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Texas Hopes to Compete for Data Center Business

Texas hopes to jump back into contention in the data center industry with the passage of House Bill 1223, a set of tax incentives for facilities that invest $200 million or more in the state.

Rows of racks holding servers make up the test lab at Rackspace Hosting Headquarters in San Antonio, Monday, January 7, 2012.

Texas once dominated the data center industry — the housing and storage of major corporate computer systems. But in recent years, other states have chipped away at its foothold. 

“What we did not have was that the other states blew us away on tax incentives,” said state Rep. Harvey Hilderbran, R-Kerrville, an expected candidate for state comptroller.

The state intends to jump back into contention with the passage of House Bill 1223, a set of tax incentives for data centers that invest $200 million or more in a Texas location. The measure takes effect on Sept. 1.

When searching for a new location, prospective data centers consider access to dependable, low-cost power; locations safe from natural and manmade disasters; aggressive economic incentives from cities, counties and states; and proximity to major transportation and employment hubs, according to Anthony Bolner, senior vice president of Stream Data Centers, a Dallas-based data center developer.

That was enough to lure data centers to Texas until about 10 years ago, Hilderbran said, when "we started increasingly losing out to other states that started putting tax incentive packages together.”

The incentives passed in the 83rd legislative session are for things like electricity, cooling systems, emergency generators and computer server hardware — all of which are vital to a data center, which must remain powered, cooled and operational all day, every day. 

The tax exemptions will account for an estimated loss of $14.6 million through the biennium ending Aug. 31, 2015, according to the fiscal note provided by the Texas comptroller’s office.

“Without the tax incentives, [data centers] will not come to Texas,” said Todd Kercheval, a lobbyist for the passage of the incentive package. “I think that by enacting this incentive, it is going to prove to be a very positive economic impact to the state of Texas.”

The bill requires that qualifying facilities have a single occupant, invest at least $200 million and create a minimum of 20 full-time jobs at 120 percent of the county's average weekly wage. “It is not a large number, but the jobs it does generate are really good jobs,” Hilderbran said.

Some fiscal analysts are concerned with the impact of the lost tax revenue. It is estimated that every 15 months a qualifying data center would have been created regardless of the tax incentives, according to the measure's fiscal note.

"We are, in fact, going to be losing the sales tax we collected from one new data center every 15 months," said Dick Lavine, senior fiscal analyst at the liberal Center for Public Policy Priorities. He said the lost revenue could be better used for a number of the state’s other needs.

"For the same amount of money, you can be giving [financial aid] for poor kids to go to college," Lavine said, adding, "They would be productive and a benefit to the economy. It’s not the most efficient use."

It is still unclear when and how many data centers the incentives will bring. Even when they do decide on Texas, the establishment process is a very time-consuming — upwards of 14 months, according to Kercheval.

But Brad Enloe, principal of Capstar Real Estate Advisors, a Dallas-based property manager and supporter of HB 1223, said he thinks there could be several in 2014 alone. “There is a pent-up demand for these large data centers," he said. "As we all know, we are using technology more and more. I think Texas is in a good spot.”

A qualifying data center will receive the tax exemptions for 10 years; if the occupant invests $250 million or more, the exemption lasts 15 years. Once the tax incentives expire, the companies are not likely to move due to the intricate infrastructure of the complexes, Kercheval said.

“At the end of that 10 years, these companies are not going to pick up and move, but they are going to continue to refresh their equipment,” he said. “So the benefits in the outer years to the state of Texas are incredible, absolutely incredible.”

More than 20 states have varying tax incentive programs to lure data centers to their respective states, but even with the new law, Texas does not boast the best of them.

“We improved our tax policy but we didn’t match the other states,” Hilderbran said, “and we didn’t have to. As long as we are competitive with the other top five to 10, along with the other advantages that we have, that will give us our share of business." 

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