Sell speed and certainty, not subsidies
Chicago Mayor Brandon Johnson has looked at the explosion of data centers and seen another industry in need of regulation. He might instead consider what Chicago desperately needs: An industry capable of putting enormous amounts of private capital onto land that has been economically useless for decades.
Data centers will not bring back the stockyards, Wisconsin Steel or the giant factories that once employed thousands of Chicagoans. They are notoriously capital-intensive and relatively light on permanent employment. That is precisely why the proper comparison is not with the factories of the fifties and sixties. It is with what occupies many former industrial properties today: Weeds, rubble, contaminated soil, abandoned warehouses and property tax assessments reflecting their diminished value. Chicago could turn those liabilities into assets without writing the data-center industry a check.
The city should establish a series of Data Center Redevelopment Zones (DCRZ) on distressed industrial and brownfield properties, particularly on the South and West Sides. Developers locating there would receive no special property tax abatement and no city subsidy. They would pay the normal taxes and the infrastructure costs their projects impose. What Chicago would offer instead is something increasingly valuable in American development: speed and certainty.
Mr. Johnson this week issued an executive order strengthening Chicago's oversight of data centers and called on Springfield for tougher regulations involving energy affordability, water consumption, environmental justice and community benefits. Chicago currently has 39 data centers, while Illinois has 262 operating or proposed facilities under one widely used count.
Some of the mayor's concerns are legitimate. A hyperscale AI data center can require extraordinary amounts of electricity. If a project necessitates a new substation, transmission improvements or other costly infrastructure, ordinary ComEd customers shouldn't receive the bill. Nor should taxpayers subsidize a billion-dollar technology company merely because economic-development officials like standing next to oversized checks at groundbreaking ceremonies. None of that requires Chicago to discourage the industry.
Govenor J.B. Pritzker has already moved away from Illinois' previous subsidy model. Beginning July 1, his administration stopped processing new applications for the state's Data Center Investment Program, which had provided qualifying projects exemptions from several state and local taxes. The program generally required at least $250 million of investment and only 20 new full-time-equivalent operating or maintenance jobs. Projects in underserved areas also could receive a credit equal to 20 percent of construction wages.
That ratio tells Chicago something important. Data centers are not principally jobs programs. They are investment programs.
A billion-dollar data center might eventually employ only a few hundred permanent workers. During construction, however, it can employ large numbers of electricians, operating engineers, pipeitters, laborers, HVAC specialists and other skilled trades. For a city with a deep union construction workforce, a succession of such projects could provide years of well-paid work.
Then comes the lasting benefit: Property that was producing little becomes highly improved taxable real estate. Illinois does not generally tax business personal property, so Chicago won't simply collect property taxes on billions of dollars of computer servers. But the land, buildings, and associated real estate improvements can still represent an enormous increase in taxable value compared with an abandoned factory or vacant industrial tract.
The crucial question then becomes location. This doesn’t mean that the government should be picking locations. Zoning laws should not be viewed as creeping socialism. That means that Chicago zoning laws shouldn't encourage a data center to consume scarce land near a CTA station that could support apartments, offices or retail. Nor should giant server farms be dropped indiscriminately into residential neighborhoods.
Instead, Chicago should help to identify large industrial parcels where conventional redevelopment has repeatedly failed. Brownfields, obsolete rail-oriented sites, abandoned factories and deteriorated warehouse districts are obvious candidates.This isn't merely theoretical.
Janesville, Wisconsin, last year solicited developers for data centers on approximately 240 acres that include the former General Motors industrial property. The city's own request for proposals (RFPs) explicitly identified sustainable reuse, private investment, employment and expansion of the property tax base as objectives.
The old GM complex once represented Janesville's industrial might. After its decline, parts became brownfield wasteland. The city recognized something Chicago should: A data center doesn't care whether customers want to live nearby. It needs land, electricity, fiber, security and access to infrastructure. Former industrial properties often possess precisely those characteristics.
