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April 28, 2014 at 6:10 AM

New Microsoft data center in Iowa offers a billion-dollar lesson

A March 2014 aerial photo of Microsoft's Quincy, Wash. data center.

A March 2014 aerial photo of Microsoft’s Quincy, Wash. data center.

Washington lawmakers couldn’t come to agreement this year on tax breaks, and you might say Microsoft is offering them a billion-dollar lesson.

The software giant has announced plans for a $1.1 billion data center in West Des Moines, Iowa. This comes six weeks after the Washington Legislature adjourned without extending a couple of high-tech tax breaks that are set to expire. You think there’s a connection? Microsoft seems more than happy to say so.

Iowa was offering a $20 million break on sales taxes. In Washington, Microsoft might have gotten a similar tax break, but only if it commenced construction before July 1, 2015, when the state’s current server-farm tax incentive expires. That would have been cutting things close. Perhaps Iowa possesses charms that escape those of us who live in Washington, but Microsoft is blunt. Iowa seemed interested. This state, not so much.

Of course there are many factors that go into that sort of decision – availability of a skilled workforce, the local business climate, proximity to markets. But the key thing is that Iowa economic development officials went after the business, says DeLee Shoemaker, Microsoft’s senior director for state government affairs. “Our concern is that a failure to offer tax incentives to encourage technology investments in this state is making Washington uncompetitive for future siting decisions by Microsoft and other technology-based employers.”

By now Washington lawmakers ought to feel a chill.  During this year’s session, they dealt with tax policy in a pretty high-handed way. The largely Republican majority in the Senate wanted to renew two tax preferences of importance to the high-tech industry. One was a business and occupations tax credit for research and development that is going to expire at the end of the year. The other was the server-farm tax break at direct issue here. But the Senate wasn’t going to consider ending any tax breaks, so the Democrats who are in charge of the House weren’t going to consider anything new. They could deal with things next year. Elegant and simple. Fair was fair.

Microsoft’s decision ought to remind them — what seems fair to Olympians can seem a bit different on planet Earth. The data-center incentive, a sales tax exemption for computer and electrical equipment, has helped encourage the development of a data center cluster in Central Washington farm country, where power costs are low. Microsoft operates one of nine large server farms in the area. Although it is in the midst of expanding its facility in Quincy, Wash., its future business now appears headed elsewhere.

Other state governments drool at the prospect. Even if they have to forgive sales taxes, they can count on construction and operations jobs. Depending on the deals they offer, perhaps hefty property taxes as well. The effect of tax incentives seems clear. When Washington offered its tax break in 2010, some $1.5 billion to $2 billion in new server-farm investment followed. Indifferent lawmakers allowed it to expire in 2011 and inquiries dried up. Over the next year, more than $1 billion in new projects were announced – in Oregon. This year, Pat Boss, development director for the Port of Quincy, says he was dealing with a number of interested firms until the session ended; now his phone has gone silent. The break has another year to go, but he says businesses want certainty.

To be sure, cause and effect is hard to prove in the economic development business, but now Democrats get to wince as Republicans say told-you-so.  State Sen. Janea Holmquist Newbry, R-Moses Lake, prime advocate this year for a bill that would have continued the tax break through 2025, says Washington ought to brace itself for another spate of announcements like Microsoft’s. “Sometimes it’s no fun being right,” she says. The situation should show the Legislature it ought to make decisions with a bit more care – and with a bit more attentiveness to the needs of one of the state’s most vital industries.   

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