Lawmakers push tax breaks for data centers, critics worry about school funds

A number of bipartisan bills are making their way around the House and Senate in efforts to make Michigan more competitive in the data center market, but opponents are concerned these bills will have a negative impact on schools and other businesses.

State Reps. Bronna Kahle (R-Adrian) and Rebekah Warren (D-Ann Arbor) introduced two bills to the Committee on Commerce and Tourism Thursday that would exempt enterprise data centers from the Use Tax Act and the General Sales Tax Act until 2055. 

The committee did not vote on the bills on Thursday. 

House Bills 5127 and 5128 would exempt an enterprise data center from sales and use taxes by including them in the existing exemption for equipment that is sold to, or used by, a qualifying data center.

As described by the bill, an enterprise data center is a data storage and processing facility composed of one or more buildings. The company would need to invest $250 million in Michigan and create at least 30 jobs with wage rates exceeding 120% of the county average wage to qualify for the tax breaks.

State Rep. John Reilly (R-Oakland) said he believes the definition in the bill is too broad and would “fit most office environments.”

“It appears to me you are choosing special groups over others,” Reilly said. “This is not conducive to competition, which is what I think we should be shooting for.”

Another bill that was passed in the Senate with a 27-11 vote last month would exempt a data center from local property taxes along with state “renaissance zone” subsidies and tax breaks from local property taxes. 

Companies in renaissance zones have been exempt from the Michigan business tax, state education tax, personal and real taxes and local income taxes since the program began in 2000.

Switch previously received tax breaks

Senate Bill 455 is designed to benefit Switch, a Nevada-based giant data center company that moved into the former Steelcase Pyramid building in Grand Rapids in 2015.

The company’s tax cut from the proposed bill is valued at $373,000 and is expected to increase over time. 

https://www.michiganadvance.com/2019/09/11/ananich-end-big-business-tax-breaks-to-fund-roads-schools/

If this bill passes, it wouldn’t be the first time that Switch was able to change state legislation to lower their tax burden. 

In order to get Switch to locate in Michigan in 2015, former Gov. Rick Snyder signed three bills into law that exempted the company from sales and use taxes on operation equipment like computers, servers and cabling through 2035.

Steve DelBianco, CEO of NetChoice, a Virginia-based trade association of online and tech businesses, testified Thursday at the committee meeting on behalf of the data center market. He says that large data centers won’t even consider opening up shop in Michigan until there is data center-friendly legislation.

“We encourage Michigan, in this respect, to accommodate this view toward data centers that will either be here or not be here. And that hinges on whether or not the state recognizes the production equipment of a data center is production equipment that should qualify for sales tax exemptions,” DelBianco testified to the committee. “Over the last five years, not a single large enterprise data center is located in a state that has imposed its full sales tax on the data center servers.”

There are currently 23 states that do not have tax exemption legislation for data centers, according to data from H5 Data Centers, a Denver-based data center operator. Ohio and Indiana both offer tax exemptions to data centers that invest a certain amount into the state. 

Opponents of the bills say large corporate tax breaks negatively impact the School Aid Fund and put more fiscal stress on underfunded schools.

School revenue worries

Ron Koehler, Kent Intermediate School District assistant superintendent, says the Switch tax cuts in particular will hurt the local schools’ revenues.  

“Caledonia Public Schools is expected to lose significant property tax revenue,” Koehler said. “When a major taxpayer is exempted from the taxes that that organization used to pay, or would have paid, it affects the tax on local businesses or schools that don’t have those benefits.”

Koehler says the impact on Kent ISD, which governs 20 districts in the surrounding Grand Rapids area, would not have a large impact on all the districts, but “it’s the principle of the matter.”

“Michigan’s schools are suffering largely because of a lack of investment. This type of tax exemption for major corporations leads to deteriorating infrastructure and our ability to fully meet the needs of our students,” he said. “We have report after report that suggests we need more revenue, and yet we have corporations on a regular basis that are exempt from taxes, not putting in their fair share, and then complaining about the schools’ outputs.”

https://www.michiganadvance.com/2019/01/24/msu-study-michigan-school-funding-lower-now-than-25-years-ago/

Warren and Kahle say the bills put forth in the committee on Thursday should not impact the School Aid Fund. 

“It is absolutely our intention, both of ours, to hold the School Aid Fund harmless with the largest language we can so there will be no hit to our local schools,” Warren said. “We have been working with the school groups on that. And you have both mine and Rep. Kahle’s commitment that we will continue to get that language right before we ask you to vote on anything.”

The nonpartisan fiscal analysis states about 73% of sales tax revenue is designated to the School Aid Fund, and an additional 10% is dedicated to constitutional revenue sharing for cities, villages and townships. Similarly, one-third of use tax revenue is designated to the School Aid Fund. The analysis anticipates that most of the revenue loss for schools and municipalities would be from sales tax exemptions.

State Rep. Darrin Camilleri (D-Brownstown Twp.) is skeptical these bills would have as little impact on the School Aid Fund as Kahle and Warren presented. 

“Over the last six years, we have seen a $276 million reduction to the School Aid Fund with various exemptions from approximately 43 different bills, many of which had the intention of holding harmless the School Aid Fund, but have not,” Camilleri said during the committee meeting. 

Warren says the language that will be added to these proposed bills will have “teeth, not just tough language.”

Camilleri believes that the state doesn’t have to give away tax incentives to be attractive to large corporations. 

“The main reason these businesses come to our state is not because of the taxes. They’ll take it, but only because our politicians are too willing to give it away,” he said.

Only weeks after the state’s drawn out budget dispute, Camilleri believes that we need to be making sure that we are raising the state’s budget, not cutting tax breaks for businesses. 

“Our General Fund budget has not changed in 20 years, so every time these businesses come forward and say, ‘Our investment is going to bring in other investments into the state.’ Well, we haven’t seen it,” he says. “It’s been stagnant for 20 years. I’m sick and tired of being promised and sold on one thing and then never seeing it.”