Report shows runaway data center tax breaks by states

Feed this into a computer and see what it spits back: To enhance the economy, and with it tax revenue, a state offers big tax breaks to data centers only to lose $100 million a year.

It's a loss in both revenue and budget transparency, but a new report is shedding light on the issue — and how Iowa is among the states falling short.

The nonpartisan Good Jobs First (GJF) has studied state tax breaks nationwide for many years and recently released a new study, “Cloudy With A Loss of Spending Control: How Data Centers Are Endangering State Budgets.”

In their report, Greg LeRoy and Kasia Tarczynska found 10 states already lose more than $100 million a year in such abatements, with Texas losing more than $1 billion a year. In some states it's becoming an expensive habit, with revenue losses in three states spiking 10 times in recent years.

At the same time, some states are slow to disclose information publicly — including Iowa, which publishes tax expenditure reports only every five years — while a dozen don't disclose even their aggregate revenue losses.

In its last report, for FY 2020, Iowa reported a $151 million cost of sales and property tax breaks for data centers.

As it happens, the report is timely for the Iowa Legislature, which is nearing a close of its legislative session but has two live bills where GJF policy recommendations for states would be helpful.

Until recent years, economic development incentives traditionally were sold as a strategy to promote good-paying jobs with benefits, spinning off progress throughout a local economy, and spurring investment and tax revenue to support communities. These notions put data center promoters to the test.

As GJF notes, these cloud-computing warehouses — which rapidly proliferated even before artificial intelligence — create few permanent jobs but are extremely capital intensive.

“So when 32 states exempt their building materials and equipment from sale and use taxes, state (and local) treasuries lose huge sums of revenue,” GJF noted in a news release. “In at least six states, the exemptions are indefinite.”

Iowa currently has one of those indefinite exemptions for sales tax. There is no expiration of a sales and use tax exemption for backup power generation fuel and electricity purchased by a web search portal, a web search portal business, or a data center for maintenance and operation.

Legislation still alive in the 2025 legislative session would set a 10- or 15-year expiration but direct that revenue to a revolving loan fund to support energy infrastructure. It also expands a property tax exemption for owner-occupied data centers to also include leased centers.

In addition, a multi-faceted tax credit bill remains alive that, among other things, permits less public information about a reformed research credit than current law provides for an overly generous subsidy. Both bills could be amended to include some good-government, transparency measures suggested generally for states by Good Jobs First.

“We know of no other form of state spending that is so out of control. Therefore, we recommend that states cancel their data center tax exemptions,” said Good Jobs First Senior Research Analyst and report co-author Kasia Tarczynska.

“Shy of that, states should amend enabling legislation to cap how much any facility and company can avoid paying in taxes each year.”

Good Jobs First also recommends states pause these programs to consider the full impact of data centers on state budgets, residential and small business electricity prices, and harm to the “business climate” caused by rising electricity prices.

Finally, GJF recommends that states should disclose the full costs of the subsidies annually by recipient, how many new jobs were created, wages, and what communities get in return.

Mike Owen is deputy director of Common Good Iowa. Contact: mowen@commongoodiowa.org

That is the kind of reform Common Good Iowa has been promoting for business tax breaks for many years. Now is the perfect time to do it.

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