Race to the bottom line: States forfeit $6B in tax breaks to Big Tech data centers

States are forfeiting hundreds of millions of dollars in tax revenue through data center sales tax exemptions, with 16 states alone granting nearly $6 billion in breaks over the past five years to tech giants like Amazon, Meta, and Google. The generous incentives have sparked debate about whether massive corporations should receive such benefits, especially since data centers create relatively few permanent jobs while consuming enormous amounts of electricity.

What you should know: A CNBC analysis found that 42 states provide full or partial sales tax exemptions to data centers, with 37 states passing specific legislation for these breaks.

• Microsoft received more than $38 million in Illinois data center tax exemptions but created just 20 permanent jobs at one facility.
• In Washington, Microsoft secured $333 million in sales tax exemptions for its data centers between 2015 and 2023.
• Virginia has an estimated $730 million exemption for fiscal year 2024 alone, though the state doesn’t break down individual company benefits.

The big picture: Data center investment is projected to reach $1 trillion by 2027, driven by the AI boom following ChatGPT’s 2022 launch, intensifying state competition for these facilities.

• Indiana’s 2019 legislation offers sales tax exemptions on equipment and power for up to 50 years for data centers investing more than $750 million.
• Companies sometimes use third-party LLCs to apply for exemptions—Google subsidiary Hatchworks received Indiana’s sales tax exemption in 2023.

Why this matters: Critics argue these tax breaks represent a poor return on investment for taxpayers, while proponents claim they generate economic activity and jobs.

• A Virginia study found the state generated 48 cents in new revenue for every dollar not collected in sales tax between 2014-2023.
• “There was a giant transfer of wealth from taxpayers to shareholders,” said Greg LeRoy of Good Jobs First, a nonprofit watchdog group.

Job creation reality: Data centers create far fewer permanent positions compared to other industries receiving similar incentives.

• A 2017 U.S. Chamber of Commerce report found data centers employ 1,688 workers during construction but only 157 permanent jobs once operational.
• By comparison, aerospace and automobile manufacturers receiving incentives between 2002-2017 promised more than 2,700 jobs on average.

Energy concerns: Virginia’s audit projects the state’s power demand will double in the next decade, primarily due to data centers.

• One smaller Virginia data center uses the same energy as 4,500 homes, while the largest facilities consume more than most industrial users.
• The strain on resources will likely increase costs for other utility customers, despite data centers currently paying full service costs.

What they’re saying: Industry representatives defend the incentives as necessary for economic competition.

• “The state decided, let’s exempt equipment purchases in order to attract more data centers,” said Steve DelBianco of NetChoice, a tech trade association. “And when it did so, it still got half of it, the sales tax that it thought it was giving up.”
• Ben Inskeep of Citizens Action Coalition, a consumer watchdog group, noted that “when the sales tax exemption was passed in 2019, lawmakers didn’t anticipate that Big Tech companies would be building out large data centers, thus receiving billions of dollars in tax breaks.”

Company response: Tech giants emphasized their investments in infrastructure and sustainable energy when contacted by CNBC.

• Amazon said it contributed $460 million in property taxes and fees for its Virginia data centers in 2023 and has invested more than $75 billion in the state since 2011.
• Amazon, Google, Meta, and Microsoft all stated they work with utility companies to cover growth costs and invest in carbon-free energy sources.