Yahoo’s sky-high subsidies

Everyone in these parts has heard of the Buffalo Billion. Overlooked is another government subsidy program that could be called the Lockport Half-Billion.

By any standard, the incentives granted Yahoo to build a data and call center in Lockport are generous.

Consider that the Yahoo subsidies:

  • Will cost up to $478 million to build a single facility that employs 200 people. The Buffalo Billion, by comparison, will finance the construction of three major facilities projected to create some 3,750 jobs and underwrite several dozen smaller projects.
  • Work out to $2.4 million per job – an “astronomical” figure in the words of one local economic development official. That compares with around $39,000 per job for a GEICO call center in Amherst that was the recipient of about $110 million in subsidies nearly a decade ago, which was considered a generous deal at the time.
  • Have not encouraged other technology firms to locate in and around Lockport, as officials had projected when Yahoo’s data center opened in 2010. What’s more, fewer than half of Yahoo employees hired during the first phase of the project live in Niagara County.

The scale of the subsidies given to Yahoo has some questioning whether taxpayers are getting a fair return.

“Anytime we see subsidies in excess of $100,000 per job, much less $2 million, it’s fair to say that taxpayers will never break even on those deals,” said Greg LeRoy, a national subsidy expert and executive director of Good Jobs First.

Newfane resident Edwina Luksch said the scale of the tax breaks offered to Yahoo is “excessive.” She’s been following the deal from the start, saving newspaper clippings and attending public hearings.

“I don’t feel we got a bang for our buck,” she said.

David Kinyon, executive director of the Lockport Industrial Development Agency, said the “very aggressive” subsidy package given to Yahoo was “necessary given the significance of the Yahoo investment” and “to attract the level of investment and job creation.”

“Locally, it’s been a tremendous stimulus in terms of raising the profile of Lockport,” he said.

The incentives were granted by local and state officials anxious to land a trophy project and in the face of aggressive lobbying by Yahoo. Public records show the company has spent more than $300,000 since 2009 on lobbying officials in New York regarding the Lockport data center.

The size of the subsides prompted LeRoy to ask: “How good of a bargain are your public officials driving?”

Two rounds of subsidies

Yahoo’s newly expanded data and call center opens this week, the second phase of a project that has received two rounds of incentives over the past six years.

A subsidy package worth an estimated $240 million helped persuade Yahoo to come to Western New York when the company was looking for a location for its East Coast data center in 2009. Incentives included sales and property tax breaks from the Lockport Industrial Development Agency, an allocation of discounted hydropower and a federal grant.

The company created 75 jobs paying an average of $65,000 a year.

By 2013, Yahoo was ready to expand its data center and add a call center. That meant another round of tax breaks from the IDA, more discounted power and a state tax credit because of the jobs created by the expansion.

The IDA tax breaks granted in both phases are more generous than the standard offered most businesses.

Yahoo will pay no property taxes on the new development for the first 10 years. The IDA’s  standard property tax abatement, by contrast, lasts only 10 years, and the recipient pays at least some portion of the full value of the taxes from the start.

And whereas IDA sales tax abatements typically cover the costs of construction materials and equipment purchased to initially outfit the building, Yahoo will receive the tax exemption on equipment purchases for 20 years.

It’s Yahoo protocol to replace a data center’s computer servers every three years – and the length of the sales tax abatement means the company will save money each time it does so. For the second phase of the project, Yahoo will pay no sales tax on up to $2.5 billion in equipment, for a maximum savings of $200 million.

The IDA even agreed to waive part of its fee – usually 1 percent of the cost of construction – for each phase, thereby saving Yahoo a further $320,000. But the agency will still collect $1.3 million in fees – enough to cover its operating costs for around eight years.

The second phase of development created 115 jobs, the majority of them in the call center, with wages ranging from $37,000 to $70,000.

High cost per job

Add it all up and Yahoo! will receive up to $478 million in subsidies. The package ranks as the sixth richest subsidy deal in state history, according to data from Good Jobs First.

The subsidies work out to $2.4 million per job, an “astronomical” number, said James Allen, executive director of the Amherst Industrial Development Agency.

Given the relatively small number of jobs created by data centers, “whatever the incentive package is should be on the minimal side as opposed to the maximum,” he said.

Andy Reynolds, spokesperson for the Coalition for Economic Justice, an association of local labor and community groups, said: “The cost per job is so high that it is extremely unlikely that the public will really see a return on its investment.”

New York Power Authority trustees were worried about the relatively small number of jobs when considering Yahoo’s first power allocation in May 2009.

Then Vice Chairman Paul Foster said the job numbers were “not good for the Authority” and that the trustees “should be concerned about the precedent being set.”

But former Lockport IDA Board Member Duncan Carlson remembers the Yahoo project as “the best we’ve ever done – because of the good-paying jobs.”

He acknowledged that “there was a lot of controversy” because of the size of the subsidy.

“But what would the situation be if they weren’t there?” Carlson said. “That would be 200 jobs that didn’t exist.”

A magnet for high-tech companies?

Officials clamoured to explain how landing Yahoo would benefit the region at the September 2010 ribbon-cutting for the original Yahoo data center.

“This opening says to high-tech companies throughout the world: “Look at Western New York, see what stuff we have, and you will come here, too,” said U.S. Sen. Charles Schumer.

NYPA President Richard Kessel said a number of “high-technology, well-known companies” were already interested in coming to Western New York.

