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Will unprecedented tax proposal for Facebook in Utah lure others or open ‘Pandora's Box’?

First Published      Last Updated Apr 13 2017 09:39 pm


Tax incentives » Package to lure giant data center unprecedented in Utah, but critics say it’s far too rich.

West Jordan officials say it's a one-time deal, a carrot too sweet to dangle twice: In return for building what might rank among the world's largest data-center campuses, Facebook would receive up to $260 million worth of tax incentives, a commitment of nearly 5 million gallons of water per day, an unprecedented rate structure on renewable energy and yet-to-be-announced benefits from the state.

Taxpayers, meanwhile, would eventually reap a 14,000-fold increase in property tax value from what is now a dryland farm — and a household-name business anchor instead of yet more residential subdivisions along the valley's southwest edge.




But city leaders concede the return won't square with the investment unless Facebook's cachet lures other companies to what they initially proposed as a 1,700-acre economic development area, and does so without the attached strings.

Salt Lake County officials and other critics warn the unprecedented incentives instead would hamstring the city during negotiations with future prospects while creating few jobs and worrisome demands on local resources.

It's an argument that has played out many times nationwide as companies building data centers ask local governments to assume the risk and return most of what makes them attractive: the taxes on their enormous capital investments.

Facebook towns • Craig Brookhart figures Prineville, Ore., residents are split into three camps about their Facebook data center, which gained the distinction of being the company's first when it opened on a bluff above the town in 2011.

Many are glad for the work after the shuttering of Prineville's five sawmills. Others, like Brookhart, say local officials who courted Facebook — and later Apple — focused too much on short-term gains and not enough on the long-term implications of bringing server farms to semi-arid high desert. A third group, he said, doesn't care.

Facebook's data centers house the likes, photos and shares from the social media giant's more than 1.7 billion active users — expressed physically by servers and hard drives massed in rows like Roman legions.

Facebook has to date built three campuses in the United States. The home of its second, in Forest City, N.C., was much like the first: a small, rural town abandoned by its staple industry — in its case, textiles — before the Great Recession delivered a knockout blow.

In erecting three buildings in Prineville and breaking ground last year on its third in Forest City, Facebook has helped dramatically shrink those communities' jobless rates. Prineville's unemployment has fallen from 20 percent in 2011 to 5 percent today; Forest City's from 19 percent in 2010 to 8 percent.

The Facebook brand provides "insta-credibility" to area developers, said one Forest City official. "A feather in our hat," said another in Prineville.

"They came to town and breathed a lot of new life into the community," said Mike McCabe, a commissioner for 24 years in Crook County, which includes Prineville. "They've been the greatest neighbors. They don't pollute our air. They don't have big demands on our fire or police departments. They brought us a tremendous number of construction jobs. I would give them a key to the city if it became handy."

Tom Johnson, director of economic development in Rutherford County, which includes Forest City, said every motel room and restaurant table has been occupied by construction workers, and a new Hampton Inn & Suites is under construction. Facebook has donated laptops for local schools and handed out backpacks at a home game for the town's collegiate summer league baseball team.

"If you need a sponsor for an event or something, they're the ones that you call first," he said. Prineville officials echoed that observation.

Facebook's friendship came with a price, however.

In Oregon, officials agreed to bypass property taxes on the facility itself and all the equipment within for the first 15 years of operation. In North Carolina, the county offered 20 years of property tax abatements, currently at 95 percent.

There was sticker shock when Prineville's exemptions were announced, said Mayor Betty Roppe.

"People were saying, 'You're giving the county away,' " said Roppe, now in her sixth year after previously serving on the City Council. "We knew we were getting nothing from them from [property] taxes. But we believed if we got them here and they stayed, it would be a tremendous benefit to us."

Project discus • Local officials often don't know in the early stages that they're negotiating with Facebook, which has a reputation for being highly secretive.

Fort Worth, Texas, Economic Director Robert Sturns said company representatives didn't include their last names in emails — sent from "Winner, LLC" — until soon before his city became the future site of Facebook's fourth U.S. data-center campus.

One thing they're told, however, is that Facebook — or "Winner," "Greater Kudu," or, in Utah's case, "Project Discus" — is among the most selective builders of enterprise data centers, and their cities will move to the front of the line for other companies that put their faith in Facebook's diligence.

The most attractive sites to large data storers are those with the most potent cocktail of low-cost land, taxes and energy. For Facebook, additionally, the ability to eventually provide 100 percent renewable energy has been a must since it built its wind-powered data center in Altoona, Iowa.

There are other factors, too. Forest City had received a dozen data suitors since the state installed fiber groundwork for a backup data center about 10 years ago. As an added bonus, Facebook's campus there is a former Burlington plant site with surplus capacity for water and sewage — another priority.

