The recent boom in data center construction caused in part by the deployment of artificial intelligence (AI), is harming state and local budgets. That is especially true because many states have enacted “as of right,” or automatic tax abatements, for nearly all new data centers, no matter how numerous or big they are.
These unforeseen budget harms are most visible in Virginia: its northern counties have the world’s largest concentration of data centers. Like many states, Virginia does not collect sales or use tax on data centers’ building materials, machinery, or equipment — including the servers that must be replaced periodically.
Virginia enacted its data center tax abatement program in 2010 but did not disclose the program costs until 2017. Only then, thanks to GASB Statement 77 on Tax Abatement Disclosures, did the state include data center revenue losses in its Statement 77 Note in its Annual Comprehensive Financial Statements (ACFR). In that first-disclosed year, the program cost Virginia $65 million. By 2022, those losses jumped to $136 million and then in 2023 to $750 million— an increase of 1,051% in just six years.
Annual Costs of Virginia’s Data Center Sales and Use Tax Exemption
Sources: Virginia Annual Comprehensive Financial Reports
Virginia doesn’t disclose which companies get how much of that $750 million, but we could speculate the increase is connected to Amazon investments and to the creation of the Mega Data Center Incentive Program. Microsoft also recently made a massive expansion in Mecklenburg County.
Despite statewide losses via the sales tax abatements, locally some places in Virginia see data centers as a rich new source of property tax revenue. Localities in the state can set a specific property tax rate for computer equipment.
Loudoun County, home to largest concentration of data centers in Northern Virginia, taxes data center equipment at a higher rate than neighboring counties. This generates tax revenue for a single locality: $663 million in 2022 in Loudoun County alone.
This is an example of a recuring problem in tax policy: diffuse costs and concentrated benefits. All 8.6 million residents of Virginia lost about $87 each, which is hard to notice. But Loudoun County’s 440,000 residents gained about $1,506 each. So, the local gain is far more noticeable than the statewide pain.
What is the solution then?
One is to cap the state program’s cost, both annually statewide and per company. This will work only if the state fully discloses how much each data center and each company receives in tax breaks. Without those checks and balances, the program costs will only grow even more.
At the local level, localities, with state guidance, could introduce revenue-sharing schemes, in which localities that benefit disproportionally from selected projects share the tax revenue they gain with other localities in the region or the state.
Bottom line: Virginia’s data center tax-loss trajectory is not sustainable. The rise of AI is accelerating data center construction and thus more sales tax exemptions. Public officials should pause and evaluate the validity of this program and at minimum disclose which companies benefit from this entitlement.