Commerce Department finds Washington lags in data center competitiveness, recommends incentive review

Washington, once a data center hub, has been losing ground for years. But there’s no reason the state can’t begin winning the competition again. That’s the conclusion of a new report from the Washington State Department of Commerce, State of the Data Center Industry: An Analysis of Washington’s Competitiveness In This Fast-Growing High-Tech Field

Although data centers do not create many direct jobs, studies show that a vibrant data center cluster stimulates job growth in related information and communications technology (ICT) industries. This, in turn, drives significant local economic growth.

In recent years Washington has captured relatively little new business. As recently as 2011 Washington was considered the data center hub of the Pacific Northwest, but that is no longer true.

The report was one of several studies called for in the 2017-2019 state operating budget. The Washington Research Council reviews three of the studies, including the data center report, which cites previous WRC work on the economic impact of data centers in Central Washington.

The Commerce Department writes that the competitive environment for data centers has changed, and Washington has not kept pace.

The national data center market has been booming since 2012, both in terms of new construction and global demand. Profit potential for data center owners remains strong and margins are better than those available for other kinds of commercial construction, including Class A office space. Market competitiveness and improving technologies have made it more cost-effective for enterprises to move their workloads off-premise into independently operated data centers. Explosive growth in cloud computing has radically increased the size and economic impact of data center investments made by the four major service providers (Amazon, Facebook, Google, Microsoft) in the United States.

Growth in the Washington data center market has been on the low end of the market, both in terms of new construction and in terms of measurable gross business income.

The analysts report that there’s been virtually no growth in the Seattle data center market. 

What’s happened to slow progress? The report cites three factors:

Three probable causes for Washington’s lagging growth are identified: (1) lack of aggressive promotion of the state’s data center economy and opportunities compared to other states; (2) historic confusion in the market about Washington’s data center incentives, which may no longer be that competitive; and (3) concession of the urban data market to Oregon because the Seattle market is not competitive on the basis of sales tax.

While the deep dive into data centers will have but a limited audience, the report’s discussion of Washington’s tax incentives may have broader application. We’ll quote a relatively lengthy section that makes the point.

Two factors have impacted the Quincy market. First, the data center tax initiatives offered by the state went through a period of uncertainty that hurt the reputation of the state and drove business elsewhere. Quoting directly from Virginia’s promotional material:

Washington state’s experience with data center incentives is also illustrative, but in a different way. Washington is home to Microsoft’s corporate headquarters in Redmond. In December 2007, Washington’s Attorney General ruled the state’s data center incentives invalid. Microsoft and Yahoo immediately halted construction on data center facilities in rural Quincy, Washington, and Microsoft subsequently chose to move its Windows Azure cloud computing service to another state. Facebook and Amazon also cited state and local taxes as an important consideration in their decisions to construct new data center facilities in neighboring Oregon.

Washington’s data center incentives were legislatively re-enacted in April 2010, sparking a construction boom and up to $2 billion in new private investment in the state. But, in June 2011 the incentives were allowed to lapse, which once again halted data center growth in Washington and drove a $1 billion investment boom in nearby Oregon as Adobe, Apple, Fortune Data Centers and NetApp all announced that they would be building data centers there rather than Washington. In May 2012, Washington again re-enacted their data center incentives, only to fail to reauthorize them during the 2014 legislative session. Microsoft subsequently cited that lack of reauthorization as a motivating factor in its decision to build a new $1.1 billion data center in West Des Moines, Iowa, rather than Washington. Washington then re-enacted its data center incentives yet again in July 2015.

As Virginia points out, the market abhors uncertainty, and predictable competitive tax incentives are a critical component of the competition between states for data centers.

Further,

Washington is almost the only state that limits its sales and use tax exemptions to specific rural counties. The data center market has changed dramatically since the state of Washington formulated its thinking. The projects are larger, the stakes are bigger, and there are three times as many states competing for these deals…

Urban Washington counties that do not have access to sales and use tax exemptions for data centers will continue to be at a competitive disadvantage to other urban data center markets, such as Portland that either do not have sales tax or that offer tax incentives that abate the sales tax.

Smart tax incentives attract investment that would otherwise go elsewhere. They don’t cost taxpayers money; they generate increased tax revenues. Sometimes, it really is that simple. The Commerce Department report makes the case, providing valuable information to policy makers.