Facebook has garnered attention in Utah by requesting a capacity of 4.8 million gallons per day while valley residents are urged to conserve. City officials have been told actual water use by the data center would be much lower than the daily maximum commitment — significantly less than 1 million gallons per day — and the company's self-published numbers support that claim. The smaller Forest City and Prineville campuses combined to use 51 million gallons in all of 2015, Facebook says.

A 2015 report from CBRE, a real-estate company, found that enterprise data centers spent about 22 percent of their capital outlay paying their taxes and energy bills, and where both are cheapest, the internet heavyweights tend to cluster.

Utah, it seems, might be next.

About 1,400 acres of the 1,700 acres that West Jordan would name the Pioneer Technology District belong to the Jones family, which began dryland farming in the area shortly after the end of World War II. Michael Jones, whose aunt owns the land sought by Facebook, said his family has been approached by four companies in the past six years. Three, he said, wanted to build data centers.

Even before legislation this year that allowed data centers to negotiate custom rates on renewable energy and to be eligible for state sales-tax breaks, CBRE ranked Salt Lake City in the top third of metro areas for building enterprise data centers.

The valley's profile includes not only relatively cheap land, power and taxes, but also an international airport, low potential for natural disasters and a cold desert climate that allows companies, on most days, to cool their servers with outside air.

Facebook also scouted sites in West Valley City, South Jordan and on the border of Herriman and Riverton, before settling on West Jordan.

West Valley City Manager Wayne Pyle said his city spent "a lot of time" evaluating Facebook's proposal.

"We think Facebook will bring some real cachet to the state," Pyle said. "We think it can be a yeast, a starter for a lot of other tech industries, bringing them in. But a data center, really kind of in itself, is pretty limited overall in what it's going to bring in, so we really didn't incentivize it that much. We tried to bring them based on location and what their infrastructure needs were."

Job count • Data centers do not create many jobs beyond the initial construction work — estimates range from 50 to 300 for the 3.3 million square feet of server space in West Jordan at full buildout. That's a major point of criticism for Salt Lake County Mayor Ben McAdams, who believes it's outlandish to offer incentives that work out to as much as $3.4 million per job. But for others, like West Jordan Mayor Kim Rolfe, the low employment profile has an upside. It means no surge in demand for costly government services, including new schools, roads and police protection.

The minimal labor requirement works in data companies' favor during negotiations because they don't have to limit themselves to population centers. West Jordan's rival, reportedly: the town of Los Lunas, N.M., with a population of 15,000. West Jordan has 112,000.

That lopsided showdown rings a bell to Dave Swenson, an associate scientist of economics at Iowa State, who remembers Google telling Council Bluffs, Iowa, that it had to contend with a small town in data center-friendly Nebraska, where the company's impact would have been massive and so was the impulse to incentivize.

"They're very, very good at playing one site against another," he said.

In October 2015, The Associated Press found that state governments had given $1.5 billion in tax incentives to companies building data centers, with an actual taxpayer cost much higher, given that many states refused to disclose the taxes they waived, and that it didn't analyze city and county incentives.

"It's a very interesting industry, because the need for data centers is growing very dramatically," said Kasia Tarczynska, a research analyst for Washington, D.C.-based employment group Good Jobs First. "They support modern life."

Good Jobs First's Megadeals database shows that at least four data centers have received more than $250 million in reported subsidies since the group began tracking them in 1995.

Western North Carolina has been particularly generous in wooing Google, Apple and IBM, with a city manager in Caldwell County telling The Associated Press in 2007 that his colleagues had skipped an economic analysis on $250 million in tax breaks for a Google data center because they knew "intuitively" that it was a good deal.

"The only thing that's taxable in my state is just the building and the ground," said Swenson, the Iowa State economist. By the time 20-year incentives wear off, he said, much of a new property's value will have been lost without having had much to show for it in the meantime.

"These are massive, capital-intensive operations, large shell buildings with state-of-the-art heating and cooling — mostly cooling — and then they're populated with the latest technology — none of which is made in Utah. You're not going to get any kind of first-round construction impacts."

According to the Good Jobs First database, West Jordan's proposed incentive would surpass a $125 million incentive for a Micron plant offered by Lehi in 1995 as the state's largest ever.

The single biggest Utah state incentive offered in recent years to recruit any company — high-tech or not — was one worth up to $85 million to bring Procter & Gamble's paper-product manufacturing plant to Box Elder County in 2008, according to the Governor's Office of Economic Development. The full incentive was tied to an estimated addition of 1,185 jobs.

Pandora's box • Wes Swenson, CEO of C7 Data Center in Bluffdale, worries that if breaks similar to the Facebook package are extended to co-locations like his 23-acre data center in Bluffdale — which he said serves 450 clients and employs 80 Utahns — it would open a "Pandora's box."

"I live in Utah. My employees do. I don't have a problem paying the tax," he said. "But my whole issue is that offering it to somebody who builds a larger-scale [data center] is not really fair."

