How a tax break for data centers snowballed into one of WA's biggest corporate giveaways

In 2010, as the country still reeled from the worst economic crisis since the Great Depression, tech companies, real estate developers and rural lobbyists went to the state Capitol in Olympia, Washington, to press for a tax break for data centers.

Turning it down, supporters argued, would mean rejecting high-paying, long-term and environmentally friendly jobs in distressed parts of rural Washington. Owners of data centers — gargantuan facilities filled with computer servers that power the internet — were scouting Washington and other states for new homes.

“In the end,” then-state Sen. Rodney Tom, a Democrat from the Seattle suburbs who advocated for the tax break, told his Senate colleagues, “we get the clean jobs that all the states are competing with, as far as the jobs it takes to run these things long term.”

State lawmakers nearly unanimously passed the special exemption and have kept the benefits flowing to the industry ever since. But the tax break has strayed from its original promises, and the state failed to fully scrutinize whether the sacrifices were worth it, a deep examination of legislative archives, public tax disclosures and utility data by The Seattle Times and ProPublica revealed.

The data center industry’s demand for electricity is growing so much that it could threaten Washington’s efforts to transition to a carbon-free power grid, the news organizations recently reported.

The tax break’s requirement for how many people a company must hire was quickly weakened.

And a modest program for a budding industry in struggling rural areas became one of the biggest corporate tax giveaways in Washington, available even to tech companies in downtown Seattle.

Today, state revenue officials aren’t allowed to say how many high-paying tech jobs Washington actually got. That’s because lawmakers kept the information walled off from the public under the state’s taxpayer confidentiality laws. Other states with generous tax relief for the industry have demanded more transparency and accountability.

The only state audit ever released publicly, seven years ago, found that based on the number of tax break recipients at the time, data centers could eventually meet the jobs requirement by collectively hiring as few as 260 workers. The average annual cost to the state at that time was projected to be $53.3 million between 2015 and 2019.

This tax exemption now eclipses the combined total of what the state gives all of its waning aerospace programs, including Boeing’s, taking away more than $117 million in 2023, according to information companies provided the state Department of Revenue. The cumulative total since 2018 is more than $474 million.

More than 65% of the savings since 2018 have gone to Washington-based Microsoft, a company with reported net earnings of $72.4 billion last year.

The company said in an emailed statement that the data center tax break from which it benefits “aligns with the intentions of lawmakers.”

“Data center investment in rural areas of the state creates jobs, stimulates growth of supporting industries, and contributes to property tax revenue,” the statement said.

Proponents of the tax break, including building trades unions, maintain that the data center industry generated new property tax revenues for rural counties and created enough work for thousands of electricians and builders to boost the entire region’s economy. Washington ranked 10th in the country for the number of data centers in each state as of July, according to data center research firm Baxtel.

But critics question whether the industry needed the tax break to land in Central Washington, given the industry’s thirst for the cheap electricity that the region offers. Others have asked whether data centers produced enough jobs to make the investment worthwhile. State committees charged with overseeing tax programs conducted just the one audit seven years ago, rendering many of those questions unanswerable.

Meanwhile, the industry is expected to grow with the adoption of artificial intelligence, creating more opportunities for the size of the state’s tax exemption to increase.

Former Sen. Phil Rockefeller, D-Bainbridge Island, one of the few lawmakers to vote against the original data center tax break, told The Times and ProPublica that it’s very difficult to end tax breaks in Washington state once they begin. The arguments from lobbyists are too hard for lawmakers to ignore.

“There’s always going to be a professional cadre of lobbyists who will come forward and say, ‘You’re going after us, you’re discriminating against us, or you’re going to damage your relationship with us and we may go somewhere else,’” Rockefeller said.

Job Promises

Early on, Washington leaders listened to the argument from data center companies and their supporters that giant server warehouses could deliver high-tech, high-paying jobs — and that without a tax break, those jobs would never materialize.

It began with then-Gov. Christine Gregoire, who in 2008 proposed to give rural data centers a 50% rebate on Washington’s sales tax when purchasing replacement server equipment. Gregoire recently told The Seattle Times and ProPublica that she was concerned about unemployment in Central Washington.

Yahoo and Microsoft had halted construction on expansions to their Central Washington data centers after the state’s attorney general and revenue officials determined they didn’t qualify for the state’s rural manufacturing tax deferral program. Yahoo told Washington lawmakers that refusing to offer the company a tax break could cause the company to move its data centers to Oregon, which does not have a sales tax.

