State and federal policymakers are moving to strip data centers of ordinary tax exemptions.
Data centers have fallen out of favor with the public.
Critics’ unfounded claims that these facilities consume large amounts of water and electricity while shifting the costs onto the broader population have eroded public backing. Officials have responded with stringent new land-use rules, and even outright moratoriums, on new data center projects.
Not content with simply zoning these ventures out of existence, politicians are now aiming to tax them into oblivion as well.
At the federal level and in dozens of states, lawmakers are proposing to exclude data centers from various business tax incentives and exemptions.
In Congress, Senators Mark Warner (D–Va.) and Ron Wyden (D–Ore.) have both introduced bills that would remove data centers from certain capital-investment tax breaks, with Wyden’s proposal also proposing a new gross receipts tax on data centers.
The National Conference of State Legislatures reports that 28 states have considered legislation to reduce or eliminate “tax incentives” granted to data centers, with the most common target being sales tax exemptions on their purchases of software, equipment, construction materials, and other business inputs.
Proponents of these tax changes argue that they merely eliminate special breaks that unfairly favor data centers while shifting more of the tax burden onto ordinary citizens.
“Michigan families are working hard to keep up with the rising costs of gas, groceries, and child care. They shouldn’t be asked to shoulder more of the burden while data centers and big tech companies, which are already earning record profits, receive yet another hefty tax break,” Rep. Kristen McDonald Rivet (D–Mich.) told Politico.
Yet many of the provisions in the tax code that are being targeted are standard exemptions offered to most businesses as a matter of course.
That is especially true of the sales tax exemptions that are now under scrutiny.
As a recent Tax Foundation brief on state-level data center taxation argues, the most palatable sales tax regime “falls exclusively on final consumption,” since that approach does less to penalize investment and economic growth.
Removing a sales tax exemption for data centers’ outlays on new servers, building materials, and similar items would shift state sales taxes toward a tax on investment. By treating data centers differently from other businesses, it would also render the tax code more distortionary. Neither outcome is ideal.
Not all states’ sales tax exemptions for capital spending are identical.
Some apply to data centers by virtue of being generally available to all businesses. Others extend exemptions to data centers only if they meet certain investment levels or employment thresholds.
The Tax Foundation paper criticizes the latter approach for turning what should be a neutral, broadly available exemption into a targeted tax incentive.
Yet lawmakers’ more recent attempts to modify or eliminate exemptions for data centers would tilt the tax code even more in favor of certain firms over others.
Press coverage of these sales tax exemptions habitually frames states as “losing” money because of them. But this framing reverses the reality. A state with no data centers would lose nothing by keeping data centers within its sales tax exemption; it would simply not collect revenue from those taxes that would apply to centers that do not exist there.
If a data center did relocate to that state, tax revenue would rise as would the “losses” tied to the exemption. It’s a curious claim to suggest that the more tax data centers pay, the more they are costing the state.
The same logic applies at the federal level.
Under the recently enacted tax reform bill passed by the Republicans, data centers are among the businesses eligible for “full expensing” of their equipment spending. This means they can deduct the entire cost of their capital investments in the year they are made, rather than spreading those deductions over multiple years as in previous regimes.
There has been lively debate on social media among tax-policy specialists about whether full expensing is truly a subsidy. Regardless of one’s stance on that question, data centers are far from the only type of business able to claim this deduction.
Removing them from this exemption, as Warner and Wyden’s proposals would do, would render the tax code even more tilted toward favoritism.
The backlash against data centers is partly explained by a nationwide construction surge in this sector. Thousands of facilities are in the pipeline, and as they come online, the fiscal consequences of how they are taxed become more pronounced.
The line between a crony-like tax advantage and a neutral decision not to levy a tax on a particular kind of economic activity can be blurry. Some data center projects do benefit from the former.
Yet the current drive to levy heavier taxes on data centers has little to do with advancing fairness. It represents a punitive move against a disfavored industry that would make the tax system less fair and leave all of us poorer.
