Silicon Valley Plays the 'Flyover' States Like Fiddles
An increasing number of public officials seem to have their head stuck in the Cloud, trying to cajole Silicon Valley companies into locating data storage facilities in their localities. Unfortunately, the brand-name new economy companies come bearing just a handful of jobs and a hand stuck deep in taxpayers’ pockets.
Marquee-name companies like Apple, Amazon and Google leverage their prestige and cutting-edge reputation to prompt a virtual war among the states, with governments shoveling billions of dollars of subsidies their way. The people of the cities and states that put up the cash and tax abatements come up far short in getting their money’s worth in economic stimulus or tax dollars returned. The taxes that the high-tech companies and their few dozen local employees will pay will not sufficiently outstrip the cost of the subsidies.
We’ve become used to manufacturing companies offering jobs as a form of magic beans to rust-belt towns trying to replace jobs lost to other jurisdictions or robots. Now, we are seeing new economy companies sup at the public trough as well as their old economy counterparts, as they pursue a massive wave of data centers to power the world’s expanding cloud needs. The size of the data-service industry would double over the next five years, the commercial real estate and investment management firm JLL estimated last year. The data-center buildout coincides with a manufacturing trough that has reduced the scope for economic development projects. Trying to fill the void, local governments offer to slash a company’s property, income and sales taxes in a bid to lure a few dozen jobs and the supposed prestige from serving as the site for a small facility for a big corporation. The cash they forego could otherwise be used more productively to keep tax rates low, build and maintain sufficient electrical and transportation infrastructure, and educate and train a population well-equipped for a knowledge economy.
The data center industry is reaping the largesse the situation affords. Data companies had been awarded about $1.5 billion in subsidies across the United States in 2015, the Associated Press has reported - building lovely spacious homes for the robots that do most of the work there. While data centers are capital intensive during the construction phase, they have a light employment footprint after the plant is put up. Seven companies – Google, Apple, Microsoft, Yahoo, Facebook, Amazon and Switch – received over $2 billion in return for fewer than 1200 jobs, at an average subsidy of almost $1.7 million per permanent job, in megadeals between 2006 and 2015 tracked by the organization Good Jobs First.
Not only do these centers generate few jobs, those they do provide are often low-paid, including security and janitorial services. And they offer very little spin-off or multiplier to local businesses, using few goods or services typically found close to the facilities.
Apple recently continued this new tradition of crony capitalism, pulling down over $200 million in tax abatements to put up a new high-tech center in Waukee, Iowa – one that will employ about 50 people, at more than $4 million per job. Apple has also promised to donate up to $100 million to an infrastructure fund in Waukee. Even if the company spends every nickel it has promised to, the town and its taxpayers will still take a big hit.
The biggest-ticket item of the subsidy deals was for Apple’s data center in North Carolina in 2009. Apple managed to garner over $320 million in total for 50 permanent jobs, at a cost of $6.4 million per job. Like all of these megadeals, this one will never pay for itself. Neither Apple nor its local employees will ever pay enough in state and local taxes to sufficiently outstrip the public services they consume and justify the multi-million dollar cost. Apple managed to grab this pork prize by setting up a bidding competition between North Carolina and Virginia. When Apple indicated it was leaning to the Old Dominion, the North Carolina legislature quickly enacted a tax apportionment formula estimated to save the company $300 million over three decades. Google set up the same kind of race to the bottom between North Carolina and South Carolina. The data giant won tax exemptions from North Carolina worth over a quarter-billion dollars for a promised 210 jobs, at about $1.2 million per job.
Playing one jurisdiction off against another comes easily to companies building data storage facilities. There are plenty of takers, with more than 25 states offering economic development incentive programs to attract data centers. The data companies have plenty of bidding locations to choose from, and they don’t have to be particularly choosy. While they need lots of reliable, low-cost electricity to power 24/7 equipment and reasonable transportation infrastructure, they are not seeking a large, well-trained permanent workforce. So they can pick from among a wide variety of towns and cities that are not in hurricane or earthquake zones.
Local politicians may think they are buying prestige and a leg up in their bid to become high-tech clusters. But given the proliferation of data centres, and the small workforce they require, all that cities and towns are buying with their taxpayers’ money is a grey cloud with no silver lining.
