HIGH-TECH GIANTS SEEKING MASSIVE TAX BREAK EASTERN WASHINGTON `SERVER FARMS' COULD GET $1 BILLION STATE EXEMPTION

DATELINE: OLYMPIA

Microsoft and a handful of other tech giants are quietly securing a state tax break that could be worth more than $1 billion through legislation forged amid corporate threats and an interstate bidding war for computer server farms that have become the backbone of the Internet.

With its low-cost land and abundant clean power, Eastern Washington has the basic attributes to support the huge data centers companies such as Google, Yahoo and Microsoft are building for their online services.

But the companies say they need more tax breaks from the state to continue building.

"States such as Iowa and others have come on board with very attractive tax incentive packages to get data centers to locate in their communities," said DeLee Shoemaker, Microsoft's state government affairs director. "These other states that are in tough economic times and are looking to attract new business and new investments Washington state is no longer competitive for this type of business."

Microsoft and Yahoo already have server farms in Eastern Washington and had planned to build more. But when the state Department of Revenue recently determined that the server farms aren't eligible for an existing tax exemption for rural manufacturers, both companies halted new construction and began pushing for a new tax break.

Eager to shore up the flagging economy, lawmakers led by Gov. Chris Gregoire have taken up the issue. The server farms generate many temporary construction jobs and a small number of full-time positions. They also reduce the tax burden on local communities by expanding the property tax base.

Gregoire requested an exemption in Senate Bill 6666, which would eliminate half the state sales tax on replacement equipment for the mammoth computer server farms in Eastern Washington.

But even if her proposal passes, it might not be enough.

The proposed legislation "is a good starting point," Shoemaker said. "It's not us wanting more; it's us saying we have to make a business decision."

That's a story state governments have been hearing far too often, said Michael Mazerov of the Washington, D.C.-based Center on Budget and Policy Priorities.

"Companies are getting very sophisticated and aggressive at playing the states off each other and of course when the economy is turning down like it is now, they are even more successful at it because policymakers are very anxious to stimulate economic development," he said.

Is it worth it?

But Mazerov says there's a trade-off.

"That revenue could be used to improve education and make other investments that also have major economic development benefits."

Mazerov said in some ways, Washington could be a smart place to locate a server farm, even without a tax break.

"Washington has huge natural advantage, in terms of clean electricity, which is what these companies are looking for," he said. "The question with any tax incentive is: Are you rewarding companies for investments that they are going to be making anyway?"

The proposed exemption is moving forward with little public attention because it's structured in a way that shifts its fiscal impact two years into the future. With a line-item cost in this year's budget at zero, it stands outside much of the give-and-take that comes with balancing the state budget.

Faced with declines in projected revenues, Gregoire has told lawmakers that this year's budget must be frugal. She describes the tax exemption measure in two lines of her 38-page Budget and Policy Highlights manual as a "tax incentive for businesses to expand (no fiscal impact this biennium)."

Cost versus jobs

But in the next biennium, the incentive is worth $32 million, and $43 million in the next, according to Department of Revenue estimates. If viewed in the same 24-year time frame that generated the $3.2 billion cost estimate attached to Boeing's 2003 aerospace exemption, the new high-tech tax break could easily be worth more than $1 billion, according to Department of Revenue estimates.

Senate Ways and Means Committee Chairwoman Margarita Prentice, D-Renton, said the bill's price tag "gives one pause," but she'll support it because of what it represents for Eastern Washington.

"It is an opportunity to bring some really good jobs, jobs that pay well and an educated population that will be there permanently," she said, noting that the influx would be beneficial to rural schools and businesses.

"Jobs come a lot easier in Western Washington," Prentice said. "I'm really convinced we will be able to provide some of the same quality jobs to Eastern Washington."

E-mailing, blogging and downloading require massive computer banks or servers to store, move and process the information that most Internet users take for granted. Server farms are huge buildings full of computers that get so hot, companies spend as much to power the air conditioning as they do the computer processing. Access to cheap power alone can save companies millions each year.

During the first four-month construction phase, a data center employs about 600 construction workers. The next phase employs 500 workers.

Once the building is completed, the buildings employ 20 to 30 full-time workers.

Asked if the legislation was a gift to a huge corporate interest, Prentice said: "We gave another corporation (Boeing) a tax break," adding that other states are vying for the server farms.

"Those jobs are going to go somewhere - better they should come to us," she said. Sen. Eric Oemig, D-Kirkland, isn't so sure.

Oemig said it doesn't make sense to cut taxes for an industry that is a drain on state resources. Server farms require a massive amount of constant electricity.

"You really have to look at the economic cost of (new industry) coming in," he said. "Maybe one thing they do is chop down a lot of trees, or create a lot of pollution or use up a lot of electricity."

Washington provides incentives for business even without more tax breaks.

"Right now we attract business because we have an excellent business climate," Oemig said. "Part of doing business in the state is paying rent. These server farms kind of want to come in here and have a reduced rent and I fail to see what the extraordinary value is that they are creating for Washington state that we should discount their rent."

Yahoo co-founder David Filo made his company's case for the tax break in a letter to Prentice.

He said the company has greatly expanded its presence in Washington, notably with a 115,000-square-foot software development facility in Bellevue and the construction of two "megadata" centers in Eastern Washington, but has halted new construction because of the Department of Revenue ruling.

"An unexpected requirement to pay sales tax will destroy the competitive advantage that led Yahoo to select Quincy as the location for our latest facility, and in fact swings the decision strongly in favor of freezing construction in Washington, and building instead in Oregon (which has no sales tax), as some of our competitors are already doing," he said.

Staying competitive

Gregoire sees the tax break as part of the cost of expanding top-tier tech companies in Washington, said her legislative liaison, Marty Brown.

"Proponents say that if we keep the server farms here, we will probably grow our base business in the state, too, because we will be closer to the server farms," he said. "Yahoo and Google may say we'll keep growing in Washington state because we've already done that in other state's where we've got server farms."

Brown said the tax exemptions are not just gifts to big-money business interests.

"They are going to do this someplace," he said. "It's sort of the industrial incentives similar to what folks did in the '70s to get industries to their state. It's what legislatures do."

The fact that Microsoft and the other companies with server farms are paying property taxes is a big selling point for them in the rural counties where they are located. Because of the high value they add to the taxing districts, the property tax burden is shifted away from individual payers and onto the megacompanies, proponents say.

Microsoft representative Shoemaker said the company has lobbied for a 100 percent sales tax exemption.

"Part of the reason why Washington state isn't suffering like many of the other states in this country is because the state has been smart enough to make these investments to diversify the economy," she said.

P-I reporter Chris McGann

can be reached at 360-943-3990

or chrismcgann@seattlepi.com

BY THE NUMBERS

0 Line-item cost in this year's budget for a sales-tax exemption for computer server farms.

$32 million Cost of the tax break in the 2009-11 biennium.

$43 million Cost of the tax break in the 2011-13 biennium.

$1 billion Cost of the tax break when viewed in the same 24-year time frame that generated the $3.2 billion cost estimate of Boeing's 2003 aerospace exemption. REST: - Sen. Margarita Prentice, D-Renton, Ways and Means chairwoman