For its Fort Worth data center, Facebook received an estimated $147 million abatement from the city and another 10-year partial abatement from Tarrant County. The promised return from the company, which reported $3.7 billion in 2015 profits: 25 new jobs that pay at least 120 percent of the county's average wage.

Pushback was apparently minimal there, though state Sen. Konni Burton wrote an op-ed critical of the incentive and legislation to exempt data centers from state and local sales taxes for 20 years that she said was "written specifically for this transaction."

Bill Peacock, vice president of research at the Texas Public Policy Foundation, called it corporate welfare.

Some say, " 'I'm a free-market fan, but, in this case, we need to take some steps to make sure we get our piece of the pie because everybody else is doing it.' "

Forest City and Prineville officials, though, expressed few regrets over their pricey wooing of Facebook, which they regard as an economic savior.

McCabe had just one: "We had an awful time housing those contractors [during construction]. Damn near every electrician in Oregon was working up here."

­— Robert Gehrke contributed to this story.

mpiper@sltrib.com

mikeg@sltrib.com

Twitter: @matthew.piper, @sltribmikeg

 

AT A GLANCE

Things to know about Facebook’s West Jordan plan, code named ‘Project Discus’

Total city/county incentive » West Jordan’s Redevelopment Agency estimates that 20 years of property tax rebates — starting at 75 percent and increasing to 100 percent as Facebook builds up to six data-center buildings — would be worth $185 million. Facebook has requested that there be no cap on the incentive — meaning the actual figure could exceed projections — though the tax entity committee has asked for a cap of $250 million. Facebook has yet to agree to a cap.

The city is also negotiating a municipal-energy tax rebate that it says will be roughly $5 million, though that rebate was estimated at $52 million in an early draft presented to the county. Facebook would also receive about $5 million in total from an administration fee and municipal sales tax breaks. 

State incentive » The state has acknowledged it will offer an additional incentive that amounts to less than the proposal from the city and county. The proposed data center would also qualify for a state sales-tax break created at a special session of the Legislature last month that the county has estimated at $54 million and might qualify for a reduced rate on renewable energy under a tariff created during the general session in January.

Vote » The city’s proposed incentives require a two-thirds majority from its eight-member tax entity committee, which canceled its Monday meeting amid uncertainty from the state school board.

Salt Lake County Council has committed its representative to a “no” vote, while four total votes from West Jordan’s City Council and the Jordan School District are committed to vote “yes.” Salt Lake County Ben McAdams has a vote and is a vocal opponent of the incentives, while Jordan Valley Water Conservancy District Treasurer Dave Martin was most recently leaning toward a “yes” on behalf of smaller taxing entities.

That leaves the tally at 5-2, and means the state school board would swing the vote. First, the board wants to evaluate how the Jordan District’s tax giveaways might shift the burden to other state taxpayers through equalization funds.

The vote is now tentatively scheduled for Aug. 29.

Jobs » Estimates of the jobs created have varied, from 70 to 130 jobs at full buildout to, now, 50 for the first building and up to 300 for all six. The company has said that average wages for the jobs would be about 125 percent of local median wage, or about $50,000.

The project is also expected to create many more construction jobs during the 14-month builds of each building. Facebook had expressed to West Jordan leaders that it hoped to break ground by the end of August.

Project-area scale » The draft proposal presented by West Jordan’s RDA and approved by its city council designated a 1,700-acre economic-development area — roughly 1,650 without roads — running north from Old Bingham Highway along the city’s western boundary, while Facebook’s imprint would be 230 acres northeast of the intersection of Old Bingham and Bacchus.

The significance of the other acreage is that this is West Jordan’s last chance to establish an EDA — which allows a city to provide incentives without an forging interlocal agreement or setting aside affordable housing — due to legislation passed during this year’s session.

West Jordan first tried to sway the Salt Lake County Council with a revised EDA of 1,050 acres — removing the area north of New Bingham Highway and west of Bacchus Highway — and has now pledged to reduce the acreage to the Facebook plot alone, provided it receives the county’s support.

West Jordan’s City Council is scheduled to formally vote Wednesday on whether to reduce the size of the proposed EDA.

Building scale »  Facebook has presented plans for six buildings expected to be 550,000 square feet each. At a total of 3.3 million square feet, it would rank among the top three largest data center campuses in the world today, though the need for data — and thus, supersized data centers — is increasingly rapidly.

Water/power use » Facebook has requested a capacity of 4.8 million gallons per day. City officials say the company has told them that actual use would be much less than 1 million gallons per day, while the county argues that it would have to devote that capacity to Facebook whether it uses the water or not, keeping it from being used elsewhere.

Facebook’s data center campuses in Forest City, N.C., and Prineville, Ore. — which, together, are currently smaller than Utah’s would be at full buildout — combined to use 51 million gallons in all of 2015, or about 140,000 gallons per day.

In terms of power, the two locations used about 60,000 megawatt hours worth of energy in 2015, roughly equivalent to the annual use of 54,000 homes, according to numbers from the U.S. Energy Information Administration.


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