In race to attract data centers, states forfeit hundreds of millions of dollars in tax revenue to tech companies

CNBC

4 hours ago

In 2019, the Indiana legislature passed a bill that would offer eligible data centers significant sales tax exemptions. The legislation said facilities packed with state-of-the-art servers could avoid the state's 7% tax when purchasing equipment and power.
The measure was a boon for large tech companies that have been rapidly building out data centers and was heavily backed by a trade association representing the industry.
Similar tax incentives have been passed elsewhere. Today nearly all states that have sales taxes offer data centers exemptions on computers, wires, air-conditioning units and, in some cases, even the energy required to keep it all running.
Demand for data center capacity was already soaring at the time of the Indiana legislation but has picked up exponentially since then due to the artificial intelligence boom sparked by the launch of OpenAI's ChatGPT in 2022. Data center investment is now projected to reach $1 trillion by 2027, according to professional services network PwC.
In the race to attract large data centers, states are forfeiting hundreds of millions of dollars in tax revenue, according to a CNBC analysis. Among the beneficiaries of these exemptions are tech giants such as Amazon, Meta and Google, which all have market caps of over $1 trillion.
Tax breaks have long been a tool states use to compete for businesses. However, watchdog groups said that for data centers the tradeoffs are iffy, because the facilities don't tend to create large numbers of jobs, while the amount of electricity required can be immense.
The growing number of tax breaks has sparked a debate about whether massive corporations should be receiving these generous incentives.
A CNBC analysis determined that 42 states provide full or partial sales tax exemptions to data centers or have no state sales tax at all. Of those, 37 have passed legislation specifically granting sales tax exemptions for data centers, and 16 of those states have granted nearly $6 billion in exemptions over the past five years. The other 21 states that offer similar breaks are not included in the $6 billion total because they do not publicly report how much they have awarded in tax breaks. Eight other states that have sales tax don't give exemptions to data centers.
Only Illinois, Nevada, Missouri and Washington itemize how much companies are getting by recipient. For instance, CNBC found that one Microsoft data center in Illinois received more than $38 million in data center sales tax exemptions but created just 20 permanent jobs. In Washington, the tech giant secured $333 million in sales tax exemptions for its data centers between 2015 and 2023.
Microsoft declined to comment on the tax incentives and job creation tied to its data centers in the two states.
But other states don't publicly disclose this type of granular data. For example, Virginia has an estimated lump-sum exemption of more than $730 million for fiscal year 2024, but the state doesn't offer a detailed breakdown of how much each company received.
It's also not always clear which companies are asking for tax breaks. In 2023, a limited liability company named Hatchworks applied for Indiana's sales tax exemption. After the award was granted, a state filing showed Hatchworks is a subsidiary of Google.
A Google spokesperson told CNBC that using a third-party LLC until project details are finalized is standard practice in economic development projects across industries.
Greg LeRoy, executive director of Good Jobs First, a nonprofit research group that tracks corporate subsidies and advocates for transparency and accountability in economic development, has spent more than a decade examining the impact of exemptions nationwide. He said the clear winners are the Big Tech companies.
"There was a giant transfer of wealth from taxpayers to shareholders," LeRoy told CNBC. "Some states, like Virginia, are headed toward billion-dollar annual losses."
Northern Virginia, which is known as the world's data center capital, has examined the economic impact of the data center sales tax exemptions. A 2024 study by the Virginia Joint Legislative Audit and Review Committee, or JLARC, showed that, on average, the state generated 48 cents in new state revenue for every dollar it did not collect in sales tax between fiscal years 2014 and 2023. Most of this revenue came from personal and corporate income taxes as well as from sales tax on nonexempt purchases, JLARC said.
But that 48 cents is also better than what the state sees from other industries with sales tax exemptions intended to boost economic activity, which, on average, brought in just 17 cents per dollar, according to JLARC. One reason the data center exemption performs better is because it requires companies to create jobs and most other exemptions don't, JLARC said.
