Adapting data center incentives

Data centers are already big business, and the growth forecast is astonishing. Several states are figuring out how to plan for the expected demand. Meeting anticipated energy consumption is the most urgent challenge, but other environmental, noise, and land use issues are also affecting how some communities view data centers. The role that incentives play in attracting data centers is getting more attention in this changing environment. 

In Virginia, the Joint Legislative Audit and Review Commission just issued a draft report examining the impacts of the data center industry on the Virginia economy and state and local policies regarding the industry. The report is well worth reading for the ways it addresses economic and fiscal impacts, energy impacts, natural and historic resource impacts, and local residential impacts. 

Of interest to us, JLARC also considers how Virginia’s data center sales tax exemption could be improved. The report notes that this exemption provided $928 million in tax savings to the data center industry in FY23, making it “by far” Virginia’s largest economic development incentive. 

The report finds that, “Changes to the state’s data center sales tax exemption could address some policy concerns related to the industry.” These changes could take several forms:

• Extend the exemption to maintain industry growth
• Allow the exemption to expire to reduce industry growth and associated energy impacts
• Change the exemption to balance industry growth and energy impacts, for example, by moving from a full to a partial sales tax exemption 
• Use the exemption to address other policy concerns related to the state center industry, such as energy, natural resource, historic resource, and residential impacts

For the last bullet point, options for using the exemption to address policy concerns include:

• Requiring data center companies to meet and certify to an energy management standard as a condition of receiving the sales tax exemption
• All new data center developments in the Northern Virginia Ozone Nonattainment Area use only certain types of generators with lower emission rates as a condition for receiving the sales tax exemption
• Requiring data center companies to meet and certify to an environmental management standard as a condition of receiving the sales tax exemption
• Requiring data center companies to conduct a sound modeling study prior to development that is located near a residential development and provide the findings to the appropriate locality as a condition of receiving the sales tax exemption

Reviewing incentive policies to make sure they are still aligned with state priorities and to initiate changes as needed is a best practice. In this case, establishing criteria that helps the state incentivize higher quality investments that consider environmental, energy, and local priorities makes good sense. Just as most states have established quality jobs requirements for their tax credit programs, it may be time for more states to consider criteria that will help direct their incentive dollars to quality investments.