of the high desert country. Oregon snagged Facebook, Intel, Amazon and Adobe. Washington landed Intuit, Yahoo and Dell. And for each of those household names there are others that are less familiar which provide facilities for other companies – the Sabey Corp., for instance, which joined the burgeoning cluster of data farms at Quincy.

The key thing is this: In 2010, after more than a year of debate and threats by Microsoft to expand in Oregon rather than this state, the Washington Legislature stepped up its game and offered a tax break of its own. It was a sales tax exemption requested by Gov. Gregoire, for computer and electrical equipment, and it applied to data center projects in rural counties that obtained a building permit by June 30, 2011. Unlike Oregon, this state still reaped millions in taxes. That’s because those who qualify for the break still are nicked for annual property taxes and sales taxes on construction materials. Yet during the 15 months the tax break was offered, it touched off a boom that labor and economic development officials say represented a private investment in Washington state of somewhere between $1.5 billion and $2 billion.

And then, on the final night of the 2011 legislative session, under mysterious circumstances, a bill to extend the tax break died in the House. The business dried up. Companies that had been giving Washington the eye started looking elsewhere. Within a few months, the spate of new announcements started coming from south of the border.

Oregon Looks Better

“We were so much less competitive, it didn’t take big corporations very long to make up their minds that Washington doesn’t work for them the way Oregon does,” says Grant County’s Brewer.

And in the Port of Quincy, projects that got in under the deadline were completed, but after that, nothing. “Since that time, June 30, 2011, there have been no announcements of data centers building or expanding, so I’m not just making this up,” says Pat Boss, the port’s public affairs director. “There is pretty strong, substantive evidence that the tax incentive created five major projects in 2010 and 2011, and then after the thing expired on June 30, 2011, there have been no major projects, and I think the evidence speaks for itself.”

To hear Boss tell it, Quincy, a town of 6,750 at the last census, is on the cusp of transforming itself into a high-tech center, much as Silicon Valley was transformed from the farming area it was in the ‘50s. Some 1.5 million servers are housed in the city’s six data centers; now server servicers are interested in moving in as well. Which makes it all the more painful to think everything came to a screeching halt a year ago.

“I was amazed the Legislature, for whatever reason, didn’t renew it last session, because clearly the evidence was there to show that it was working pretty successfully,” he says.

Strange Night at the Statehouse

There was more than one version of what happened last May 25. Among those working the hallways of the statehouse that night, it was believed that the bill was killed in a hostage-taking maneuver. Earlier in the day, Democratic House Speaker Frank Chopp had resurrected another bill to increase recording fees at county auditor’s offices to raise money for public housing, and it cleared the House 52-44. The widely repeated story had it that the House was demanding passage of that bill in return for three tax bills that had passed the Senate. Those bills continued tax breaks that were due to expire, for the server farms, film production and online newspapers. All three bills had cleared the Senate well in advance of the final day, with support from both parties, but they lingered on the House calendar until the final hour.

The housing bill died without a vote in the Senate. Next thing you knew, the three tax bills died in the House.

Yet after the final gavels had fallen and House Majority Leader Pat Sullivan was asked about the hostage-taking at a session-ending news conference, he said, “I don’t know where you heard that – lots of rumors spread around here pretty quickly.”

No, House Democrats were tired at the end of a long session, and the three bills just sorta slipped through the cracks. “Having passed a budget 24 hours ago that actually didn’t fund some of the programs that some of our members really wanted to see funded, it was difficult to turn around then and pass a tax break,” he said. “But mostly I think it was the fact that we just didn’t get there on a long day.”

Workers Lose Jobs

Whether it was bare-knuckle politics, distaste for tax breaks, or a simple combination of procrastination, weariness and disinterest, the decision by House Democrats to kill the server-farm tax break certainly had an effect. For one thing, it outraged the unions. “This was the only real jobs bill of the session,” said Dave Johnson, then the executive secretary of the Washington Building and Construction Trades Council. The tax break had created the man-hour equivalent of 1,000 construction jobs in Eastern Washington, where work is hard to come by, he said. “They’re playing politics with real jobs,” he said.

A year later, labor representatives testified as to what happened. “When the data center bill did not pass last year, practically overnight about 625 building trades workers were laid off in the depths of a bad recession,” Nichole Grant of the Certified Electrical Workers told the Senate Ways and Means Committee. “350 of those were electricians, so it is a big deal for us.”

And given the fact that labor is often the loudest in protesting tax breaks for business, it is worth noting that unions were among the biggest public supporters of this year’s legislation. “It is one that we think is a responsible incentive to continue,” said Rebecca Johnson of the state Labor Council. Of course, there was plenty of support from the business community as well. This year’s version lasts a bit longer than the original, granting the exemption for projects that commence over a three-year period, between April 1, 2012 and July 1, 2015.

What Might Have Been

The furor over what happened last year really is now part of the Legislature’s dead past. The film-industry tax break passed without fuss this session, as did the recording-fee bill. The newspaper tax measure is included in SB 6635 along with the server-farm tax break. As for those data centers, it’s a little hard to say with absolute certainty that workers would have kept their jobs if it had remained in place, because other states also are hungry for the business and are offering Oregon-scale incentives to attract it.

Jill Miles is the national business recruitment officer for Business Oregon, that state’s equivalent of the Washington Department of Commerce. She says Washington’s decision to end the tax break last year no doubt made her state look a bit more attractive. “Yeah, it probably hurt Washington in the short term. We did see some interest, and we have lost projects to Washington just as they have lost projects to us. We have managed to stay pretty consistent in our programs and in our legislation, and we haven’t tinkered with it, so we have managed to have that consistency that companies like.”

Of course it hurt, says Boss. “I think it is more than a coincidence when all of a sudden a lot of these tech companies stop calling, effective June 30, 2011, when the incentive expired, and you all of a sudden start seeing announcements down in Oregon.”

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