And Gov. David Paterson said that having Yahoo come to Lockport “opens the door to enormous possibility” that other high-tech companies would follow.

Five years on, that possibility hasn’t turned into a reality.

Asked how many technology companies have moved to Niagara County as a result of the Yahoo deal, however, Kinyon replied: “none to date.”

“We’ve competed very strongly for some other tech prospects, but we don’t have any other particular companies that have located here to date.”

Kinyon did say, however, that he expects to announce soon that an unnamed technology company is moving to the Lockport Industrial Park.

Thomas Kucharski, president and CEO of Buffalo Niagara Enterprise, who helped recruit Yahoo to the region, said “companies really follow what the name brands in their industries are doing.”

“Yahoo’s decision validates a lot of what the community has to offer.”

But there’s little evidence that Yahoo’s presence has succeeded in attracting other technology companies to the region – and certainly not to Niagara County.

In 2014, financial services company BlackRock opened a data center in Amherst that is receiving tax breaks from the town’s IDA. There’s no clear evidence that the Yahoo facility sparked Blackrock’s interest, although Kucharski said the company began its investigation of the region after Yahoo opened its data center but “backed off” a few times before committing to the project.

Since the first phase of Yahoo development was approved in 2009, Kucharski said, Buffalo Niagara Enterprise has received “expressions of interest” from 31 companies who are “at least taking a look” at moving data centers to the region.

But none have done so.

LeRoy said claims that Yahoo’s presence would create a new regional tech sector were far-fetched to begin with.

“Data centers are not perceived as high-tech incubators; they’re not mini-Silicon Valleys,” he said.

Moreover, they tend to generate little by way of economic ripple effects – especially compared to manufacturing plants.

“If you have one server farm, you might attract another – but if one isn’t doing much for the economy, two won’t either,” LeRoy said.

Kinyon said the size of the tax breaks offered to Yahoo reflected the scale of the company’s investment – and the fact that New York was competing against other states.

“We’re not just competing with Omaha, Nebraska and Washington State for those kinds of Yahoo investments, we’re competing globally,” he said.

Yahoo has a history of playing hardball when it comes to tax breaks.

In 2007, Washington state’s attorney general ruled that data centers were not eligible for a sales tax break designed for rural manufacturers. Yahoo responded by stopping construction on a data center in the eastern part of the state. The company’s co-founder threatened to build it in Oregon instead. Construction on the data center was only resumed once the tax break was restored, four years later.

And in Nebraska, Yahoo successfully lobbied the state legislature to pass a measure that allowed the company to avoid paying state sales tax on equipment manufactured there but shipped to its data centers in other states.

Discounted power crucial

Officials argue that local communities aren’t losing anything by giving subsidies to companies that would never have come to the region without a reduced tax bill. But critics point out that in Yahoo’s case, the discounted electricity offered by the New York Power Authority – not the IDA tax breaks – was likely the deciding factor.

The authority sells hydropower generated at the Niagara Power Project in Lewiston to about 100 local companies at prices that are presently 30 to 40 percent below market rates. Yahoo’s allocation of 23.2 megawatts makes it one of the largest recipients of low-cost hydropower in the region. The discounts will save the company an estimated $48 million over 20 years.

Inexpensive power is crucial to the economics of running data centers because they use enormous amounts of electricity which can add up to more than half the operating cost.

Some question whether state and local officials offered Yahoo too much.

“Are they just larding more giveaways on top of the cheap electricity?” asked LeRoy of Good Jobs First. “Because it’s likely the cheap electricity is the reason there’s even a discussion in the first place.”

Community costs and benefits

Yahoo company officials refused an interview request from Investigative Post. But in a statement, a spokesperson noted that as part of the 2013 subsidy deal, Yahoo has agreed to donate $3.5 million to be spent on unspecified economic development projects in Western New York.

Half of that will be “exclusively for Lockport /and or Niagara County,” while the other half will not be geographically limited, according to Empire State Development Corp., which will decide how the money is spent.

Yahoo’s donations are “a drop in the bucket compared to the magnitude of the tax breaks they’re getting” said Newfane resident Edwina Luksch.

LeRoy of Good Jobs First said the donation “sounds like a cosmetic, public relations stunt,” adding that it doesn’t alter the basic math of the deal: “On a net taxpayer balance sheet, it’s a loser.”

Niagara County residents pay the third-highest property tax rates as a percentage of home value in the nation, according to a 2012 analysis by the Tax Foundation, an independent research organization.

What’s more, most of Yahoo’s workers employed at the Lockport site in 2013 didn’t live in Lockport – or in Niagara County. Forty-six of the 77 employees then working in Lockport – 60 percent – lived outside the county, according to Kinyon, executive director of the Lockport IDA. That means much of the economic benefit that those jobs bring is being shifted elsewhere.

“They’re so desperate here in Niagara County for any kind of jobs, they’ll give them any kind of tax breaks they want,” said Luksch, the Newfane resident.

“You would think that the companies would have a little more conscience; you would think that they want to support their school district or they wanted to support the county for the services that they give.”

The company recently bought more land in Lockport’s industrial park and has said its newly expanded site could accommodate up to 300 employees.

In their 2013 application to the Lockport IDA for a second set of subsidies, Yahoo representatives made it clear that any future expansion would depend in part on the “availability of incentives from various providers (including power, business, and tax incentives).”

Said Kinyon at the IDA: “We’re hopeful that there still may be a Phase Three project down the road.”