Sales Tax Slice: Seeking Job Growth, Why Are So Many States Looking to Data Center Exemptions?

Data Center

In recent years, data center incentives have been particularly popular with states seeking to spur job growth. Google, Microsoft, Facebook, Apple, and Amazon have received a combined $2 billion in state and local subsidies for their data centers according to Good Jobs First’s recent report, Money Lost to the Cloud.  

Popular as they may be, are these incentives worth the revenue forgone by the states? While data centers require massive capital investment, they create few full-time jobs. Based on a survey of 11 large-scale deals, Good Jobs First concluded in its report that on average 1 job was created for each $1.95 million in tax revenue forgone. Ken Patchett, Facebook’s Director of Western Data Center Operations, has criticized this analysis, stating, “Nobody’s writing a check to Facebook.” Last month, Fargo, North Dakota granted $500,000 in tax incentives to a data center projected to create three jobs.    

Currently, 25 states have some form of sales and use tax exemption for data centers. For example, Utah exempts from sales and use tax machinery and equipment purchased by a qualifying enterprise data center. Pennsylvania will start refunding taxes paid on equipment purchased by qualifying data centers on July 1, 2017.   

Most states do not condition their data center exemptions on a certain number of jobs being created. Some do. Texas requires that a data center create 20 jobs that pay 120 percent of the average county wage to qualify for exemption. 

Even without creating many jobs, these exemptions may still be worthwhile if data centers would locate elsewhere without them. In a previous blog post, I postulated that data centers have a unique flexibility in selecting their location, making incentives crucial to lure them to a particular state. Good Jobs First’s report disagrees. According to the report, companies consider many factors in locating their data centers and the availability of tax incentives is rarely a significant factor. Thus, it concludes, “public officials routinely pay companies to do what they were already planning to do.” If this is the case, these incentives may be difficult to justify regardless of the number of jobs created. An earlier report by CBRE agrees that tax incentives are secondary to such factors as the cost of electricity, climate, and available telecommunications infrastructure.   

Are data center incentives good policy? Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn.  

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