Microsoft lobbyist DeLee Shoemaker, who just five years earlier was a top aide to then-Washington Gov. Gary Locke, told the Seattle Post-Intelligencer that the state was “no longer competitive” for the data center industry.

Cindi Holmstrom, then the director of the state’s Department of Revenue and a Gregoire appointee, told lawmakers that the governor’s proposed tax relief for data centers would bring “high-level information technology services and research and development jobs throughout Washington state.”

(Two years later, Holmstrom became a lobbyist whose clients included Microsoft.) Holmstrom and Shoemaker did not respond to requests for comment.

While the Great Recession tanked state revenues, slowing the effort to reduce taxes on data center owners, Microsoft in 2009 made good on its implied threat to relocate. It announced it was moving its Azure servers out of state, citing “local tax laws.” The next year, lawmakers’ hesitation evaporated. They passed a rural data center tax break with only six voting against it.

Then-Sen. Linda Evans Parlette, R-Wenatchee, one of the bill’s sponsors, emailed lobbyist Rob Makin, who represented Sabey Corp., a Seattle-area real estate development company that evolved into building and leasing data centers. She asked him what to put in a celebratory press release.

The first among many upsides, Makin responded, was an “immediate stimulus of jobs.”

“Every citizen in Central Washington will benefit from this legislation whether you are a techno geek or not,” he wrote. Makin did not respond to a request for comment. Parlette said in a recent interview that she didn’t think the tax break brought in as many jobs as people expected at the time.

The jobs argument came back routinely over the years as lobbyists returned to Olympia to seek expansions of the tax break. Lawmakers repeatedly acquiesced, even as the Washington Supreme Court held them in contempt — later fining them $100,000 a day — for failing to fund public schools.

House Finance Committee Chair April Berg, D-Mill Creek, who joined the Legislature in 2021 and later sponsored an expansion of the data center tax cut, said the message she heard about the data center industry was clear.

“It was definitely thought that if we did not have this particular exemption, we would not have this industry any longer in our state,” Berg said in an interview with The Times and ProPublica. “So we had to make a conscious decision to say yes to this industry, which included this tax break.”

But it’s unclear how essential the tax break was to landing data centers in Central Washington. In 2011 and 2012, several tech companies expanded or built new data centers in Oregon while Washington’s data center tax cut briefly lapsed.

On the other hand, Microsoft and Yahoo had plenty of reasons other than tax breaks to locate in Central Washington, including the region’s clean, low-cost hydropower. Tech companies have also built data centers in Silicon Valley despite California’s lack of tax incentives to do so.

Greg LeRoy, the executive director of Good Jobs First, a left-leaning think tank that has watchdogged data center tax breaks, said tax breaks are “pocket lint” in the true calculus of siting data centers.

“If you've got cheap hydropower, you’re going to get a lot of data centers,” LeRoy said. “Nobody had to abate anything to get those deals.”

Broader Eligibility, Lower Expectations

After accepting the industry’s case that the tax break would create good jobs in 2010, the Legislature almost immediately began loosening the law’s requirements for job creation.

The original bill required each data center to create at least 35 permanent positions at 150% of the surrounding area’s average personal income.

A second bill, approved just a month after lawmakers passed the first tax break, gave recipients the choice between creating 35 jobs or just three positions per 20,000 square feet of server farm space, whichever was less. While some of the data centers in Grant County were around 500,000 square feet — larger than three typical Costco warehouses — data centers can be much smaller.

The new legislation allowed data centers to count security and maintenance contractors toward the employee total. Another new provision: Data center building owners and companies that rented space from them could each claim a tax break as long as the building as a whole met the hiring requirements, even if only one of them created new jobs. There were no public hearings before it was approved.

Lawmakers passed another expansion in 2012. Then, in 2015, lawmakers further broadened the tax break, again without public hearings, while rejecting a bill to increase data centers’ employment requirements.

As lawmakers dialed back their jobs expectations, they formally declared a different measure of success for the corporate tax cut. Now, the Legislature would continue the incentive as long as the data center industry added new revenue — any new revenue — to rural property tax rolls.

The property tax was “almost a meaningless standard” to apply to the tax break, said Matt Gardner, a senior fellow at the Institute on Taxation and Economic Policy, a think tank that has advocated for higher corporate tax rates. Job creation is a better measure, he said.

“Because virtually anything you create, it’s going to add value to the property tax base,” Gardner said. “You build an outhouse, that’s got some value.”

