It’s no secret AI giants are racing against each other to build data centers across the country. With the AI boom skyrocketing in the 2020s, the U.S. has grown to nearly 5,000 data centers across all 50 states to date, with hyperscalers driving much of that expansion. But with that growth comes tax incentives that seem to scale further than market competition.
According to a report from JLL, a commercial real estate and investment management company, the global data center sector will likely expand at a 14% compound annual growth rate through 2030—and it notes “hyperscalers will remain a key driver of sector growth.” And with that growth comes significant savings for the hyperscalers: nearly three-quarters of all states employ tax incentives for data center development—which include exemptions from sales and use tax, property tax and “financial transactions” tax.
The eligibility of these exemptions differ state by state, however. Some states like Texas require a substantial—at least $200 million—capital investment in the data center project, others such as Maine require a certain amount of square footage to be eligible, and a few states also require employment metrics to be met. Certain states, like New York, have no minimum investment requirement—and to sweeten the deal further, the tax exemptions are applicable for a wide range of data center expenditures.
Such measures are evident in the New York Department of Taxation and Finance structure, for example, in which data center tax incentive eligibility covers property, services, equipment and contracts. The incentives for the data centers themselves lie in the inherent replacement cycle required for upgrades and system life.
Capital expenditures like electrical systems, batteries and structures have usable lives in excess of 20 years—but other types of equipment such as cloud computing operations often have lives of as short as three years due to the high strain of AI computing. Based on the nature of equipment churn, the Tax Foundation found that a $5 billion data center could “easily spend more than a billion dollars a year on machinery and equipment,” making sales taxation a “significant” consideration when choosing development.
Data centers, assuming they meet the minimum threshold required to be eligible depending on the state, are exempt from paying sales tax on equipment and machinery for years following their construction. States that already do not employ sales tax, such as New Jersey, incentivize data center development through property tax abatements and tax credits instead. This effectively means states are passing up billions in tax revenue to further cultivate the AI boom.
And that’s creating a real financial problem for some states.
According to an investigative report by Good Jobs First, at least 14 states failed to disclose tax abatement revenue losses suffered from data centers. Illinois isn’t one of those 14, but it does have a related issue—the state has historically “published evidence [which] shows soaring revenue losses.”
“The number of data center projects awarded the sales and use tax exemption in the Prairie State increased from six in 2020 to 27 by 2024,” the report read. “The Department of Commerce and Economic Opportunity’s annual Data Center Investment Program report stopped providing an annual revenue-loss number in FY 2023.”
Qualified data centers in Illinois receive exemptions from state and local sales and use taxes on “tangible personal property essential to operations,” according to the Illinois Data Center Investment Program. The equipment property eligible includes servers, computers, data storage devices, electrical systems, network and telecommunications infrastructure, software, climate control systems and building materials incorporated into the facilities. The state also offers a 20% income tax credit on wages paid to construction workers involved in building the center. These exemptions are valid for up to 20 years within renewable five-year increments, and are contingent on continued investment from the data center. This has caused states to roll-back on previous aggressive tax incentives for data center development.
But don’t think of these exemptions as a free gift for tech giants looking to build more property. Illinois requires a minimum capital investment of at least $250 million to be eligible for the tax exemption—and other states have minimum investments in the millions as well. Virginia, colloquially named “data center alley,” hosts nearly 35% of global total hyperscale facilities—and requires $150 million in capital investment with at least 50 new jobs located at each data center paying over 150% of the local average wage.
Across the country, minimum investment eligibility measures range from up to $450 million in Kentucky to as low as $2 million in parts of Maryland.
Is the juice worth the squeeze?
With all this, it’s still up in the air if this investment and tax incentives are truly stimulating the economy.
A Georgia Tech study from July posits the capital investments of these data centers may help spur the local economy in the short-term, but long-term benefits have less measurable benefits. Based on the findings, employment rose about 3.5%, wages by 5% and household income by 2% when a data center opens. But the researchers also found that the “gains are much smaller than what might be expected from a large investment,” and “they’re not evenly distributed.”
The study also found that was a trade-off to the slight bump in economic development. The researchers found electricity prices rose about 5% after a data center began operation, mainly due to the large power consumption necessary to keep one running. This tracks with moves made by grid operators across the country, showing signs of the electricity bill attached with AI buildout.
“When the benefits to communities are small, even downsides like higher electricity prices that strain infrastructure will be felt by locals,” the study read.
Evidence from Brookings, a public policy thinktank, also found that data centers create local jobs—but not as much as industry advocates had claimed. According to its report, wages were unaffected by data center development, and “subsidies may matter more for precisely the facilities that generate the smallest employment benefits.”
This story was originally featured on Fortune.com