New Haven Register (New Haven, CT)

Will state’s race to attract data centers pay off?

- By Erica E. Phillips CTMIRROR.ORG

As more and more businesses have shifted IT operations to the cloud, state leaders around the country turned to data centers — the giant server warehouses that power the internet — as one way to rejuvenate their economies coming out of the Great Recession.

Over the past decadeplus, more than 30 states have created tax breaks or other incentives for data center constructi­on, and the technology sector’s biggest players, from Facebook to Google and Amazon, have taken full advantage.

This year, Connecticu­t joined the race.

In late February, state lawmakers passed emergency legislatio­n allowing the Connecticu­t Department of Economic and Community Developmen­t, for the first time, to offer tax incentives to certain data center developmen­ts.

Specifical­ly, the state will waive sales and property tax obligation­s for 20 years for data centers that invest at least $200 million in Connecticu­t — or just $50 million if the facility is located within a state-designated enterprise zone. The tax exemptions could be extended to 30 years if a $400 million investment is made, or a $200 million investment in an enterprise zone.

But with so many other states offering incentives, and Connecticu­t arriving relatively late to the game, the legislatio­n’s expedited passage through the Assembly struck some observers as odd. The bill obtained emergency certificat­ion — sending it immediatel­y to the floor for a vote, with no committee referrals or public hearings.

DECD Commission­er

David Lehman said that was all because of one particular detail: Connecticu­t agreed to waive its right to impose a financial transactio­ns tax on any qualifying data centers. At the time, New Jersey lawmakers were considerin­g passing a $0.0025 tax on every financial transactio­n processed electronic­ally in the state. Given how much of Wall Street’s exchange server infrastruc­ture is located in New Jersey, the proposed tax had massive implicatio­ns for the finance industry.

“We were moving very quickly,” Lehman recalled. “The governor, myself and others were having conversati­ons with these companies around potentiall­y relocating their exchanges to Connecticu­t … This legislatio­n was really important if they were going to make the move.”

Connecticu­t lawmakers had the data centers bill on Gov. Ned Lamont’s desk within a week. Lamont signed it on March 4.

Lehman estimates Connecticu­t could have seen as much as $750 billion in data center investment if New Jersey had passed the financial transactio­ns tax. But New Jersey’s bill has stalled in committee, and it looks like the data centers powering Wall Street are staying put for now. “There’s no imminent move from the financial exchanges at this time,” Lehman said.

Richard Auxier, a tax policy analyst with the Urban-Brookings Tax Policy Center, said he’d be surprised to see any state pass a financial transactio­ns tax, or FTT, given the possible negative economic consequenc­es and the tenor of the opposition it’s raised to date. Plus, he added, “my guess is states are too busy with [American Rescue

Plan] funds and other pandemic-related issues to start tackling new taxes like this at the moment.”

So, about that emergency bill

The prospects have dimmed for Connecticu­t to wrest Wall Street’s backoffice data infrastruc­ture from New Jersey. But in several communitie­s, particular­ly in the eastern part of the state, other kinds of data center developmen­ts — aimed at a broader clientele — are beginning to take shape.

Depending on the agreement they work out with the local municipali­ty, new data centers will typically make an annual flat-fee payment in lieu of paying local taxes on the property value of their real estate and equipment. It’s a significan­t discount, but supporters say it could be worth the trade-off.

“This gives more opportunit­ies to some of our rural towns that may have farmland being taxed at the [lower] farmland tax rate,” said Sen. Heather Somers, R-Groton. “Some towns are looking at generating millions of dollars off this.”

Somers also said that, compared to other industrial sites, data centers are “low impact.” Once constructi­on is completed, there are no trucks or heavy-duty machinery on site, and the small number of employees means there’s essentiall­y no impact on traffic in the surroundin­g area, she said.

“Usually on property tax exemptions, we get very hesitant,” said Randy Collins of the Connecticu­t Conference of Municipali­ties. His group worked with legislator­s to include language in the bill that would protect towns in cases where the developer doesn’t hold up their end of the deal. “We wanted to make sure a municipali­ty wouldn’t be taken advantage of,” Collins said.

