Illinois is conducting an economic experiment that Virginia might do well to study — unless, of course, Virginia decides not to wait on those results and instead forges ahead with its own experiment.
The economic experiment in question deals with data centers and how they’re taxed.
Last week, Illinois Gov. J.B. Pritzker — in what Capital News Illinois called “a surprise move” — announced that he will suspend the state’s tax incentives for data centers.
This is probably smart politics: Data centers have become unpopular, and the tax abatements for data centers have come to be seen in some quarters as giveaways to “big tech.”
Whether this is smart policy is yet to be seen. Unfortunately for Virginia — which is now embroiled in its own debate over data center taxation — the impact of the Illinois policy change may not be known for years, which is longer than many politicians want to wait.
The rap against data centers is that they burn a lot of energy and drink a lot of water while not creating many jobs.
The flip side is that data centers pay a dragon’s horde in taxes — even with tax incentives — and the jobs they create are high-dollar.
The question with Pritzker’s move in Illinois — which applies to Virginia, as well — is what impact, if any, a change in data center tax policy will have on those tax revenues and jobs. Illinois is a significant market for data centers. Only three states have more data centers, with Virginia at the top of that list (for now).
Senate Finance Committee Chair Louise Lucas, D-Portsmouth, the most adamant in favor of eliminating these tax incentives as soon as possible, sees $1.9 billion in forgone taxes that otherwise would flow into the state treasury — that’s understandably a tempting amount of money. What we don’t know is whether this is a case of collecting that $1.9 billion now only to see the industry gravitate elsewhere over time, costing Virginia jobs and money it could have held onto.
More to the point: Are data center tax incentives a giveaway or an investment? If they’re abolished, and data centers keep coming, then the tax incentives were a giveaway. If they’re abolished, and data centers stop coming, then the tax incentives were an investment. While there are opinions on both sides, the reality is that we really don’t know what impact their elimination will have. The data center industry is relatively new, historically speaking, and while some states have moved to scale back or eliminate their incentives, those moves are so recent there’s no data to go on. (Washington state, for instance, ends its incentives July 1; Minnesota ended its incentives last year.)
Data centers are not like sports teams that will just pick up and move; the risk is that data center companies stop updating the technology at a particular site and, over time, open operations elsewhere. That takes time to measure, and we just haven’t had enough time yet to know what the true impacts might be. Instead, all we have are glimmers: The performance agreement for the Stack company, which is looking at building a data center complex in Pittsylvania County with a minimum of 2,500 jobs, is predicated on the state’s tax incentives staying in place. Secretary of Finance Mark Sickles told the Senate Finance Committee last month that another company had scratched Greensville County off its search list for two sites; just one data center might have doubled the amount of tax revenue Greensville takes in every year.
Those examples introduce a distinct regional dimension to this debate over data center taxation: Some suburban localities in Northern Virginia may have had their fill of data centers, but some (though certainly not all) rural areas now see themselves finally getting attention from data centers — and worry that they’re about to be denied an opportunity that more affluent localities have enjoyed to excess.
Caution would dictate that Virginia hold off on decisions until we understand the market better; others would say that the time for caution has passed when a tax exemption whose impact was originally assessed as “unknown” is now quite known, and approaches $2 billion in revenue the state isn’t collecting.
Here’s what we do know:
Virginia is going to lose its dominance in data centers no matter what we do
Virginia right now has more data centers than anywhere else in the world. By 2030, Texas will surpass Virginia, based on the number of projects that have been announced. Texas has things Virginia does not: Lots of flat land, for one. Visual Capitalist also says the Lone Star State has “faster permitting and a deregulated grid” that makes it easier to get data centers up and running. This is neither an argument for Virginia to keep its tax incentives nor abolish them, just a recognition that we’re in a dynamic environment. If Virginia does away with its incentives, somebody someday will surely say that’s why Virginia lost its top spot — such a move might accelerate Virginia’s relative decline in the market, but it’s going to happen anyway.
38 of 50 states have tax incentives for data centers
The National Conference of State Legislatures says that only 12 states don’t have any kind of tax incentives for data centers; that number will rise to 13 once Washington eliminates its incentives. These states are clustered in three parts of the country: New England, a swath of states from New Mexico to South Dakota, and the West Coast (including Alaska and Hawaii).
If Virginia were to eliminate its tax incentives for data centers, we would be the only state east of the Mississippi that’s not in New England to have that status. What impact would that have? Once again, we don’t know for sure, although data center companies have warned that investment would go elsewhere, which might be quite fine with data center critics, but not with the local governments that want data centers for the tax revenue they provide.
The nature of these tax incentives varies widely
In a report on tax breaks for data centers, the National Conference of State Legislatures reports that “no two states are exactly alike.”
Virginia’s tax break exempts certain technology used in data centers from sales taxes. Among states with tax incentives for data centers, that’s the most common scenario. However, some states do just the opposite: They tax the technology but not the property. Virginia taxes the electricity used in data centers, but 18 states don’t, and a 19th, Tennessee, has a special low tax rate for electricity going to data centers.
