Virginia Loves Data Centers More Than Chip Makers

Share this article on:


Virginia’s Joint Legislative Audit and Review Commission, in its latest analysis of Virginia’s economic development incentives, reports that efforts to capture and nurture microchip manufacturing with grants and tax breaks led to some early success that failed to hold, and the industry here is in decline. The reason may be Virginia loves data centers more.
The 127-page report issued June 17 (here) touches on a number of programs and is similar to a December report in its faint praise for their success. It does point to the rapid growth of Virginia’s data center industry and ties that to exemptions from sales taxes required on their equipment, a result that generated substantial news coverage.
The reports are written by staff, working with the Weldon Cooper Center for Public Service for economic analysis, but once adopted by the panel itself must be viewed as legislative policy. They reflect long-standing skepticism toward “spending” on these incentives, and if accepted as gospel by the rest of the Assembly the whole effort might be in jeopardy. The verb “spending” is used uniformly and applied to both grants and tax reductions alike.
Manufacturing is a key part of Virginia’s economy. The jobs pay well, factories need complex supply chains that also generate jobs and taxes, and local governments suck property tax dollars out of their manufacturing operations like vampires. It is unfortunate that this report mingled manufacturing issues with the data centers, which are a service industry with low employment and minimal supply chains. The data center information grabbed the headlines and the manufacturing sections have been ignored.
This June report also looks at two tax provisions important to manufacturing across the board, the single sales factor apportionment option and the property tax exemption for pollution control equipment. And it looks in depth at how Virginia’s effort to attract semiconductor manufacturing has sputtered, despite various state incentives. This column focuses on that industry’s incentives.
One useful observation that comes from reading the data center analysis and the information on the microchip industry in sequence. The data center exemption focuses on the capital cost of building the facility and filling it with equipment. The semiconductor industry didn’t get that. Should that become the model for manufacturing incentives across the board? (Translation: The machinery and tools tax and other business property taxes are a problem Virginia needs to address.)
A second useful observation: Virginia tried much harder with the data centers, allowing $420 million in tax avoidance over eight years. The grants and tax breaks combined for the chip producers totaled $36 million for the same period, and the income tax breaks under enjoyed by those who took the single-sales factor option totaled only $70 million. Virginia loves data centers more.
Virginia approved $195 million in incentives for five chip manufacturing facilities but paid out only $93.4 million between 1996 and 2017 (most of it before 2010). That sector’s employment in the state has declined precipitously since 2001, at about twice the rate of decline as the nation as a whole has seen. The international competition is winning overall, but other states are also beating out Virginia for remaining domestic production. Production in Virginia continues at Micron and Qimonda.
This was all as of 2017. The report intentionally ignores the planned expansion of Micron in Prince William County fueled by another $70 million grant approval, since it is too soon to know how that works out. Looking at the past, the JLARC staff (well, actually Weldon Cooper under contract) reported that the help given to Micron had more impact than the grants awarded to the other major Virginia entity, Qimonda.
“The return in revenue from both custom grants is also moderate, with Micron again yielding a higher return. The return in revenue for every $1 spent on the Micron custom grants was 97¢ annually, on average, and the return in revenue for the Qimonda custom grants was 49¢. These returns in revenue are similar to the returns (55¢) for all grants collectively per $1 dollar in total grant spending. (See Economic Incentive Grants 2018, JLARC, 2018.)”
We’ve been here before. That 2018 report cited sparked this from me on Bacon’s Rebellion. The result is all about the assumptions, buried in the appendixes of that December report (linked here). Here is a key paragraph from my report when it came out:
“In analyzing the payback on the grants and tax incentives, Weldon Cooper has added another factor seldom mentioned: It estimated and accounted for “reduction in economic activity because of the tax increase to pay for the sales and use tax exemptions (or grants).” This is the kind of dynamic scoring of opportunity cost that is rarely used by the state. In fact, not everybody on the state payroll is willing to admit that raising or lowering taxes has an inverse impact on employment and gross domestic product.”
In the December 2018 report, Weldon Cooper assumed that some economic decisions were due only 10 percent to the incentives, and 90 percent to other factors. In the case of the data centers, however, that was flipped, and the incentives given 90 percent credit for bring them to Virginia. The assumptions matter.
The money paid to Micron and Qimonda has been in form of post-performance grants, tied to job creation and capital investment. For Weldon Cooper and JLARC to treat that as “spending” is legitimate. It is not clear in this report if the 97 cents of revenue it claims the state and localities have received is the combined benefit from each $1 in grants, or an annual return on that $1. If annual and recurring, that is a fantastic return by anybody’s standards.
The report also looks at two tax exemptions tied to that industry, which combined produced less than $9 million in tax savings over eight years. Teasing out the impact of those versus the grant programs can’t have been easy, but JLARC credits them with creating 43 additional jobs, $7 million in state GDP and $4.3 million in annual personal income ($100,000 per job.)
Here’s an ominous note buried in the report on these provisions, perhaps a sign of things to come. “One factor likely limiting the economic benefits of the sales tax exemptions for semiconductors is that, unlike the data center exemption and many incentive grants, eligibility is not contingent on the companies achieving certain levels of job creation and capital investment.” That is classic planned economy apparatchik thinking: We need to add more mandates.
Everybody interested in the state’s economic development incentives and related tax policy needs to dig into this report and the assumptions behind the scorecard. If this is how a Republican-dominated JLARC views things, wait until the other team has its hands on the reins.

E-Mail this author

This entry was posted in Technology. Bookmark the permalink.