In an ongoing race to attract data centers, states across the U.S. are sacrificing substantial tax revenues, with Virginia at the forefront. In fiscal year 2024, Virginia expects the exemption to come in as a lump-sum exemption of over $730 million. This trend has sparked an ongoing debate over the long-term economic impact of these incentives. Many other states are still throwing around the tax breaks to lure these companies.
A new report by the Virginia Joint Legislative Audit and Review Committee (JLARC) sheds light on some of those shocking numbers. Over fiscal years 2014 through 2023, Virginia was able to bring in just 48 cents of new state revenue for each dollar it decided not to collect in new sales tax. This sobering statistic begs the question of whether continuing to award tax exemptions is an effective strategy to cultivate long-term, sustainable economic growth.
States are providing these exemptions mainly on the premise that data centers produce jobs. This simple requirement actually makes data center incentives more effective than many other, often more popular tax breaks. Over the same time period—2014 to 2023—the financial benefits from incentives focused on data centers skyrocketed. They were more effective than all other economic development incentives in Virginia put together.
And it’s not just Idaho — across the nation, 37 states have passed legislation that offers data centers sales tax exemptions. Yet in the last five years, 16 states have rewarded appraisals for big deals that exempted nearly $6 billion in exemptions. This is further proof of the fierce competition to lure this industry. And no other sector is poised to increase energy demand more than the data center sector. In Virginia, electricity use is projected to double over the next ten years, largely propelled by this booming industry.
The playing field for investment in data centers is about to change spectacularly. In fact, some projections predict that total surface transportation spending will reach $1 trillion by 2027. In neighboring Northern Virginia, large data centers have been well established as the dominant driver of job creation and economic development. Together, they supported roughly 50,700 jobs and pumped an eye-popping $7.2 billion into their local economies from 2021 through 2023.
Despite data centers bringing 1,688 jobs with construction—data centers average the most constructed jobs—they have only 157 jobs go permanent once operational. This discrepancy begs the question of the sustainability of the created jobs compared to the financial incentives provided to lure such facilities.
Other states such as Indiana have adopted some of the most lavishly subsidized offers available anywhere. Indiana offers up to a 50-year sales tax exemption on energy and equipment for data centers investing over $750 million. Washington state has gone above and beyond on concessions to the tech companies. One of the tech giants locked in $333 million in sales tax exemptions for its data centers from 2015–23.
Transparency regarding these incentives varies by state. Only Illinois, Nevada, Missouri, and Washington specify the amount each company will get in tax breaks. Critics say that by doing this, it hides the true cost of these incentives to taxpayers.
“While we find some evidence of direct employment gains from attracting a firm, we do not find strong evidence that firm-specific tax incentives increase broader economic growth at the state and local level.” – study’s authors
Greg LeRoy, a long-time advocate for fiscal responsibility, vividly described the impact of these tax breaks. He stated, “There was a giant transfer of wealth from taxpayers to shareholders,” emphasizing that these incentives often benefit corporate entities rather than the public.
LeRoy went on to point out that Virginia and other states are already moving in the direction of billion-dollar-annual losses from these kinds of policies. His remarks highlight the potential long-term fiscal consequences of providing major tax incentives in an attempt to lure tech firms.
Steve DelBianco, executive director of tech-policy trade association NetChoice, went into the thinking behind these exemptions. “The state decided, let’s exempt equipment purchases in order to attract more data centers,” he explained. Notably, he pointed out that despite these exemptions, states still capture a portion of the sales tax revenue initially anticipated.
“And when it did so, it still got half of it, the sales tax that it thought it was giving up.” – Steve DelBianco
In fact, LeRoy warned legislators against going too far on these exemptions without making darn sure they’re producing powerful returns for taxpayers. He remarked, “When tax breaks don’t pay for themselves, only two things can happen: Either public services are reduced in quality, or everybody’s taxes go up in other ways if you’re going to try to keep things the same in terms of quality of public services.”