City councilors in The Dalles are due to sign off Monday night on a new package of tax breaks for Google, which is considering building two new data centers along the Columbia River.
The new deal will be far more lucrative for the city and Wasco County than three prior agreements between the tech giant and the local governments. It obliges Google to make a $3 million, up-front payment for each new data center and then pay half or more of what it would otherwise owe in annual property taxes.
While that would still save Google tens or hundreds of millions of dollars, it would provide local governments more than double what they received under three prior agreements: over $3 million annually on a new $600 million data center.
For The Dalles and Wasco County, that could represent an enormous boost to the $43 million in property tax revenue the county collects each year and distributes to local government agencies. Two new data centers could represent a 15% increase, or more.
That windfall could help address a persistent undercurrent of suspicion in The Dalles about Google’s prior tax breaks.
But the company is facing fresh skepticism because it wants a great deal more water to cool the new data centers – Google won’t say how much more – and is pursuing an agreement with The Dalles to expand the city’s water treatment and storage capacity. The city council has delayed a vote on the water deal until next month.
Moreover, no one knows yet what Google would really pay for the new data centers. That’s because it hasn’t said if or when it might build them, or how much they might generate in taxes.
It’s also unclear how property tax assessors will value the projects.
Google and the Oregon Department of Revenue are currently negotiating over how to assess the company’s first data center, which opened in 2007. That facility’s original, 15-year tax deal expires next year, and it will come onto the tax rolls for the first time.
Decisions about how to assess that original data center, and how Google operates it in the future, will have big implications in The Dalles and beyond.
The old data center could add another $7 million annually to the property tax revenue collected by Wasco County once it becomes taxable, and could set a precedent in small cities from Prineville to Boardman, which have similar deals expiring with tech companies Facebook, Apple and Google over subsequent years.
It’s also possible, though, that Google may challenge Oregon’s assessment methodology. Or Google might make changes in its operations to shield its most valuable assets from local taxes.
So for now, Wasco County is making no commitments on how it might spend the windfall – if it arrives.
“I think we all feel the same. We don’t really know what to expect and want to be very cautious,” said Jill Amery, Wasco County assessor.
CHEAP POWER, BIG TAX BREAKS
These tax questions sound arcane, but they have enormous implications for Oregon’s multibillion-dollar data center industry.
Since Google arrived in 2007 to build its first corporate data center in The Dalles, other tech companies have jumped in with their own
, massive projects.
Inside huge, windowless buildings across central and eastern Oregon, stacks of computers arrayed in rows host billions of emails, videos, social media posts and streaming music.
Facebook is building out its 10th and 11th data centers in Prineville, a campus collectively valued at $2 billion. Apple has its own data centers down the road in Prineville, and Amazon has a small constellation of data centers in Morrow and Umatilla County.
They’re all here because of the Northwest’s cheap electricity and, to a much greater degree, because Oregon offers data centers some of the nation’s most generous tax breaks.
In Wasco County alone, Google’s prior deals have saved the company more than $240 million over the past 15 years, including $34 million last year.
Google’s new tax deal
Duration: 15-year tax exemption for each new data center
Savings: Half off the property taxes associated with the first new data center, and 40% off a second. However, Google would also pay $3 million, up-front, when it begins construction of each new project. On a $600 million data center, The Dalles expects Google would by $3.3 million annually.
By comparison: Google’s first three deals had up-front payments of $280,000, $1.2 million and $1.7 million, respectively. It also paid $800,000 annually afterward in the first two deals, and at least $1 million annually in the third deal.
Additionally: Google would transfer 35 acres of property to Wasco County and give The Dalles and the county an option to buy the new data centers’ land from the company if it ceases operations.
Still coming: A separate deal, scheduled for a vote next month, would commit Google to pay $28.5 million to expand The Dalles’ water supply to meet the company’s future water needs.
Data centers aren’t big employers – Google has just 200 workers in The Dalles – but in small towns, even a modest number of jobs can make a splash. And franchise fees generated by the computers’ electricity use, coupled with payments that partially offset the tax breaks, can have a meaningful impact on city budgets.
There’s no question, though, that in dollar terms Silicon Valley has been the big winner from these tax deals. Collectively, Oregon’s data centers’ tax breaks save some of the world’s wealthiest companies more than $120 million annually.
Today, there’s some indication that local governments may have leverage to extract more from Oregon’s data centers.
Google’s new tax deal is different from three prior agreements. Each of those earlier deals were reached under Oregon’s enterprise zone program, which exempts data centers from all the property taxes other businesses pay in exchange for comparatively small, offsetting payments.
Google’s latest agreement, under Oregon’s Strategic Investment Program, obliges the company to pay half of its regular property taxes for the first data center and 60% for a second. That could generate a tax bill triple the size of what the company paid under its latest agreement, in 2015.
It’s not clear why Google agreed to pay more this time. Neither the company nor city and county negotiators will discuss how they reached their agreement.
But last month, Mayor Richard Mays told The Oregonian/OregonLive that Google wants to improve its public image.
“They don’t mind doing that because of the public relations part of it,” Mays said. “One of the criticisms of the first deals was that Google wasn’t paying their ‘fair share’ of property taxes.”
Negotiators, though, didn’t extract any assurances from Google on how tax assessors could value its property.
Oregon counties levy property taxes on businesses’ land, building and equipment. When it comes to data centers, it’s the computers and the systems that operate them that hold most of the value. The machines inside each data center are worth tens or hundreds of millions of dollars.
Assessing highly technical equipment can be a difficult and contentious process. So Oregon counties have ceded the task of assigning values to the equipment inside large data centers to the state Department of Revenue.
To this point, annual assessment seems to have been pretty straightforward. But it hasn’t really mattered, because the data centers have been exempt from local property taxes.
That changes next year, when Google’s original agreement expires on its first data center in The Dalles. The Department of Revenue says it has been working with Google since last year to get an accurate inventory of the company’s assets and check appraised values against the market.
The department says it is inspecting the site physically this year and plans to have its review done by year’s end.
Even if Google and the state come to agreement on how to value the company’s property, though, the company might be able to avoid property taxes by using older computers with less value in the 15-year-old data center that is coming onto the tax rolls.
Or it might shut down the older data center, reasoning that it doesn’t make financial sense to pay full property taxes on a 15-year-old facility when it could shift operations to newer, more advanced buildings that are still covered by tax exemptions.
Wasco County administrator Tyler Stone said negotiators working on Google’s new Strategic Investment Program deal did not consider seeking any assurances from the company about the older data center, its operations or how it would be valued.
“We’re just strictly negotiating the SIP agreement,” he said. Stone declined to discuss anything about negotiators’ objectives, other than that “Our goal is to get the best deal we can for the community.”
The Dalles and Wasco County opted not to hire outside attorneys to help negotiate the deal. Mayor Mays told The Oregonian/OregonLive last month that he interviewed a Portland law firm but concluded city officials could do just as well.
That decision has invited second-guessing from some residents, who say they are concerned Google’s legal team has more resources and expertise in such deals.
“Not to say that we’re hick-seeds,” Dalles resident Bill Lennox said at an online city council meeting last month. But he said the city risks being overmatched in its talks, simply because Google’s lawyers negotiate such deals regularly.
“The Dalles, with all respect, maybe needs to seek out appropriate counsel when dealing with an entity such as Google,” Lennox said.
— Mike Rogoway | email@example.com | Twitter: @rogoway | 503-294-7699
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