At the same time, CCM didn’t want to cut off an economic opportunit­y for distressed communitie­s. “When you take a town with no economic prospects for this parcel — sure, in a perfect world, I’d get $5 million on this parcel but I take $1 million. Maybe the economic developmen­t around it will build off what they’re doing,” Collins said.

For developers, the upfront investment and lead time for data center projects is substantia­l. In some cases, the towns they’re targeting will have to draft new zoning rules, since many laws on the books hadn’t contemplat­ed this particular type of developmen­t. Data center developers can apply for the state incentive program only once they’ve worked out a fee agreement with the local town. From there, they negotiate a power purchase agreement with the local utility and begin constructi­on.

In the short-term, constructi­on could create well over 1,000 jobs per site. But data centers generate far fewer permanent, full-time positions. Lehman estimated each project could result in 25 to 50 permanent jobs. He and others described those jobs as “white collar,” noting the higher salaries would boost payroll tax revenue.

Not everyone saw eye-toeye on the program’s costs and benefits.

State Sen. Matt Lesser, D-Middletown, one of five senators who voted against the bill, expressed his concerns during the Senate debate in February before the vote was taken.

“We are gathered here to try to lure an industry to

Connecticu­t that, as far as I can tell, will provide few lasting jobs but provides major costs,” he said. “Those costs are to taxpayers who will be providing the industry with significan­t 30-year tax breaks.”

Data centers “chew through” computer equipment, and operators spend several million dollars a year to replace servers and other hardware, said Bill Hassan, a specialist in data center site selection with commercial real-estate brokerage CBRE. Under Connecticu­t’s new incentive program, those equipment purchases won’t be subject to the state sales tax. If they were taxed at Connecticu­t’s 6.35 percent rate, each data center could potentiall­y owe several hundred thousand dollars a year to the state.

DECD’s Lehman said that’s a moot point, because “The key thing around any incentive is, if you didn’t provide it, would this still happen?” Many other states grant sales tax exemptions for data center equipment, he said, and in order to compete, Connecticu­t needed to offer the same.

“I think we can say, hand on heart, we would not have the investment over the next 10 years unless we put forth this legislatio­n,” Lehman said.

The Office of Data Infrastruc­ture Administra­tion and Security, within the DECD, launched July 1. Lehman said so far the office has fielded a handful of requests for applicatio­ns from developers. Within three years, he said, he expects the number of approved new data center projects to be in the “midto high-single digits.”

Power struggle

Connecticu­t’s current data center tally stands at 14, and their overall data capacity is small compared to that of other states. The main reason for that is the relatively high cost of power in the state.

These facilities use a massive amount of power, which means most developmen­t to date has happened in parts of the country where electricit­y prices are low. The average price per kWh for industrial customers in Northern Virginia, for example, is 5.5 cents. In New Jersey it’s 8 to 9 cents, and in Connecticu­t it’s 12 to 13 cents. So a user who might pay $750,000 a year for power in Northern Virginia would be paying more than $1 million in New Jersey and more than $1.5 million in Connecticu­t, according to CBRE calculatio­ns.

David Silverston­e, who represents customers of the public electric utilities known as Connecticu­t Municipal Electric Energy Cooperativ­e, said there’s plenty of power available to add data centers to the grid. “However, you’ve got to get the power to the customer,” and that involves building a bigger power line out to the location in order to accommodat­e the additional capacity. “If you’re a data center, there’s no pole in the street. There has to be a whole system to bring the power to you.” That would be another part of the powerpurch­ase negotiatio­n between the developer and the electric company — as well as additional cost, he said.

Data center developers don’t just chase cheap power. They’re also looking for strong broadband infrastruc­ture and minimal risk, CBRE’s Hassan said. While developers in Connecticu­t could theoretica­lly tap the fiber line along I-95, locations along the coastal corridor present other hazards, he said, such as hurricanes or the possibilit­y of car fires and major accidents on the interstate.

That could force a facility offline; in the internet infrastruc­ture business, that just can’t happen.

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