As bustling metropolises have grown increasingly skeptical of big tech companies demanding tax breaks, Oregon’s rural communities keep doling them out.
The Hermiston City Council and Umatilla County commissioners voted unanimously this month to grant Amazon broad property tax breaks for massive data centers planned in Eastern Oregon.
It’s the latest in a string of similar agreements with Amazon that shave nearly $50 million annually off the company’s Oregon tax bills. Facebook, Apple and Google save tens of millions of dollars more each year thanks to similar agreements for data centers in Prineville and The Dalles.
Amazon didn’t respond for a request for comment on its plans for Hermiston. Its total savings in the new deal will depend on how much the company spends on its data centers, but the assistant city manager in Hermiston overseeing the new tax deal estimates it will run in the “hundreds of millions” of dollars over the next 15 years.
In exchange, Amazon need pay only $40 million in compensatory payments in that timespan and create just 10 jobs.
Oregon law gives small communities the sole responsibility to grant such local property tax breaks, even for mammoth projects like this one. The state has no authority to reject Amazon’s incentives, no matter how large, so long as the company complies with the technical requirements of Oregon’s “enterprise zone” program for tax exemptions.
That autonomy may not be a blessing. Since Oregon sets no limits on how big the tax breaks can be and exercises no oversight over how communities negotiate them, these cash-strapped small towns end up competing with one another to offer the biggest tax savings to the companies that arguably need it the least.
Hermiston, population 17,400, is a largely agricultural community that sits south of the Columbia River. Officials there and in Umatilla County say they can’t afford to risk losing whatever Amazon offers.
Amazon’s $40 million will be divided up by councilors and commissioners in Hermiston and the county seat in Pendleton. They need the money, they say, to balance the budgets, pave the roads and hire sheriff’s deputies.
“Maybe if I was in Seattle or New York I could look at it differently but I’m not,” said George Murdock, chairman of the Umatilla County Commission. “We’re kind of out in the sagebrush and we have to make decisions in a different way.”
A needed boost
Amazon reported $233 billion in revenue last year. When it comes to taxes, though, the company counts every penny and has repeatedly demonstrated it will play hardball.
The online retailer walked away from plans for a second “headquarters” in New York this year after residents balked at $3 billion in incentives Amazon had negotiated. Seattle dropped plans for a “head tax” on large employers when Amazon vociferously objected; despite winning the fight, Amazon began shifting new operations across Lake Washington to Bellevue.
Seattle and New York are thriving cities that can take the economic hit. Lots of other businesses want to move in. Oregon’s rural communities maintain their calculus is different.
Six years ago, Murdock said, Umatilla County was cutting staff and programs. Since Amazon began opening data centers in the county, he said the revenue from the tax agreements — even after millions of dollars in exemptions — has helped balance the budget and enable the county to expand its number of deputies from seven to 17.
“We aren’t Portland. That’s a pretty big deal out here,” Murdock said. “It hasn’t been our sense that the state of Oregon has been willing to sustain us without this kind of thing.”
The benefits are real. Tax watchdogs don’t dispute that but maintain that Oregon’s system for awarding incentives has the effect of pitting communities against one another to the benefit of the big companies seeking tax breaks.
“This is a situation where the tax policy isn’t adjusted for the business basics,” said Greg LeRoy, executive director of Good Jobs First, a Washington, D.C., think tank that critiques state tax policy and corporate tax breaks. He says Oregon’s tax system is flawed because it promotes competition among communities and fails to capitalize on the state’s inherent advantages.
“The state’s not letting the local governments play a smart hand,” LeRoy said, “even though you’ve got great cards.”
Something for nothing
Oregon’s enterprise zone program of property tax breaks dates to 1985, a time when large capital projects usually meant large factories with lots of workers.
Data centers were inconceivable back then. They’re big, dark, chilly warehouses, almost completely devoid of people.
Instead, they’re packed with rows and rows of computers, whirring and blinking as they process hordes of digital information — everything from Netflix videos to corporate secrets.
Shoppers know Amazon for its everything store and rapid delivery. But its data hosting business is at least as important to the company. Amazon leases its server farms out to every kind of company, from major enterprise to tiny startup, storing their data and promising it will be kept secure yet readily available — anytime, anywhere.
A single data center can cost hundreds of millions of dollars because of the high-end computers inside. A complex of them, like the one Amazon plans in Hermiston, can run in the billions.
All those computers are subject to sales tax in most states — or, in Oregon’s case, property taxes. So tech companies demand that communities exempt their computers from local taxes.