Virginia has one of the nation’s highest thresholds to qualify for tax incentives: Data centers have to create 50 new jobs that pay at least 150% of the local prevailing wage, although that job threshold drops to 10 if the project is in an economically distressed area. Of the states with tax incentives for data centers, 13 have no jobs threshold at all. Only Massachusetts requires more jobs than Virginia — “100 permanent, full-time jobs within five years,” according to the National Conference of State Legislatures.
The point is that there are lots of ways to structure incentives. Virginia could scale back the size of the tax abatement and not risk projects like the proposed Stack development in Pittsylvania County by setting higher job thresholds. It could set lots of other requirements. Or we could go back to the way Virginia’s tax incentive law was originally structured and have it apply only to economically distressed localities. Or we could be like the states that don’t have any tax incentives, if that’s where we want to be. We’d just have to be comfortable with the risk of those rural areas losing jobs that might have come their way.
Virginia appears to forgo more taxes than any other state
Let’s begin with a solid figure from a solid source: Virginia’s tax commissioner reported earlier this year that the tax abatement for data centers in fiscal year 2025 was $1.9 billion — meaning that’s what the state didn’t collect. That appears to be more than any other state, which makes sense, since we have more data centers than anyone else.
Virginia gets more bang for its buck, though
That $1.9 billion in foregone taxes has to be measured against what the tax commissioner said was $48.5 billion in investment. If you want to look at this way, for every $1 in tax revenue the state doesn’t collect, it generates almost $25.50 in investment. Whether that’s a good deal or not depends entirely on whether you think the state would continue to attract that investment anyway — or whether we even want that investment.
How does that compare to elsewhere? Here is where we must blame our founders for federalism. Just as the details of tax incentives vary from state to state, so does the accounting. That makes it hard to make state-to-state comparisons, although, conveniently, a report from Illinois lines up quite nicely. In Illinois, the state has forgone $983 million in taxes through data center incentives. That’s measured against $15.7 billion in investment, which means in Illinois, the rate of return is $16 for every $1 of a tax break. By that measure, Virginia’s tax break is more productive than the one in Illinois.
What about jobs?
Virginia’s report cites 9,395 jobs tied to the data centers that qualify for its $1.9 billion in tax breaks. That’s $202,235 in foregone taxes per job. The Illinois report cites 591 jobs at the data centers that qualify for $983 million in tax breaks — a rate of $1.6 million per job.
Both those figures are outrageously high. However, these are the jobs specifically at those data centers in question; they don’t take into account the larger business ecosystem of data center jobs — contractors, supply chains and so forth. Let’s factor those in and see what we get.
In May, the Data Center Coalition released a report from the consulting firm PwC that attempted to compute the number of data center jobs per state. The figure for Virginia is 49,000; for Illinois, 32,100. However, a General Assembly study put the figure higher: 74,000 jobs in Virginia.
If we measure those Data Coalition Center figures against the tax abatements, then that’s $39,620 in tax abatements per job in Virginia; in Illinois, $30,629. If we go with the Joint Legislative Audit and Review Commission report (and their studies have always been rock-solid, so I’d trust their work over the industry study), then Virginia’s tax abatement works out to $25,675 per job.
That still seems pretty high. However, we also know that data centers are not necessarily big job generators. The communities that want them see them as tax generators first, job creators second.
If you want to take the least favorable view of data centers, you’d measure the tax abatements against the jobs created. By that scale, data centers would be found wanting — unless, perhaps, they locate in economically distressed areas that have been losing jobs, particularly high-wage ones. Until recently, though, that’s not where data centers have been looking; they’ve generally looked in Northern Virginia or the Richmond area.
If you want to take the most favorable view, you’d measure those tax incentives against the tax revenue. Data centers have helped Mecklenburg County build new schools while other rural counties have struggled to do the same. Loudoun County has been able to lower its tax rate because so much of its revenue comes from data centers. Or you could measure it against investment dollars — or their gross domestic product. The PwC report said the GDP for data centers in Virginia is $14.7 billion (which is higher than the figures I’ve seen reported before, but we also have more data centers than before). In Illinois, it’s $9.6 billion. That means for every $1 of tax abatement in Virginia, we get $7.73 of GDP. Illinois gets $9.76. In Investment circles, a return of nearly 8-to-1 would seem pretty good. The JLARC study said that without the tax incentive, maybe 90% of this investment would not have happened. Virginia’s tax commissioner reported earlier this year that the figure might really be closer to 100%.
So out of all these figures, which are the best ones to go by? Ultimately, that depends on whether you think these tax incentives are a giveaway or an investment. If you really want to know for sure, we should wait and see what happens in Illinois over the next few years. That’s what a scientist would do when monitoring an experiment. Are Virginia lawmakers that patient, though?
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