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Brier Dudley offers a critical look at technology and business issues affecting the Northwest.

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February 12, 2008 2:38 PM

A first test of Microsoft+Yahoo efficiencies: Handouts from Washington state

Posted by Brier Dudley

Chris McGann has a nice story today about Gov. Gregoire and other politicians showing just how concerned they are about the economic downturn -- so concerned they're trying to slip in $1 billion tax break that would mostly benefit Microsoft.

They're proposing a tax break for the datacenters that Microsoft and Yahoo are operating and building in Eastern Washington. Yahoo is threatening to halt construction of the next phase of its project if the tax break doesn't come through.

It's clever of these companies to work a deal like this during a short session when the Olympia press corps is distracted by elections.

But what's appalling is that Gregoire and others are taking the companies' threats seriously, and buying the hooey about datacenters creating a lot of jobs.

Have they been reading the newspaper lately?

Yahoo may very well stop expanding its infrastructure in Washington state. Not because of taxation, but because it may be redundant.

Steve Ballmer said so in the Jan. 31 letter he sent to Yahoo's board, explaining why Microsoft is buying the company:

"Eliminating redundant infrastructure and duplicative operating costs will improve the financial performance of the combined entity,'' he said.

That's just one threat the companies are using to avoid the taxes that other companies around here pay. A tax break would reduce their potential contribution to education, roads and other critical services the state provides.

Also hollow is the promise of jobs. Building datacenters does create a short burst of not necessarily local construction jobs; Microsoft hired Turner Construction, a New York company with offices in Seattle, to build its Quincy datacenter that opened in April.

Ongoing employment is trivial, with each datacenter employing about the same number of people as a McDonald's.

In Eastern Washington, locals aren't counting on an influx of techies, so why are the west-side politicians talking up the jobs? A Quincy business leader told the Washington Post in 2006 they don't want them. From the story:

"Here in Quincy, local business leaders are relieved that the Yahoo! and Microsoft data centers will create relatively few jobs and that the children of newcomers will not swamp local schools.

'For us, having minimal new jobs is a relief, at least for the short term," said Lisa Karstetter, executive director of the Quincy Valley Chamber of Commerce. "We can't grow that fast. Everything is already full around here.'"

Microsoft currently lists zero jobs in Quincy, by the way, but plenty of datacenter operations and engineering jobs in Redmond. Maybe they'll telecommute?

In their lobbying push, the companies told Gregoire they'll "probably" grow their main businesses in Washington if the server farms stay in Washington. Why didn't the governor laugh in their face? When was the last time she visited Redmond? You can't even see the trees because of all the construction cranes on Microsoft's campus.

That gets to the weakest argument of all for the tax breaks -- the threat that Microsoft and Yahoo will pull these operations out of Washington if they don't get the tax break. I can't believe Gregoire's legislative director, Marty Brown, used that old chestnut in the P-I:

"They are going to do this someplace," he said. "It's sort of the industrial incentives similar to what folks did in the '70s to get industries to their state. It's what legislatures do."

If these folks in Olympia were negotiating on behalf of Yahoo, Jerry Yang would already be stocking soda coolers in Redmond.

Why is Gregoire's office undervaluing Washington state that way? The reason Microsoft, Yahoo and others are building datacenters along the Columbia is because of its unique and vast supply of cheap hydrolectricity. The sales tax isn't enough to erode the value of that rare and priceless asset.

Even so, the state previously subsidized the datacenters with economic development support for the public industrial parks where they're located.

Microsoft is frantically racing to build Internet infrastructure as fast as it can, to catch up to Google and a long list of competitors. The state could double the sales tax on datacenters and Microsoft wouldn't stop building.

The Sonics learned the hard way that after choking it up for Boeing and the owners of the Mariners and the Seahawks, Washingtonians are tired of rich businessmen twisting their arms. Microsoft could burn through a lot of its local goodwill chasing this pocket change.

But the big question is whether the state will ever have leaders who stand up to these bluffing games.

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