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Sunday, 06 December 2015 22:12

Abate, then Switch: Las Vegas tech firm asks legislators to change Michigan tax law to benefit data center industry

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Dangling the carrot of a $5 billion investment and 1,000 new jobs, a Nevada-based data center operator asked the Michigan Legislature to change state tax laws to be competitive with other states.

Switch Communications Group LLC said it would start construction immediately on its eastern U.S. facility at the former Steelcase Pyramid Building in Gaines Township, but only if Michigan lawmakers exempted the data center’s colocated computer equipment from certain sales, property and use taxes.

Without those changes, the company said it would make the investment elsewhere.

The state Legislature was deciding the fate of a trio of tax bills as this report went to press last week. At the time, the outcome of those votes was still anyone’s guess, but what remained clear was that many seasoned policy watchers reviled the process of doing targeted economic development by legislation specific to one company or one industry.

The reason: “The state government’s track record at picking winners is, at best, mixed,” said Rich Studley, the president and CEO of the Michigan Chamber of Commerce.

Michael LaFaive, director of the Morey Fiscal Policy Initiative, a part the Mackinac Center for Public Policy, a Midland-based free-market think tank, described the process of rewriting state tax laws for one company or even one industry as a step backward in Michigan’s economic development strategy. Doing so allows state government to pick winners and losers, he said.

“I’d like our economic developers to tell me whether the stock market will go up or down,” LaFaive said. “They have a 50-50 shot. But they’re deciding that this company is the winner and should have resources while others don’t. It’s a fairness issue. Why them?”

Another local executive familiar with the negotiations summed up another concern, even if the legislation passed: Switch continues to evaluate sites in other states along the East Coast, so any action Michigan takes could be moot if the company gets a better offer elsewhere.

The main sticking point for the Michigan Chamber hinged on the lack of clarity in the bills regarding job creation thresholds and investment requirements that are common in laws in other states, including Switch’s home state of Nevada. For his part, Gov. Rick Snyder said he wanted to find a way for the bills to include job creation requirements.

However, people familiar with the negotiations said it could be difficult to put such requirements into tax policy legislation.


A CHANGE OF STRATEGY?

Changing state law to attract one company or even one industry would be a marked pivot in Michigan’s economic development policy since Gov. Snyder took office in 2011.

As governor, he’s long championed improving Michigan’s overall business climate as a way to improve the economy, versus targeting incentives at specific sectors or companies. His policies have skewed more toward economic gardening — helping grow existing businesses — than seeking out new industries to locate in the state.

[RELATED: Switch’s energy demand at proposed Michigan data center could pose challenges as utilities warn of capacity shortfalls]

Snyder also led the charge to reform the state’s business incentives to performance-based grants in a shift away from open-ended credits that have caused general fund budget shortfalls as recently as this year.

That strategy shift was not lost on policy watchers following the discussion of changing tax laws pertaining to Switch Communications last week.

“There’s simply no getting around the fact that this proposal is inconsistent with the approach Michigan has taken in the last four to five years to shy away from hyper-specific tax incentives that deprive the state budget or have mediocre job results,” said Tricia Kinley, the senior director of tax and regulatory reform at the Michigan Chamber.


LEVELING THE FIELD

But spokespeople for Switch and others in the industry say if Michigan wants a level playing field with the 22 other states that currently offer similar exemptions, it needs to act.

If Michigan wants the high-tech industry here, it will need to become competitive first.

Jason Mendenhall, executive vice president of the cloud at Switch, said in Senate testimony that the company would be self-sustaining and require no further government support if it were to set up shop in West Michigan. That led lawmakers to question why the company needs the tax support on the front end of its development.

“(Tax policy) is the only thing that makes Michigan unattractive, and it’s unattractive to our clients,” Mendenhall said. “We can’t come because our clients won’t come (unless the legislation passes).”

Switch counts technology giants like Google, Amazon and eBay among its 1,000 clients. Switch said that if it builds the data center in Gaines Township, those companies would not only bring their servers to West Michigan, but also their own employees would live in the region and oversee the colocated operations at Switch.

According to Roger Martin, a spokesperson for Switch and a partner with Lansing public relations firm Martin Waymire Advocacy Communications Inc., about 35 percent of the 6,500 people based at Switch’s Nevada data centers work for the firm’s clients but live in the state.

He said he expects a similar situation in West Michigan should the Pyramid site plans go through.

