Let's Make a (Special) Deal: Legislators Can't Shake the Habit

A few months after the cost of previous deals shock, state looks to hand out more sugar

As 2015 draws to a close, Gov. Rick Snyder and some state lawmakers are excited about yet another sweet-sounding deal that promises the moon in return for special treatment. Switch, a Las Vegas-based technology company, says it will establish in Michigan the largest data center campus in the eastern United States — if the state is willing to provide it with sufficient tax exemptions.

That's an ironic development, considering that 2015 opened with the revelation that state taxpayers were on the hook for $9.38 billion in liabilities from tax exemptions handed out during former Gov. Jennifer Granholm’s second term. The attitude many lawmakers were expressing then about tax exemptions was “never again.”

Pledges like that are often only made during a painful aftermath, and now that their shared headache has subsided a bit, government officials are revealing that they’re not serious about kicking the corporate welfare, tax break habit. Gambling with other people’s money (that is, taxpayer money) is simply too alluring.

Arguments made in favor of the special treatment is that this case differs from other, less successful ones of the past. Yet the manner in which the Switch project is being promoted sure seems to be on par with previous follies.

As for it being hyped as the largest data center campus in the eastern United States, that could be simply due to the size of the building involved. The campus would be located in Steelcase’s Pyramid Building near Grand Rapids, which — though a local landmark — has been somewhat of a real estate white elephant, perhaps partly because of its unusually spacious dimensions.

Supposedly the project would bring with it a $5 billion investment, along with the usual teasers, such as the possibly of 1,000 “well-paid” jobs. There's also the old familiar claim that it would lead to further development in the area.

Assertions of this type always accompany these projects when government favors are being pursued. Such pie-in-the-sky claims have been made for nearly every subsidy, exemption, or other special deal made through the Michigan Economic Development Corporation over the years. And as we now know, via audits performed by the state auditor general, the track record for such projects living up to their glowing predictions has been abysmal.

What we also know is that if the exemptions are offered and the project moves forward, no one in government or the regular news media will follow through to find out whether the project even comes close to accomplishing what its promoters claimed.

There will be news releases highlighting the number of people hired, but no one will bother to track how long these jobs last or whether they are in fact well-paid one. If the promise of other developments in the area fails to materialize, no one will take notice. Only events that cast the project in a favorable light will make the headlines.

Switch announced plans for its SUPERNAP expansion at the start of the year. The initial target cities mentioned were Phoenix and Reno. The project in Grand Rapids is also being referred to as SUPERNAP, and the plan seems to be to make the campus one of a handful the company wants to open across the U.S.

Switch provides security, power and cooling for stored data owned by clients such as Amazon, eBay, the U.S. government and Zappos. The major reason given for the company’s expansion is to have its campuses located far enough apart so that the data would be less vulnerable to disasters, whether man-made or natural.

One of the catch phrases used to describe the project is that it would bring "transformational infrastructure and serve the eastern U.S." But referring to the warehousing of data as providing “transformational infrastructure” seems over the top.

Multiple packages of bills to bring about the project are already in the House and Senate and will be waiting for lawmakers when they return from their Thanksgiving break. The legislation (which is still in the “work in progress” phase) is being described as providing tax exemptions for data centers, possibly implying they wouldn’t necessarily be limited to only the Grand Rapids project.

Are lawmakers really contemplating exemptions for all data centers regardless of size and scope? For that matter, why stop at data centers? Storage is provided for lots of things other than data. How about distribution centers for companies that sell over the Internet?

Oops. Michigan probably missed its chance to attract distribution centers when, earlier this year, it implemented the Internet tax — doing an end run around the 1992 U.S. Supreme Court ruling that said a physical presence was required before a state could compel sellers to collect a sales tax. That was another policy decision for which the alleged benefits might not pan out and won’t likely be measured.

How narrowly the data base exemption legislation is drawn will determine which data centers would be eligible for the tax breaks. Undoubtedly it will create a definition for a data center and establish the specifications such a center must meet to qualify for an exemption. Nobody should be surprised if it turns out that the only data center in Michigan that meets those qualifications is the SUPERNAP project.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.