The Exceedingly Dumb Politics of Data Center Subsidies
PLUS: Virginia bans junk fees and Apple loses big in court.
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The Colorado Senate is currently debating a bill that would make Colorado the latest state to provide tax subsidies for the construction of data centers, those massive facilities tech corporations use to house the servers that allow businesses to store and manage data.
“The reason that Colorado gets so few investments in data center technology is we’re just not competitive,” said Democratic State Sen. Nick Hinrichsen, one of the bill’s sponsors. “If we are not competitive with our peers, the big sites will not come.”
“Does Colorado want to participate meaningfully in the 21st century or not?” asked Republican State Sen. Paul Lundeen, another co-sponsor.
If I were a gambler, I’d bet against this particular bill becoming law this year, despite its bipartisan support. But there are still 32 other states that already subsidize data center construction in some form or fashion — and that total doesn’t include the various other ways state and local governments subsidize data centers, such as giving them discounts on utilities. And there are always new states looking to pile in.
To that end, the Colorado sponsors’ pleas to their colleagues are very instructive, in that they show just how silly this debate has become, even while there’s nothing silly about the amount of money data center subsidies are costing the public. So I’m going to use this opportunity to break down, as the title says, the exceedingly dumb politics driving this particular policy choice.
By “competitive” of course, Hinrichsen means the competition to throw the most public dollars at the private infrastructure big tech corporations need to literally exist as business concerns. What the “winners” of this competition receive is the opportunity to spend hundreds of millions or even billions of dollars subsidizing large corporations, while receiving few jobs or other public goods in exchange. Dressing up subsidies in the language of “competition” does not make them any less costly or any more effective.
In fact, it’s the later entrants to a particular subsidy area that are the likeliest to pay the most and receive the least, because they need to outbid the earlier entrants not only on raw dollars but on convincing them to start anew somewhere, rather than building where they already have existing infrastructure, relationships, and supply chains, as well as tax breaks.
I think there’s a bit of a cycle going on with data center subsidies, akin to that which occurred with film and television production tax credits in the early 2000s: In the film/TV space, the early adopting states did reap some concrete benefits, which were quickly diffused as more and more states piled in. The later entrants upped the amount they spent — since they had to outbid earlier entrants — which forced the early entrants to increase their spending in a vicious cycle that redounded to no one’s benefit but the corporate interests that were bidding everyone up.
Eventually, states were spending so much that more than a dozen repealed their film and TV tax credit programs entirely, unable to justify the cost, including some of the first movers. Those who continued to play the game spent more and more, with Georgia now topping $1 billion in film subsidies annually, and other states, such as New York, California, and New Jersey, spending hundreds of millions each every year.
The same dynamic is playing out with data centers, with some of the earliest adopters, most prominently Virginia (which has been subsidizing data centers since 2008), looking at costs that are set to spiral out of control and negative knock-on effects in the local communities that host data centers multiplying. According to a recent report from Good Jobs First, at least 10 states already lose more than $100 million per year on data center subsidies, with Texas’ costs climbing to $1 billion. Three states — Virginia, Texas, and Illinois — “have each recorded revenue-loss spikes of more than 1,000% in recent years.”
That’s what Colorado, or any other state looking to pile into the data center subsidy game now, has to top to be “competitive.”
And that’s leaving aside, as I noted earlier, the other ancillary costs, such as the strain data centers place on utilities. Virginia residents are on pace to be on the hook for about $450 per year in higher electricity costs each due to data center growth, and Maryland customers could be facing an additional $800 million in collective costs.
South Carolina’s state-owned electric utility, Santee Cooper, recently enacted higher rates for large, industrial users such as data center owners, but that’s been the exception, rather than the rule: Most other states are giving data centers lower rates and pushing those costs onto residential customers.
The only real upside of data centers is that they do provide property tax revenue to the locality in which they reside, so assuming the site was an empty field previously, a data center can generate some real money. But that reality reflects the general lack of imagination many policymakers have about economic development more than anything else: The choice is almost never a data center or nothing, if a community has a real strategy for building a foundation for sustainable economic growth.
All of which is to say, the Colorado lawmakers are pushing a kind of FOMO — fear of missing out — onto the public, making it seem as if residents will lose a massive opportunity if they don’t subsidize data centers, or will miss the train on modernity and end up living in the Stone Age. I don’t know if they actually believe that rhetoric or are just hoping the rest of us do, but the reality is the opposite, as the states that went all-in on data centers first are starting to discover.
UPDATE: Virginia Republican Gov. Glenn Youngkin last week signed a bill making his state the fifth to adopt a comprehensive ban on mandatory, undisclosed “junk fees.” (The others are California, Minnesota, Massachusetts, and Colorado.) There are still several states with active legislation to ban junk fees this year, which you can track at our campaign hub here.
UPDATE II: A federal judge last week said Apple has been intentionally dodging an order that it allow developers who use its App Store to collect payments outside the App Store infrastructure (thus avoiding the 15-30 percent fee Apple collects from each transaction within the store, which is distinct from the money developers pay to be listed in the store). “Apple sought to maintain a revenue stream worth billions in direct defiance of this court’s injunction,” the judge wrote, while referring the corporation and one of its executives to federal prosecutors for possible contempt charges.
For the full background on this issue, read my primer here. I spent a few years working with allies in various state governments to try to make legislative changes akin to what the judge ordered. We never succeeded, but it’s nice to know, I guess, that we were just ahead of our time.
SIMPLY STATED: Here are links to a few stories that caught my eye this week.
Colorado is the first state to pass a ban on landlord collusion via third-party rent-setting software, but Gov. Jared Polis hasn’t committed to signing it.
My colleagues Helaine Olen and Laurel Kilgour released model legislation to help state lawmakers prevent the corporate takeover of veterinary practices.
Arizona Gov. Katie Hobbs vetoed a bill that would have allowed the state to invest public money in cryptocurrency.
Iowa Gov. Kim Reynolds signed a bill eliminating so-called “certificate of need” requirements that were preventing the opening of new birthing centers.
Michigan Attorney General Dana Nessel is suing Roku for allegedly illegally collecting children’s data.
Virginia Gov. Glenn Youngkin signed the Save Our Local Pharmacies Act, which will create a single pharmacy benefit manager for the state’s Medicaid program. Similar laws in other states have yielded hundreds of millions of dollars in savings.
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— Pat Garofalo