The tax break continued to drift from its original sales pitch. In 2022, lawmakers moved beyond their original claim that the tax cut was needed to provide rural jobs. They added new incentives for data centers in the Seattle metro area — which already had many data centers — and extended the existing tax break to 2048. New projects were required to pay employees only 125% of the area average income, lower than the previous 150%.

Despite the tax break’s limited job creation requirements, trade unions supported the 2022 bill because it included a major win for their members — requiring data center construction contractors to have labor agreements covering issues such as wages and working conditions.

“We were adamant moving forward, corporate tax breaks like that would be attached to something for the citizens of the state,” said Mark Riker, executive secretary of the Washington State Building and Construction Trades Council.

More than 500 electricians are employed by data centers in the central and northeastern parts of the state, and the industry in the same region supports 350 to 400 apprentices in training as of May, according to the International Brotherhood of Electrical Workers Local 191, which testified for extending the tax break.

John Traynor, legislative director at the Washington State Labor Council, said he spent months working as an electrician at Microsoft’s data center campus in Quincy.

“This is exactly the kind of thing we should be doing,” Traynor said of the tax break. “These jobs wouldn’t exist and there wouldn’t be those training opportunities. They’d be done somewhere else with worse environmental standards and worse labor standards.”

Many conservatives opposed the 2022 law because of the labor requirement. But with labor and business on board with the bill in the Democratic-controlled Legislature, all but one Democrat voted yes and it easily passed.

Reuven Carlyle, a former state senator who was critical of the tax break’s gradual expansion but voted for the 2022 legislation, said in an interview he chose to not “throw an elbow” to his fellow Democrats while he was pushing a climate-related transportation package. He said the data centers tax break in its current form would never have passed back in 2010.

“These lobbyists were very strategic, very methodical, very organized,” Carlyle said. “All of a sudden, bills got weaker and weaker in terms of accountability.”

Nonsensical Job Numbers

While lawmakers created and then loosened staffing requirements for data center tax break recipients, they did nothing to ensure the public could see how many jobs were created at individual facilities.

In fact, state law expressly barred Washington’s Department of Revenue from disclosing any information used to determine tax break eligibility — not only for the data centers, but for some other industries receiving tax cuts, too. As a result, the agency’s public disclosures on the number of data center jobs can seem nonsensical.

The department’s annual tax disclosure report for 2022, for example, attributed 108,320 jobs to the 22 companies that received the data center tax incentive.

The figure is striking because aside from construction and electrician jobs, data centers employ relatively few people on a permanent basis. Overseeing the servers doesn’t take much labor compared with other large industrial outfits, and the facilities are easy to distinguish from other hulking manufacturing buildings because of their small or mostly empty parking lots.

The explanation behind the Revenue Department’s seemingly enormous jobs number comes two pages later in its report: The agency counts the entire Washington workforces of companies getting tax breaks. In 2022, the Revenue Department counted in its data center job tally all 70,379 Washington employees of Microsoft. Every programmer, office assistant and executive in the company’s sprawling Redmond campus was included.

To get more precise statistics, The Seattle Times and ProPublica went to the company itself.

Microsoft told the news organizations that as of July, it employed 417 people in its Washington data centers. In 2023, Microsoft avoided paying nearly $68.4 million in taxes for those data centers, according to preliminary data from the Department of Revenue. Assuming Microsoft’s savings remained about the same, that would amount to about $164,000 per job from just one year of the tax break.

In some cases, data center companies reported zero statewide employees but received the tax break anyway, according to the limited information available on the Revenue Department’s website.

A subsidiary of T-Mobile has avoided paying $5.8 million under the tax break program since 2017 but showed zero employees statewide in the revenue department’s public disclosures, which are drawn from reports filed by companies.

A T-Mobile spokesperson told The Seattle Times and ProPublica that the company was confident it was in compliance with state law. While the disclosures report employees of “one legal entity within our organization,” the company said, T-Mobile does have employees and contractors working in its Washington data center. The spokesperson did not specify how many.

The Revenue Department said it has reviewed hiring by 26 tax break recipients but declined to name them or say whether any fell short.

Some other states with data center tax incentives do release site-specific job information. Illinois, which gave away more than $653.5 million to data centers in 2023, reports annually on the number of jobs each data center has created. Nevada publishes the same information as Illinois every two years.

But Washington lawmakers twice — in 2009 and 2017 — rejected proposals to do something similar.

State Sen. Karen Keiser, a longtime member of the state Senate Ways and Means Committee, said she didn’t know that the Revenue Department does not share site-specific employment information.