“We’re talking about the largest data center in the eastern United States,” Martin said of the scope of the Gaines Township project. “Those other states have policies that support the business model of a large-scale data center. Switch wants to be in Michigan, but it wasn’t on their radar until about 10 weeks ago.”


LEGISLATING UNDER PRESSURE

Despite Switch’s newfound desire to locate its data center in Michigan, the company indicated it wanted to start construction before the end of the year, hinting that any delays in approving the tax changes could stall the project.

According to Studley, forcing legislators to pass tax legislation under a tight deadline could leave the state with unintended consequences.

“At this point, we have more questions than answers,” Studley told MiBiz as the state Legislature held its first committee hearings on the bills mid-week. “There is simply no good reason why this type of very costly legislation should be rushed through the House and Senate in the closing days of the 2015 session.

“If it’s good legislation in December, it’s good legislation in January.”

Neither the Michigan Economic Development Corp. nor Snyder had issued comprehensive statements regarding the tax changes in the legislation at the time this report went to press, but the administration said the discussion over the bills had just started.

“Gov. Snyder’s approach to economic development has been in a way that is fiscally responsible over the long term,” Snyder Press Secretary David Murray wrote in an email to MiBiz. “The legislation linked to this project has only recently been submitted, and we are still very early in the process. We expect there will be a lot of discussion about this project as we move forward.”

Snyder even echoed the sentiments of other officials in questioning the high job creation numbers estimated by Switch Communications. Speaking to reporters at an event in Grand Rapids on Dec. 1, the governor said that data centers aren’t known for being big job creators.

“Just a data center by itself is not a huge job generator. It’s a huge data center,” Snyder said.


MINIMIZING REVENUE LOSS

Citing the desire to minimize the fiscal impact to the general fund and school aid fund from changing state tax laws, the administration advocated for a narrowly-focused pilot project with Switch to test tax changes for colocation data centers, according to Senate committee testimony by Jeremy Hendges of the Michigan Department of Talent and Economic Development.

At the same time, Hendges also acknowledged some lawmakers’ concerns that doing a pilot project with Switch would immediately put existing Michigan-based data centers at a competitive disadvantage.

“That’s certainly one of the concerns that’s out there,” Hendges said.

Estimates of the fiscal impact of changing the tax laws for colocation data centers varied widely in separate reports issued Dec. 1 by the House and Senate fiscal agencies.

According to the Michigan Senate Fiscal Agency, the bills at the time of the analysis were expected to extend tax breaks to 331 existing colocation data centers in the state. The bills would reduce revenue coming into the state’s general fund and school aid fund “by an unknown, although potentially significant, amount ... (that) likely would total at least $11.4 million per year,” according to the analysis.

Meanwhile, a House Fiscal Agency report gave a vastly different picture, saying that the legislation would extend tax exemptions to just 40 data centers. However, its report estimated the bills immediately would create an annual revenue decrease of between $20 million and $30 million for the state.


DIVERSIFYING THE ECONOMY

As the bills moved through the state Legislature last week, Andy Johnston, vice president of government and corporate affairs at the Grand Rapids Area Chamber of Commerce, said the goal was to create legislation that was fair to all companies in Michigan’s data center industry.

Most neighboring states have tax policies favorable to a company like Switch Communications, Johnston said, noting the unlikely chances of it locating here without the policy change.

“For policymakers, it comes down to whether we want this industry,” he said.

Birgit Klohs, president and CEO of The Right Place Inc., said in testimony to the Senate Competitiveness Committee last week that an economic development project like the Switch proposal doesn’t come along very often. Moreover, she said luring the company to Michigan would help further the state’s economy in the long run.

“The investment by Switch will serve many industries, including the car industry,” Klohs said. “This will level the playing field not just for one company, but for an industry.”

The Right Place believes securing an investment from Switch will also help attract the industry’s supply chain to the state, a spokesman said.

However, Kinley from the Michigan Chamber offered a different take.

“We don’t disagree that Switch might be a magnet, but is it a magnet for actual human beings or is it a magnet for tax-free equipment?” Kinley said during a Senate hearing. “To be sure, let’s be positive we’re all talking about the same thing: We’re not talking about a data center or data processing with people and human beings, we’re talking about server farms.”

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Editor’s Note: This version of the story has been updated to correct the official name of Switch Communications Group LLC.

Read 4906 times Last modified on Wednesday, 16 December 2015 00:05

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