Data Center Site Selection: What Can You Give Me?

A recent article in the Chicago Tribune posed the question, “Can Illinois Lure Data Centers Without Incentives?” While I won’t deign to tell an entire state what they need to do, I will say this, “It won’t hurt.”

Municipalities, and for our purposes we’ll use the term broadly, have historically manipulated their tax codes to entice businesses to decide to call their cozy confines home. By making these offerings, cities and states acknowledged that their economic calculus demonstrated that there was a favorable trade-off between lowering the tax burden of the coveted company and the economic boost the surrounding area would experience due to the influx of other revenue sources, defined in terms of “new jobs”, and the positive impact they would have on area’s tax base overall. So, from a historical standpoint, we can summarize the current environment by substituting “data center” for “new manufacturing plant.”

What differentiates the current “should we or shouldn’t we” tax question from the past is that the demand for new manufacturing plants, for example, is dwarfed by the seemingly unquenchable need for data center capacity. The result of this data center land rush is the democratization of competition where non-traditional contenders for significant corporate investment now find that many of the elements that made them non-competitors in the past, like vast untouched acreage and lack of population density, are now desirable attributes for your friendly neighborhood mega-cloud provider.

Since the number of areas vying for any new data center project, with the exception of Northern Virginia since they have a variety of strategic advantages that no other location can currently compete with, has become so broad (at last count 30 states offered some form data center financial incentives) tax dispensations can be the point of differentiation that tips the scales from Iowa to Idaho.

While Chicago continues to be a significant data center location due to communications density, the rest of the state has typically been found wanting, even though they’ve turned on the “Welcome” sign. Certainly, they have land areas big enough to host even the largest compute and storage colossus, but their inability to offer an economically attractive response when prospective new data center residents ask: “What’s in it for me?” has made them a less attractive destination for the hyperscale community.

Unlike most competing states that offer data center incentives, Illinois’ financial position looms as a substantial factor in their cost/benefit analysis. The state currently has over $14 million in unpaid bills and a pension shortfall estimated to be north of $66 billion – a balance sheet situation that led the Fiscal Times to speculate if they would be the first state to declare for bankruptcy. As much as Illinois may desire more data center business, their financial position may limit their ability to construct tax policies as enticing as other competing alternatives.

Based on the unceasing level of demand for data center capacity, the answer to the Tribune’s question over the long run is most likely, no. In other words, the Second City now finds itself to be the embodiment of the adage, “Damned if you do, damned if you don’t.”