Day: April 25, 2025

As the AI boom continues to escalate, states have rushed to entice data centers with juicy tax breaks. Data centers not only provide cloud based storage, but also power the training of increasingly powerful AI models. Lawmakers in more than 30 states have carved out tax incentives for data center companies, arguing that without them, the data centers wouldn’t come—and that their presence is essential toward growing property and income tax revenue, and driving economic development.

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But some economists and policy experts have started to question this logic. In a new study from Good Jobs First, a nonprofit research group, authors Greg LeRoy and Kasia Tarczynska find that data center tax breaks have swelled to billions of dollars in lost revenue for states a year—and that those losses, for some states, actually outweigh the tax revenue that the data centers bring in.

“It’s a billion-dollar subsidy to the industry that is dominated by a few big tech companies,” says Tarczynska. 

Conversely, other economists and data center lobbyists argue that the industry’s overall impact vastly outweighs those potential losses, including by supporting local infrastructure and catalyzing further investment. The paper’s authors contend that even if there are positives, the public doesn’t yet know the extent of their costs, which are often obscured by tax privacy laws, confidentiality agreements or a sheer lack of research. 

“All politicians and corporations want to talk about are the benefits, while ignoring or downplaying the costs of development subsidies,” LeRoy writes in an email to TIME. “Let the companies compete on quality and price, not on how much they can extract from taxpayers and distort economic development and land use.” 

‘Up and up and up’

Many data center agreements are shrouded in secrecy, which means that the paper’s authors had limited data to draw from. At least 12 states, Leroy says, share no data on tax expenditures for data centers at all. 

But by looking through state budgets and other fiscal reports, the paper’s authors found that at least 10 states are missing out on $100 million per year in tax revenue. Much of this comes from subsidies for equipment like expensive servers, which need to be swapped out every few years. Many of these exemptions are uncapped in terms of their dollar amounts or time limit. This means that as data centers grow in size and power, so do the subsidies, forcing states to drastically recalculate their budget projections. In Texas, the cost projection for its data center sales tax exemption program increased from $157 million in 2023 to $1 billion this year. 

“These hyperscalers come and spend a lot of money, and the tax breaks are going up and up and up,” says Tarczynska. 

Data center proponents offer several rebuttals. First, they argue that most states already offer tax exemptions for manufacturing equipment—and these new carveouts are simply bringing the data center industry in line with those rules. They also argue that without subsidies, data center companies would set up shop elsewhere. In 2022, a tax incentive evaluation study from the Carl Vinson Institute of Government at the University of Georgia found that 90% of data center activity in Georgia was due to the incentive—implying that without those tax breaks, all of that business would essentially vanish. 

However, there is debate in economic circles around how much incentives actually cause economic activity. A 2018 paper from the economist Timothy Bartik found that the percentage of firms who made a location decision based on an incentive was much lower than the Vinson number: between 2 and 25 percent. “You need to allow for the fact that for some incentives, you would have gotten some data center activity anyway,” Bartik tells TIME. “My view is that there are potentially some fiscal benefits of data centers, but the industry is vastly overstating them.”

Read More: Inside Amazon’s Race to Build the AI Industry’s Biggest Datacenters

A debate in Georgia

Data centers are a particular point of contention in Georgia, where they are growing at an unprecedented rate, particularly in the Atlanta metro area. State reports show that data center incentives have waived at least $163 million in local state and sales tax collections each year since 2022. The Governor’s Office of Planning and Budget estimates those incentives will surpass $327 million next year. 

Last year, Georgia state senate finance committee chairman Chuck Hufstetler, a Republican, spearheaded efforts to scrutinize tax breaks, resulting in the state legislature passing a bill halting tax breaks to data centers for two years. But Governor Brian Kemp vetoed it, saying that it would harm investment plans. 

Hufstetler tells TIME that the incentives are unnecessary. “The thing I’ve seen is that it’s a competition of who can build it the quickest. It’s more important to them that they’re built first versus the cost,” he says. “I’m not opposed to data centers. But if they’re going to come, it shouldn’t be on the backs of local people, and they should be paying all their costs.“ 

Georgia state senator Sally Harrell, a Democrat, agrees, and contends that data centers do not provide long term jobs or serve local businesses. Data centers typically employ just a few dozen workers, which pales in comparison to factories of similar sizes. “The local community is left footing the bill for big, national companies that generate economic activity elsewhere,” she writes in an email to TIME. 

The aforementioned 2022 Vinson study in Georgia found that the amount of revenue forgone due to exemptions far exceeded the tax revenue generated by data centers, resulting in a negative state fiscal impact of $18 million in 2021. The study argued, however, that because the data centers would mostly not have been established without the incentive, their overall economic impact was significantly positive.

Nathan Jensen, a professor at the University of Texas Austin, argues that this line of reasoning is flawed. “It’s always a bit of a trick where they cite the economic impact: You could go to a Walmart parking lot and throw $100 in the air, and that would have a net positive economic impact,” he says. “The key is the fiscal impact: does the state make its money back?” 

Read More: How AI Is Fueling a Boom in Data Centers and Energy Demand

A defense of data centers

Stephen Hartka, vice president of research at the Virginia Economic Development Partnership, has a different perspective. He says that the “overwhelming majority” of data centers in Virginia were brought to the state by incentives. He argues that economists who only look at state tax revenues miss the fact that Virginia’s tax structure sends more benefits to smaller localities—who especially benefit from the property taxes that data centers pay. 

He also says that data centers can be particularly valuable in rural areas that have struggled to attract businesses. “Data centers are a very good fit for these rural areas, because they don’t require a lot of people and they generate a ton of revenue for local governments,” he says. “They are financial boons to these communities that might not have many other options.” 

However, there has been a groundswell of activism against data centers in many Virginian communities. Last year, Ian Lovejoy, a Republican state delegate in Virginia, told TIME that data centers were the “number one issue we hear about from our constituents.” Residents expressed concerns about data centers threatening electricity and water access, and worried that taxpayers may have to foot the bill for future power lines. Across the country, communities have complained about data centers emitting pollutants and harming quality of life. 

LeRoy, the author of the Good Jobs First study, cautions localities from making “land use decisions based not on jobs or quality of life, but on how much they can get in tax revenue from a particular use.” He points to a precursor: when localities rushed to build malls and big-box retail centers for the sales and property taxes they brought in, only for them to be deserted when e-commerce took its place. 

The direction of data centers and their national expansion is still hazy. But watchdogs like LeRoy and policy experts like Jensen wish that more data was provided about the massive tradeoffs that states are making, and whether they are worth it. “I think the simple story is these are heavily subsidized capital intensive investments, which makes a pretty tough value proposition for communities,” Jensen says. “Because it’s the tax revenues that are the biggest benefit, and you’re giving a ton of that back.”