State Tax Breaks for Data Centers Come Under Fire With AI Boom

Data centers have emerged as a major political target in state capitals as they proliferate across the country and elected officials hear voter complaints about the massive, energy-guzzling warehouses.

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That has put tax breaks for data centers—which can amount to hundreds of millions of dollars annually in some states—squarely in the legislative crosshairs.

Lawmakers in more than a dozen states have introduced legislation to repeal sales tax exemptions or raise the bar to qualify for them. Support for rolling back incentives cuts across party lines, with Republicans and Democrats expressing opposition to subsidizing a rapidly growing industry.

But the industry’s boosters also cross party lines, and two Republican governors have vetoed attempts in previous years to repeal the tax breaks.

On this episode of Talking Tax, Bloomberg Tax reporter Daniel Moore discusses how these tax exemptions work, why they’ve grown so much, and how they could change this year.

Do you have feedback on this episode of Talking Tax? Give us a call and leave a voicemail at 703-341-3690.

This transcript was produced by Bloomberg Law Automation.

David Schultz:

From Washington, I’m David Schultz, and this is Talking Tax. The number of data centers across the country is exploding, and so is the amount of money states are not collecting from these data centers because of tax breaks. In an attempt to lure data center construction and the jobs it would bring, many states granted sales tax exemptions to these projects that can last for 10, 15, even 20 years.

Now, amid the AI-fueled data center boom, lawmakers in some of these states are having regrets and even attempting to claw back these tax breaks. Our guest today, Bloomberg Tax reporter Daniel Moore, went to one of those states, Ohio. He just published a story about what’s going on there and specifically why data center builders are making way more money from the sales tax exemptions than anyone in the state capital predicted.

I started off by asking Daniel how this type of state tax incentive program works and how common it is.

Daniel Moore:

About three dozen states have some sort of tax incentive program that exempts data centers from paying any sales or use taxes. And so what this means practically is that if I’m a data center developer, I don’t have to pay state or local taxes on purchases of construction materials or any of the equipment that I’m putting inside my data center. And generally, states require a certain amount of investment or job creation thresholds in order to qualify for that exemption. And then the state will follow up on that and verify that you’re meeting those investment and job creation thresholds. But that’s generally how it works. It’s a promise that data centers make. And the states want to lure those facilities to their states. And it can be very lucrative for those developers.

David Schultz:

Oh, yeah, definitely. Your story proved that very well. But before we get into that, why sales taxes? I was curious about that. Why are states granting sales tax exemption as opposed to property tax or corporate tax? Because as we’ll get to in a minute, you know, keeping track of the sales tax exemptions can be really hard. Why did they go specifically with that type of tax?

Daniel Moore:

Right. And it is worth pointing out state tax incentives can vary pretty widely. Local governments can offer property tax abatements, for example, to lower development. But it really comes down to the fact that sales tax exemptions are very lucrative for the data center industry. It’s what developers want to see. I mean, they go out, they buy a lot of equipment. And it’s not just construction. These things can last for many years. And so data centers replace equipment every few years. They have to replace their servers. They have to upgrade their HVAC. All of those purchases are exempt from sales tax. So if you think about it, you could provide a corporate tax cut or you could provide property tax abatements. But sales tax really is a lucrative benefit. And that does add up over the years.

And so states began dangling these incentives about 15 years ago when cloud computing and e-commerce and the expansion of the Internet really took off. But it really wasn’t until AI and the explosion of data centers and the size of data centers that states began to see how valuable and lucrative that could actually be for the industry.

David Schultz:

Yeah. Although it seems like in some places, and particularly in central Ohio, where you visited, this has maybe worked a little bit too well because local residents are a little concerned at the pace of data center construction there. Can you talk about what you saw there in central Ohio and why people think there may be too many data centers popping up now?

