Tax Data Centers for Their Use of the Grid, Not Their Location

A data center’s worth is measured in megawatts. The taxes chasing it are still measured in floor space, and that mismatch is putting off exactly the investment governments say they want.

UK Tax Mismatch

England’s recent business-rates changes expose a deeper problem in how governments tax data centers. The standard multiplier fell, from 55.5 pence in the pound to 48, but a new top band appeared at 50.8 pence for properties with a rateable value of £500,000 ($675,000) or more, a surcharge to fund relief on the high street. Large data centers, with their plant-heavy valuations, sit squarely in this band: they pay the premium and miss the relief.

These sites are treated like ordinary property, even though their economic value lies far less in floor space than in electrical capacity. That mismatch matters because it distorts investment signals at the very moment governments say they want more digital infrastructure. It’s one more case of taxing computing infrastructure with a rulebook written for shops and warehouses.

Power, Not Size

From my own work building the electrical backbone of these facilities—the switchgear and power systems that turn a grid connection into resilient capacity—one point stands out. A data center is worth very little for its floor space and almost everything for its power. The shell is the cheap part; the value, the cost and the controversy all sit in the megawatts. Tax the building, and you target the wrong thing.

The legal framework shows the same confusion. In Ricketts v. Cyxtera, the Upper Tribunal ruled that empty “white space” in a data hall, wired and cooled but holding no servers, was still taxable because the operator was treated as being in beneficial occupation of it, the rating law test of whether a space is in use and under one’s control for its intended purpose. The system is effectively trying to tax electrical capability through the clumsy proxy of floor space.

That points to the real issue. The problem isn’t floor space or tax breaks, but power. The grievance is that these sites draw enormous amounts of electricity, and the cost of connecting them can fall on everyone else’s bill. That concern is legitimate, but a sales tax break was never the right way to address it. We’re using tax policy to solve what is really an electricity pricing question.

International Policy Drift

Internationally, governments are making different versions of the same mistake. The UK example is part of a wider pattern: policymakers are struggling to match tax systems to the real economics of digital infrastructure. In the US, states spent a decade offering generous sales-tax breaks to attract data centers and are now rapidly pulling them back.

Virginia spent the spring deadlocked over a roughly $1.9 billion annual exemption; Texas, which forgoes well over a billion dollars a year, is weighing repeal; and more than 300 data-center bills have appeared across 30 states this year. The frustration is understandable, but withdrawing incentives investors relied on sends a damaging signal that the terms can change as soon as a project succeeds.

India has taken a different approach, offering foreign cloud providers tax certainty out to 2047 on the assumption that predictability attracts long-term capital.

In a single year, three of the world’s biggest economies are sending three different signals about the same asset, leaving anyone underwriting a major build with little stable ground to plan on.

A Better Way

The answer isn’t to make data centers pay more, but to charge them for the right thing, predictably: price the genuine grid impact through transparent network and connection charges that reflect the load a site places on the system, not by bolting it onto a property tax built for warehouses or clawing back incentives on a whim.

Done well, it helps operators too. Efficient sites pay a fair, foreseeable charge, capital gets the certainty it needs, and the system finally rewards what eases the grid: on-site generation, efficient cooling, resilient power. For the best-run operators, a smarter basis should mean lower long-run costs, not higher.

The build-out isn’t slowing. Data centers are the physical foundation of the AI economy, rightly called critical national infrastructure. That deserves a framework built for what they are, not one inherited from the high street. We’ve spent a decade arguing whether to subsidize these places or punish them. The better question is how to price their real effect on the grid. Answer that, and the investment looks after itself.

This article does not necessarily reflect the opinion of Bloomberg Industry Group Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Adhum Carter Wolde-Lule is a director of Prism Power Group.

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