St. Louis offers another useful lesson. This year it approved a data center at the former Famous-Barr warehouse while imposing conditions concerning noise, power, water and environmental effects. Rather than handing out a local tax incentive, the city negotiated a community-benefits framework. St. Louis projects substantial tax revenue from the development and says the completed project will create about 200 permanent jobs. Any agreement, should not however, be based on securing a specific number of jobs. That should occur organically. The last thing that is needed is a new jobs program loaded with featherbedding.
Chicago could combine the best features of these approaches while eliminating much of the bureaucratic baggage.
First, designate perhaps a dozen large distressed industrial sites as eligible Data Center Redevelopment Zones. Second, determine in advance whether zoning permits the use. Where changes are required, make them before developers arrive. Third, coordinate with ComEd to determine existing electrical capacity and what upgrades would be necessary. A developer should know before buying the property whether 100, 250, or 500 megawatts can realistically be delivered and on what timetable. Fourth, establish basic environmental, noise, water, and backup-generation standards in advance.
Developers should know the rules rather than negotiate them piecemeal after committing hundreds of millions of dollars. Fifth, create a single city approval process with deadlines.
If every requirement has been met, Chicago should aim to complete decisions under its control in perhaps 90 or 120 days. That last provision could be worth more than a conventional tax incentive.
For an AI company that is racing with competitors to bring computing capacity online, losing a year (at least!) to zoning hearings, departmental reviews and uncertain permitting represents a genuine financial cost. A city that can credibly promise certainty and speed has something valuable to sell without reducing taxes by a penny. The only losers in this case would be the lawyers. Oh the pity!
Chicago's bargain could therefore be wonderfully uncomplicated: We will not subsidize you. We will not surprise you either.
Build on designated distressed property. Remediate contaminated land. Pay ordinary taxes. Pay the incremental infrastructure costs attributable to your enormous electrical demand. Meet clear, and reasonable environmental standards. The return for the data centers is that City Hall moves quickly and predictably. No surprises or new demands. There would be no need to pretend that every data center will transform the employment prospects of the surrounding neighborhood. Clearly, it won’t. A 50-acre abandoned industrial parcel might remain virtually unproductive for generations waiting for the imaginary factory employing 5,000 workers to return. Meanwhile, a data center developer willing to invest $1 billion could be welcomed by Indiana, Wisconsin, or another Illinois municipality.
An occupied territory employing 150 people is far better than a burned out wasteland employing nobody. Thousands of top paying temporary jobs are better than none. Remediated land is better than contaminated land. A productive taxpayer is better than an economic black hole. Once a major private investor commits hundreds of millions of dollars, adjoining property may become more attractive as roads, utilities and infrastructure improve. That is not the reason to go ahead but rather a possible outcome. As it is that land has no possibilities.
That is why Mr. Johnson's emerging data center policy shouldn't become another debate between prohibition and subsidy. Chicago doesn’t need to use bribery so that families like the McCaskeys and the Reinsdorfs accumulate wealth at the taxpayers expense. At the start of the data center race things looked eerily similar to different municipalities competing for sports facilities with a wad of cash in hand. The blowback from the resulting electricity demands has changed the political landscape.
For more than half a century the city has struggled with what to do with industrial land abandoned by the economy that created it. Artificial intelligence (AI) has unexpectedly produced an industry that needs enormous buildings, industrial zoning, electrical infrastructure and large parcels and doesn't care if those parcels sit in fashionable neighborhoods.That looks less like a threat than an opportunity. There is no need for a moratorium. There is a need for action.
Chicago should keep its tax revenue, protect its utility customers and make developers bear the costs they create. Then City Hall should offer the one incentive the government can provide without costing taxpayers anything: Get out of the way quickly and permanently.
I have frequently and correctly criticised Mayor Johnson in the past. If he becomes a born again Cato Institute crusader then I will actively campaign for him. If he opposes it then there are plenty of other mayoral aspirants who should carry the torch. It would be a winner for them and a grateful city.