Daniel Moore:

Sure. Ohio certainly is a microcosm for what many other states are confronting right now. I spent some time in New Albany, Ohio, which is just outside of Columbus. And this is a suburban community that has been meticulously planned for many years now. It’s got a sprawling business park that has corporate headquarters, logistics facilities, biotech companies, Intel is building a big plant there, and it also has several dozen data center buildings. So you’ve got all the big players, Amazon, Meta, Google, and a handful of other major data center developers.

Ohio established a data center sales tax incentive in 2013. So one year after that, Amazon agreed to a sales tax exemption with the state of Ohio that could go as long as 2055 if Amazon meets the terms of its initial deal. I was interested in Ohio because it had signed these deals with all the big tech companies in the 2010s. And all these companies bought up a bunch of land in New Albany because there’s a lot of available space there. And they started building and then came AI and then came this building boom where these companies were able to expand and are now, you know, Meta is building one of the largest data centers in the world. And along with that scale comes tax exemptions that are lasting many, many years. And the state is now suddenly realizing like a lot of other states are. This is a lot of money that we are foregoing that we would have otherwise collected.

David Schultz:

Right. I mean, that’s the thing that I found most striking about your story is that there are some pretty sophisticated accountants and financial professionals who work for these states. And yet the value of the state tax exemptions is almost uniformly much more than what they thought it would be when they granted the state tax exemptions. For example, data center sales tax breaks in Virginia amounted to 16 times higher than what the state had projected just a few years before. What’s going on here? Why is it so hard to make accurate predictions about how much these tax breaks actually will be worth?

Daniel Moore:

Yeah. I mean, for a long time, this was just an afterthought in the state’s budget. As recently as 2020 or 2021, these were pretty minuscule tax exemptions. And I mean, it really is a function of how fast data centers are growing in this country. And it’s not even just year over year. It’s within the year, more data centers growing in states like Virginia, Georgia, Ohio, Arizona, Illinois.

The challenge there is that states are looking backwards. So data centers generally will file reports every year with the state saying, this is how much equipment that I bought that is exempt from sales tax, and states can kind of calculate how much revenue it otherwise would have collected on those purchases. But data centers are growing so fast in this country that often those numbers are wildly out of date by the time the state collects them and publishes these reports sometimes every year, sometimes every two years. And so those numbers year over year are growing exponentially, as you mentioned in Virginia. And so it’s, yeah, you can see why it’s challenging to predict what the numbers might be when you’re looking backwards and just trying to translate those numbers in the future.

David Schultz:

I’m also realizing that, you know, the amount or the value that these exemptions are worth is really in the hands of the builders. Because you don’t know how much money they’re going to save in sales taxes until you know how much stuff they’re going to buy. So every time they buy something, they’re saving more and more money. So it’s sort of like a tax exemption that they themselves control.

Daniel Moore:

Exactly. And another factor is that data centers upgrade their equipment every few years. And that’s something that is becoming more and more prevalent with the hyperscalers, the very large data centers and AI. And given the lifespan of the servers and the technological upgrades that need to be made, if you have a major refurbishment of a data center, this year that was built 10 years ago, you know, it’s hard for the state to anticipate that happening. As that happens more and more, and as the facilities grow in number and also size, just think of that as a function of the revenue the state doesn’t see.

David Schultz:

Yeah. So, anytime you’re talking about tax incentives, you have to think about are we incentivizing something that wouldn’t have happened otherwise? You know, are we giving a company a tax break and then in exchange they’re doing something in our state that they would have done in another state or not at all? What’s the thinking here? Is that how this is working? Or is it just sort of giving data center builders a tax incentive to do something they would have done anyway?

Daniel Moore:

The builders insist that this tax exemption makes a major difference. They point to figures that the state of Virginia put out that say 90% of data center development would not have occurred if not for the tax exemptions. Data center lobbyists have popped up in places like South Dakota, which currently does not have a sales tax exemption and testified that they would move to the state if there was a sales tax exemption. It’s hard to know if that’s true or what other factors they might be considering.

