Tech Giants Reap Billions in Tax Breaks as States Compete to Host Data Centers

In 2019, Indiana passed a bill offering significant sales tax exemptions to data centers, allowing them to avoid the state’s 7% tax on equipment and power purchases. This move, heavily supported by a trade association representing the tech industry, mirrors similar legislation in nearly all states with sales taxes, which now provide full or partial exemptions to data centers. The rapid expansion of data center capacity, driven by the AI boom starting with OpenAI's ChatGPT launch in 2022, has projected global investment to reach $1 trillion by 2027, according to PwC. The competitive race to attract data centers has led states to forfeit substantial tax revenue. A CNBC analysis revealed that 42 states offer tax breaks, with 37 passing specific legislation to grant these exemptions, and 16 states collectively awarding nearly $6 billion in exemptions over the past five years. However, the exact figures in many states remain unclear due to a lack of transparency. Tech giants like Amazon, Meta, and Google, each with market caps exceeding $1 trillion, are among the primary beneficiaries. For instance, one Microsoft data center in Illinois received over $38 million in sales tax exemptions but created only 20 permanent jobs. In Washington, Microsoft secured $333 million in exemptions between 2015 and 2023. Transparency issues persist; in Virginia, the state is set to lose over $730 million in fiscal year 2024 alone, but it doesn’t disclose individual company awards. Google, through its subsidiary Hatchworks, applied for a tax exemption in Indiana, illustrating the practice of using third-party LLCs to manage projects before final details are revealed. Critics argue that these exemptions are a poor bargain for taxpayers. Greg LeRoy, executive director of Good Jobs First, notes that the "giant transfer of wealth" to shareholders results in lost revenue, which often leads to reduced public services or increased taxes to maintain service levels. Steve DelBianco, CEO of NetChoice, counters that some revenue is better than none, pointing out that Virginia saw an average return of 48 cents for every dollar of tax not collected, which is higher than the 17 cents seen from other industries. Northern Virginia, known as the world’s data center capital, has seen notable benefits. Between 2021 and 2023, the region gained 50,700 jobs and $7.2 billion in economic contributions, compared to 12,100 jobs and $1.3 billion in the rest of the state. However, the majority of these gains occurred during the construction phase, and the operational phase typically provides fewer jobs—averaging 157 permanent positions per data center, according to a 2017 U.S. Chamber of Commerce report. The power demand from data centers is another significant concern. Virginia’s audit predicts a doubling of energy demand in the next decade, primarily attributed to the data center industry. Smaller data centers in the state consume as much energy as 4,500 homes, and larger ones use more than most industrial facilities. While current costs are fully covered, the increased strain may raise utility rates for other consumers. Tech companies defend the incentives, stressing their commitment to covering growth-related costs and investing in sustainable energy. Amazon, which has contributed $460 million in property taxes and invested over $75 billion in Virginia since 2011, emphasizes strict investment and job creation benchmarks tied to incentives. Google and Microsoft similarly highlight their partnerships with utility companies and investments in renewable energy sources, such as wind and solar power. However, Apple, OpenAI, and Oracle did not respond to requests for comment. Industry insiders and economic researchers offer mixed reactions to these tax incentives. While some acknowledge short-term economic benefits, particularly during the construction phase, others warn of long-term drawbacks, including reduced public service funding and increased utility costs. The debate highlights the tension between state efforts to attract high-tech investments and the potential financial and environmental impacts on communities. The discussion around data center tax incentives encapsulates broader concerns about corporate subsidies and their efficacy in driving economic growth. While tech companies and some economic development experts argue that these incentives create jobs and stimulate local economies, watchdog groups and researchers raise valid points about the financial and environmental sustainability. Virginia’s experience suggests a moderate economic benefit, but the hidden costs and long-term impacts warrant careful consideration. Tech companies' commitments to sustainability and local investments should be transparently evaluated to ensure they genuinely contribute to community well-being.