The Virginia Economic Development Partnership, the state's economic development authority, declined to comment for this story, referring CNBC to the 2024 JLARC report. In that report, the state classified the exemption as a "moderate economic benefit" when compared with other incentives and said that "like most economic development incentives, the data center exemption does not pay for itself," considering the lost revenue.
LeRoy calls it a losing proposition for taxpayers.
"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," he said.
Steve DelBianco, CEO of tech trade association NetChoice, said some tax revenue is better than none.
"The state decided, let's exempt equipment purchases in order to attract more data centers," said DelBianco, whose organization has represented Big Tech companies in Indiana and lobbied on their behalf nationwide. "And when it did so, it still got half of it, the sales tax that it thought it was giving up."
When lobbying on behalf of companies such as Meta, Google and Amazon for sales tax exemptions, DelBianco has said that data centers are a key driver of economic growth.
Between 2021 and 2023, Northern Virginia benefited from 50,700 jobs and $7.2 billion in contributions to the economy, according to the 2024 JLARC report. During that same period, the rest of the state generated 12,100 jobs and contributed $1.3 billion to the economy, JLARC said.
Between fiscal year 2014 and 2023, incentives for data centers provided more financial benefit than all other economic development incentives combined, the JLARC study said. It said most of this growth came from the construction phase of data centers.
Former U.S. Rep. Barbara Comstock, R-Va., was a member of the Virginia legislature and the lead lawmaker behind its data center sales tax exemption when the legislation passed in 2012. She now serves as an advisor to NetChoice.
In her 2019 Indiana state legislative testimony, Comstock said she viewed the exemptions as a crucial strategy for attracting investments, creating jobs and generating local tax revenue.
In Indiana, consumer watchdog group Citizens Action Coalition said it has been monitoring the sales tax exemptions granted to data centers. Ben Inskeep, the group's program director, said Indiana offers some of the country's most generous subsidies, including a sales tax exemption on energy and equipment for up to 50 years for data centers that invest more than $750 million.
Inskeep said that when the sales tax exemption was passed in 2019, lawmakers didn't anticipate that Big Tech companies would be building out large data centers, thus receiving billions of dollars in tax breaks. He said the facilities create very few permanent jobs.
A 2017 report from the U.S. Chamber of Commerce said it looked at financial data of "10 major enterprises and service providers that own 244 large data centers across 16 states." It found that during the construction phase, data centers on average employ 1,688 workers. But once they're up and running, they provide only 157 permanent jobs.
By comparison, a 2020 study by two economics professors evaluating state and local business incentives found that aerospace and automobile manufacturers that received firm-specific exemptions between 2002 and 2017 promised more than 2,700 jobs. However, unlike the data center figures, which reflect actual employment averages, the aerospace and automobile job numbers were based on company projections tied to incentive agreements.
"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," the study's authors wrote.
Then there's the power. The Virginia audit found the data center industry is projected to drive an "immense increase in energy demand." The study predicted that the power demand in Virginia will double in the next 10 years, mainly due to the data center industry.
The report said one of Virginia's smaller data centers used the same amount of energy as 4,500 homes and that the largest new data centers use more energy than most industrial consumers.
While data centers in the state are currently paying the full cost of service, the strain on resources is likely to increase the costs paid by other customers, the report said.
CNBC contacted Amazon, Apple, Google, Meta, Microsoft, OpenAI and Oracle for comment.
Amazon, Google, Meta and Microsoft all said they work with utility companies to ensure they cover the costs of growth required to meet their data center needs.
Amazon, Google and Microsoft said they also invest in carbon-free and sustainable energy sources — such as wind, solar and nuclear power.
An Amazon spokesperson said incentives play a key role in attracting data centers and require companies to meet strict investment and job creation benchmarks.
Amazon also said it contributed $460 million in property taxes and fees for its data centers in three Virginia counties in 2023 and has invested more than $75 billion in the state since 2011.
Apple, OpenAI and Oracle did not respond to multiple requests for comment.