But I will say the biggest factor data centers have to think about when they decide where to locate is access to power and energy. I think that’s what I’ve heard over and over again. So if you do have a situation where you’re considering multiple states and energy is available from each of those states, maybe the tax breaks make a difference. But there are a lot of factors. And I’ve talked to a lot of people who are skeptical that data centers need this tax incentive. I mean, we’re talking about some of the largest companies on the planet. And that’s definitely one of the arguments I hear against states continuing to offer these things.

David Schultz:

So let’s talk about the blowback here. It seems like sort of the political winds in a lot of states are shifting against data centers, both for environmental reasons and for economic reasons, because they can drive up the cost of power. And it sounds like for tax reasons that, you know, some people think that they don’t need these tax incentives. What’s going on in the states and why are there politicians who want to get rid of these?

Daniel Moore:

Yeah, it really is the local opposition to the data centers that state lawmakers are hearing. So the concerns are predominantly energy consumption and the concerns that data centers moving in will raise people’s power bills at a time that affordability is a buzzword that a lot of lawmakers and governors are running for reelection and looking to show their constituents that they care about affordability and that they’re going to make decisions to protect them from rising costs. And it’s an easy political target for elected officials at the state level. And it’s largely bipartisan in the sense that you have Republican states like Georgia and Ohio that are looking at rolling back the incentives, repealing the tax exemptions.

David Schultz:

It’s worth noting, though, especially in Georgia and Ohio, that those are both states where Republican lawmakers in the state legislatures have passed bills that would repeal these tax breaks and the Republican governors in both of those states vetoed those bills, although it seems like there may be even a veto override at some point, you know, to be determined. That’s kind of an interesting wrinkle also.

Daniel Moore:

Yeah, there’s disagreement within both parties about data centers. I mean, there’s opposition to data centers in both parties and there’s support for data centers in both parties. And it is interesting to watch Ohio and Georgia, both Governor DeWine in Ohio and Governor Kemp in Georgia, have vetoed data center repeal legislation in recent memory. The governors both cite the fact that data centers, and this is an important point, data centers, despite getting sales tax exemptions, do bring in substantial tax revenue that otherwise wouldn’t be there.

In Ohio, the local government in New Albany had arranged a fee structure based on square footage that brought in about $10 million last year to the municipal budget that helped pay for priorities on the local level. And so it is a tradeoff. I mean, there’s tax incentives that the state gives, there’s local tax revenue that the local government sees. And I think the governors ultimately balance those things. It will be interesting to see across the country what governors step in and strike anything that passes.

David Schultz:

Yeah, that’s what kind of what I wanted to end on is sort of the crystal ball aspect of this is, you know, where are we heading in the future? Do you think that we’re going to see data center sales tax exemptions repealed across the states? Do you think we’re going to see any new sales tax exemptions or is it going to be this kind of uneasy status quo where nothing’s going to change or we’re not going to see any new exemptions? What do you think is going to happen?

Daniel Moore:

It’s probably most likely the last one. It’s very difficult to take away a tax incentive, even if it’s for an industry that is under immense political pressure. And you know, while skepticism of data center tax breaks cut across party lines, as I mentioned earlier, support also cuts across party lines. And I’ve talked to plenty of people who look at the construction jobs and the national security arguments and who genuinely think data centers are not causing the disruption. Many, many others say they are. And if you look at labor unions in particular, they are powerful political entities and the industry itself is very powerful. So I see these sticking around for a while longer, but I am watching what I’m really watching to see is whether we see some more requirements and restrictions and guardrails put on the tax exemptions. I think that’s far more likely.

David Schultz:

Got it. All right. That was Daniel Moore talking with us about data centers and tax breaks. Daniel, thank you so much.

Daniel Moore:

Thanks for having me.

David Schultz:

And that’s it for today’s podcast. You can find up to the minute news on latest tax and accounting developments at our website, news.bloombergtax.com. That website once again is news.bloombergtax.com.

Today’s episode was produced by myself, Daniel Moore, and our editor was Benjamin Freed. From Washington, I’m David Schultz. Thanks for listening.