Despite the growing necessity of data centers as the demand for their services increases, there is debate over their associated costs and benefits. This is especially the case with how many taxpayer-funded incentives state and local governments should offer to attract their construction.
Data centers are structures dedicated to the constant storing and processing of information by computer systems. They are an essential aspect of modern technological infrastructure, supporting a vast spectrum of functions and services from personal activities such as texting and streaming to supporting healthcare infrastructure and storing sensitive national security files. They are the backbone of the digital world.
Last month, the Foundation highlighted some of the impacts and tradeoffs associated with the rise of the data center industry in Georgia. The Peach State has become a hub for data centers as states around the country compete with one another to attract tech companies to come and build.
Since the passage of House Bill 696 in 2018, Georgia has exempted a portion of construction materials and other equipment related to data centers from state and local sales and use taxes. To qualify for the exemption, data center projects must meet specific investment and job creation thresholds, which vary based on the population of the county where the data center is located.
While the data center industry has grown rapidly since the tax credit was introduced, there is debate over how influential the credit has been over that growth. In late 2022, the University of Georgia’s Carl Vinson Institute of Government released a report that evaluated tax incentives for Georgia’s data centers. This study calculated the return on investment of the credits, or in other words, how much economic activity would have occurred if not for the subsidy.
It was determined that 90% of data center activity in Georgia was due to its tax incentives, a result that mirrors a similar study conducted in Virginia in 2019. This would seem to imply that the tax incentive is almost wholly responsible for the industry’s existence, but the full picture is a bit more complicated.
The Carl Vinson Institute report notes that many other factors go into the selection of construction sites for data centers, and that their research lines up with anecdotal evidence that, “while sales tax incentives may not ‘seal the deal’ on attracting new data center projects, a lack of incentives can certainly ‘kill the deal.’” Some also argue that industries overstate the role that tax credits play and that incentive studies are positively biased to attribute economic activity to subsidies.
Regardless, the impact of incentives across almost all industries is nuanced and context-dependent, and there are differences in the effects of incentives for data centers and other industries. For example, unlike incentives for manufacturing or the film industry, data center incentives often generate less long-term employment, but they are frequently justified as infrastructure investments, often driving upgrades in transmission, accelerating renewable energy projects and catalyzing innovation in regional grid management.
No matter how much activity is the direct result of tax incentives, the debate over costs and benefits does not stop there. While the incentive spurred investment and growth in Georgia’s data center industry, it has also led to revenue losses. The Carl Vinson Institute report estimates that forgone state tax revenue will have multiplied tenfold, from $8 million in 2018, the incentive’s first year, to $80 million in 2030. Consequently, state tax collection from the construction and operation of data centers would not offset forgone revenue.
Negative fiscal impact through revenue loss was similarly projected from minus-$5.4 million in 2018 to minus-$56.7 million in 2030. When accounting for combined state and local tax collections, Georgia’s data center incentives have waived at least $163 million in each year since 2022.
It is important, however, to view this revenue loss in the context of what, according to the study, is an almost-entirely incentive-driven industry. That is to say, if 90% of data center activity in Georgia is due to the tax incentive, then it can be assumed that most of the revenue that is “lost” would not have existed in the first place if not for the incentive. (The Foundation takes no position on whether the 90% estimate is accurate.)
Economic activity can be a difficult thing to quantify and weigh for analysts and lawmakers alike. It is worthwhile to question how precise an impact analysis is possible given some of the intangible or indirect benefits that a growing data center industry signals. While many of the services provided by data centers are apparent, other benefits are less tangible. Data centers typically don’t deliver large job numbers or immediate financial returns. They can, however, lay the groundwork for long-term innovation that’s consequential but harder to measure.
Last year, Georgia’s tax credits were on the chopping block when both of Georgia’s legislative chambers narrowly passed House Bill 1192, which would have paused the issuance of new sales and use tax exemptions for data center projects starting in July of 2024 while allowing existing projects to retain their exemptions. It also proposed the creation of a Special Commission on Data Center Energy Planning. The bill was vetoed by Gov. Brian Kemp, who asserted that it would undermine investments made after the incentive was extended by the legislature in 2022.
While Georgia’s tax incentives have been effective at attracting data center investments, they also pose challenges in terms of fiscal impact. Policymakers will have to balance benefits with long-term fiscal implications moving forward. This is likely to be an even tougher problem to navigate if forgone tax revenue does indeed continue to increase over the next few years. Rising demand for the services that data centers provide isn’t slowing down any time soon, and continued industry growth is necessary to maintain a safe and stable digital infrastructure.