The entrance to a data center in Henrico. (Scott Elmquist/Style Weekly)
More than a quarter of Virginia’s spending aimed at enticing businesses to the state over the past decade has gone toward sales and use tax exemptions for data centers, a report from Virginia’s legislative watchdog found.
Of nearly $3 billion in economic development incentives between fiscal years 2011 and 2020, roughly $837 million, or 28 percent of Virginia’s overall foregone revenues, was tied to the state’s data center exemption, according to the report from the Joint Legislative Audit and Review Commission presented to legislators Monday.
JLARC also concluded that increases in state spending on business incentives beginning in fiscal year 2016 were driven by the exemptions.
Under the data center exemption, a business can avoid paying sales and use taxes on certain equipment used for data processing, storage, retrieval and communications. Any company seeking the exemption must enter into a memo of understanding with the Virginia Economic Development Partnership and submit annual reports demonstrating that it has met employment, investment and wage requirements.
Since the state’s first such exemption was created in 2008, data centers have proliferated across Virginia. Today, Northern Virginia is the world’s largest data center market, and Loudoun County brands itself as “Data Center Alley.”
A 2019 JLARC report stated that the exemption “appears relatively effective.”
“The exemption has a sizable influence on data center decisions to locate or expand in Virginia, and it is estimated to have a moderate economic benefit per $1 million in spending by the state,” the commission wrote. However, its authors cautioned, information on the full fiscal impact and benefits of the exemption was limited, and it “has not stimulated much growth in distressed areas.”
Earlier this year lawmakers, with an eye to encouraging data center growth in the coalfields region, loosened some of the exemption requirements for companies that chose to locate in economically distressed areas.
While local governments have often embraced data centers because of the sizable tax contributions they make, job creation has been more limited.
The industry’s high energy demands have also caught policymakers’ attention as the state moves to decarbonize its electric grid. One recent study from University of Virginia researchers found that data centers will be one of the primary drivers of growing electricity demand in Virginia over the next few decades.
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