“That’s ridiculous,” said Keiser, D-Des Moines.

After an interview with The Seattle Times and ProPublica, Keiser emailed the Revenue Department to ask for site-specific job numbers and was denied.

The tax break law does specify a select group of elected leaders who can view the detailed numbers, under strict confidentiality: the governor (or a member of the governor’s office), and the chairpersons of the House Finance Committee and Senate Ways and Means Committee.

The governor’s office did not have a record of reaching out to revenue officials about this. Among the committee chairs who have served since 2017, three said they hadn’t checked with the Revenue Department for the jobs information, two didn’t respond to questions and one did not remember.

Postponed Auditing

Even the state watchdogs responsible for auditing tax breaks have not kept close tabs on the rapidly growing tax cut.

Lawmakers have ordered five-year reviews of another major tax break recipient: the aerospace industry. But with data centers, the Legislature opted to leave scheduling up to its Joint Legislative Audit and Review Committee and the Citizen Commission for Performance Measurement of Tax Preferences.

Those committees published their first and only attempt at analyzing the data centers tax break in 2017.

They found that the data centers, with their enormous square footage, increased the property tax revenue in Grant and Douglas counties by $17.7 million, even as the counties lost $12.1 million in exempted local sales taxes. Whether or not taxpayers came out ahead depended on how badly the tax exemption was needed for companies to locate in these counties, the auditors said.

Since then, data centers have grown to account for more than 25% of the tax base in Grant County. The assessed value has helped the farming community of Quincy, at the heart of the state’s data center boom, to build a new $80 million high school, city hall, library and police station. It is in the midst of a $55 million project for a new hospital.

But when it came to data center jobs, the main justification for the original tax break, the legislative auditor, who oversees the research of the legislative audit committee’s staff, said in 2017 it was “too early to tell” whether recipients would hit the minimum job number required of them — which was an overall total of 260 positions at the time. Data center companies had a six-year deadline to fulfill hiring requirements, and the earliest tax break recipients would just be hitting the deadline at the time of the study.

As of the date of the audit, its authors estimated the state was spending about $205,000 per job through forgone tax revenue.

The state has not conducted a full review in the seven years since then. In 2022, the Washington Technology Industry Association, a tech lobbying group, estimated that data centers had created 760 full-time jobs statewide over the previous four years. But Grant County remained on the state’s “distressed areas” list in 2023, with an unemployment rate of 5.9%, compared with 4.5% statewide.

The 2017 review came with a warning: The Legislature, the citizens commission wrote, “should periodically evaluate” whether data center benefits “really exceed the cost of the tax incentives” over the long term.

Grant Forsyth, the chief economist for private utility Avista and chair of the citizen commission that wrote the admonition, said the audit in 2017 had found the industry in general sustains few full-time, permanent jobs after they’re built.

“It was this notion that if we were going to continue this tax break, we would have to be with the understanding that it wasn’t necessarily going to be a big job creator,” Forsyth said in an interview.

Despite the 2017 warning, the legislative audit committee’s staff and the citizen commission canceled a review last year of the rural data centers tax break and recently said an audit might not take place until 2034. The urban program will be evaluated in 2026.

Asked about the decision to postpone the review, Washington state Legislative Auditor Eric Thomas said the Legislature’s expansion of the tax break in 2022 meant new data needed to be collected. He said his team’s size limits what it can take on each year.

“We don’t have the capacity to review every [tax] preference,” Thomas said. “I mean, just, we don’t.”

Virginia, the largest data center market in the U.S., has taken a different approach. The state resolved last year to conduct an in-depth, cost-benefit analysis of its data center industry and tax break. The decision followed a 2019 audit that, despite concluding it was reasonable for the state to continue the tax break, found only “moderate” economic benefit.

Washington state Sen. Bob Hasegawa, D-Tukwila, a longtime skeptic of the state’s corporate tax breaks, said without a specific disclosure required by state law, such tax preferences lie under a “veil of secrecy.”

Hasegawa, who proposed limiting the original version of the tax cut but voted in favor of its latest expansion, has tried to add transparency and clawback measures for various state tax breaks, with little success. The state passed so many new tax incentives — about 176 since 2013 — that it’s difficult to make sure they all have adequate oversight standards, he said.

“If we’re going to allow these companies or corporations to take advantage of these tax incentives, you’re supposed to incentivize something,” Hasegawa said. “We need to know it actually accomplished its goal and created jobs and elevated folks’ standard of living in our area.”