Why the U.S. should give tax breaks to cloud adopters

To promote the use of cloud computing by small businesses in India, the Indian government is planning to introduce a subsidy for cloud usage. The hope is that the use of the cloud will make small businesses more successful, thus increasing both employment and tax revenues to the government.

In the United States we see the opposite approach, with the government more interested in taxing cloud computing than promoting its use.   

Subsidies or not, the cloud does make it easier to start a small business because it makes IT resources both affordable and available. Before the cloud, those resources could cost millions of dollars.

Small businesses tend to operate on tight margins, and cheaper IT is great, but the reality is that it’s also just as cheap to competitors large and small. So cloud taxation would especially hurt small businesses.

And it would slow cloud adoption by enterprises already faced with extensive upfront migration costs to move to the cloud. They will save over the long run, but putting hurdles in the initial phases only delays getting to that end game. Public companies are already penalized in cloud migrations because they are rated by earnings per share (EPS), and migration costs reduce that short-term metric, angering investors and the boards that respond to them.

In the long run, delaying or otherwise inhibiting cloud adoption is bad for both companies and governments.  

So perhaps the U.S. government should try what India is doing: promoting cloud adoption through tax policy. Here are two reasons why I believe it should consider the idea:

1. Corporations are taxed on their profits, so more profits means more tax revenue. Enterprises that move to the cloud will see lower IT costs and thus more profits just from those savings. That means more taxable income.
2. Cloud computing reduces the need for electrical power, which is a big cost that the government subsidizes in so many ways. A tax-the-cloud approach would encourage enterprises to keep building datacenters — after all, those capital expenses are tax deductible. And that means more power plants and energy resources (whether coal, gas, solar, biofuel, wind, or hydro) to subsidize and regulate, as well as more pollution to remediate or pay for such as through increased medical costs for the poor who tend to live near pollution emitters.

You could argue that penalizing the cloud will preserve high-paying jobs at all those enterprise software and hardware companies already struggling as enterprises move to Amazon Web Services, Google, and Microsoft, not to mention the construction and management jobs at the power generation facilities that datacenters need.

But that’s short-term thinking. The cloud and its benefits will prevail, for a greater good. Perhaps rather than slowing down the inevitable, the government can speed it up.