Communities comply because the tech companies bring a big brand name, excitement and tax dollars — albeit greatly reduced by those incentives.
Listen to how local officials described Amazon’s deal:
“This is a once-in-a-lifetime opportunity before you this evening,” Hermiston assistant city manager Mark Morgan told the city council this month.
John Kirwan, the Hermiston city councilman who chaired that meeting, told the council that Amazon would replace recently lost railroad jobs with “technological jobs that are going to be the wave of the future.”
“Some people would say what are we giving away? Well, the answer to that is we’re giving away zero,” Kirwan declared. “Because if we don’t do this Amazon will go someplace else. And some other city will embrace this substantial amount of no less than $40 million and they’ll take it and run with it and they’ll have the opportunities Hermiston could have tonight.”
In truth, data centers rarely bring an infusion of high-tech work. Nearly half the people working at Facebook’s Prineville data center, for example, are security guards.
And geographically, Amazon’s alternatives are limited.
Data centers can’t go just anywhere. Even electrons take time to travel from place to place.
Tech companies must distribute them regionally so it doesn’t take too long for a corporate analyst to pull up a database stored in an off-site server farm, and so people at home can stream their favorite songs and movies without a lag.
Moreover, the Northwest enjoys some of the nation’s lowest power rates thanks to the hydroelectric projects on the Columbia River. And Hermiston is a special bargain: The local utility, Umatilla Electric, sits right on the river and charges 17% below the regional average.
That’s a big deal when you’re powering a billion dollars’ worth of computers.
The Columbia’s clean hydropower is also attractive to Amazon and other tech companies that have come under fire for their data centers’ carbon footprints. Amazon, like other tech companies, says it wants to shift its power load to renewable energy.
When crafting Amazon’s latest tax breaks, though, local officials say they don’t believe they had any leverage at all.
“Those are competitive projects. Amazon has the option to locate pretty much wherever they want so long as it has power and water and grid,” said Paul Chalmers, director of assessment and tax for Umatilla County.
Rather than trying to wring a better deal out of Amazon, Chalmers said “we kind of plagiarized” prior tax deals the company had already secured in neighboring Morrow County.
Indeed, a number of local officials said they worried that if they asked too much of Amazon it would go to another small community nearby. Pressed, they acknowledged they didn’t know what other communities Amazon might have considered.
“Many regions are simply so desperate for any type of new jobs that the leadership won’t even try to bargain, so I don’t know that we really know what the firm’s calculus looks like,” said University of Oregon economics professor Tim Duy. “And of course they will say that they won’t come (or) expand without the tax breaks, but what else are they going to say?”
It’s certainly true that regions are better off any time they receive new economic benefits, Duy said. “We just don’t know if they could have been more better off.”
Leveling the field
There’s a massive power imbalance in negotiating these tax deals, according to LeRoy, the tax watchdog from Good Jobs First. The cities and counties don’t know Amazon’s decision-making criteria, cannot see whether the company has plausible alternatives and have no way of knowing what a company will do if the tax breaks don’t reach a certain threshold.
Amazon comes armed with corporate lawyers and real estate professionals who have negotiated many such deals. On the other side of the table are small-town managers and largely volunteer city councilors who have never seen a project like this one.
“Talk about asymmetrical warfare,” LeRoy said.
Oregon would be better served if the state put a limit on the total value of tax breaks, he said. That would set a minimum threshold and help overcome the race to the bottom.
When communities win a compensatory payment in exchange for a larger tax break, LeRoy suggests Oregon should require they distribute that money among neighboring counties and cities. That would help them recognize the benefits from new private investment are regional, reducing the incentive for nearby communities to compete with one another.
Corporate tax watchdogs have pitched a series of reforms to state lawmakers in recent years but no major changes have taken hold. Rather than tighten the rules around business tax breaks, Oregon has generally loosened them.
Oregon used to limit the number of enterprise zones — the agreements that exempt businesses from local property taxes — to just 30 statewide. But lawmakers tossed the limit and since 2015 there are no limits whatsoever, and roughly 70 enterprise zones in total.
Across Oregon, companies receive more than $120 million in enterprise zone tax breaks annually, according to the most recent state data.
Hermiston City Councilman John Kirwan agrees that the program is probably due for modernization. But given the rules in place in 2019, he said, Hermiston and Umatilla County didn’t have a better alternative than to match the incentives Amazon won in neighboring communities.
“If the state of Oregon created a better program, we absolutely would use it,” he said. “If this program is what we have, that’s what we use.”