In the Name of Tax Fairness, Politicians Propose Special Tax Penalties on Data Centers
State and federal policymakers are attempting to exclude data centers from run-of-the-mill tax exemptions.
Data centers are horribly unpopular right now.
Critics' erroneous allegations that these facilities consume excessive amounts of water and power while passing on the costs to the rest of us has seen public support for them collapse. Policymakers have responded with onerous new land use regulations, and even full-on moratoriums, on new data center projects.
Not content with zoning these projects out of existence, politicians are now looking to tax them into oblivion as well.
At the federal level, and in dozens of states, legislators are proposing to exclude data centers from various business tax incentives and exemptions.
In Congress, Sens. Mark Warner (D–Va.) and Ron Wyden (D–Ore.) have both proposed bills that would exclude data centers from certain tax exemptions for capital investment. Wyden's bill would also levy a new gross receipts tax on data enters.
The National Conference of State Legislatures reports that 28 states have considered legislation to pare back or eliminate "tax incentives" provided to data centers, with the most common target being sales tax exemptions on their purchases of software, equipment, construction materials, and other business inputs.
Proponents of these tax changes argue that they are merely eliminating special tax breaks that unfairly favor data centers while shifting more of the tax burden onto ordinary citizens.
"Michigan families are working hard to keep up with the rising cost of gas, groceries, and child care. They shouldn't be asked to shoulder more of the burden while data centers and big tech companies already making record profits get another giant tax break," Rep. Kristen McDonald Rivet (D-Mich.) told Politico.
Yet most of the sections of the tax code being amended are standard exemptions offered to most businesses as a matter of course.
That's especially true of the sales taxes exemptions that are now on the chopping block.
As a recent Tax Foundation brief on state-level data center taxation argues, the most palatable sales tax "falls exclusively on final consumption," as that does less to penalize investment and economic growth.
Axing a sales tax exemption for data centers' spending on new servers, construction material, and the like would make state sales taxes more of a tax on investment. By treating data centers differently from other businesses, it also makes the tax code more distortionary. Neither is ideal.
Not all states' sales tax exemptions for capital spending are created equal.
Some apply to data centers by virtue of generally applying to all businesses. Others offer exemptions to data centers only if they meet certain levels of investment or employ a certain number of people.
The Tax Foundation paper criticizes the latter practice for transforming what should be a neutral, widely available exemption into a targeted tax incentive.
But lawmakers' more recent efforts to amend or eliminate exemptions for data centers would make the tax code even more slanted in favor of some businesses over others.
Press coverage of these sales tax exemptions invariably describes states as "losing" money on them. But this formulation flips reality on its head. A state with zero data centers would "lose" nothing by including data centers in its sales tax exemption. But it would also receive no revenue from the taxes that still would apply to non-existent data centers.
If a data center did move into that state, tax revenue would go up. So too would the "loses" stemming from the sales exemption. It's an odd notion indeed to say that the more taxes data centers pay, the more they're costing the state.
It's a similar story at the federal level.
Under the Republicans' recently passed tax reform bill, data centers are among the businesses that can claim "full expensing" of their equipment spending. That means that they can deduct the full cost of their capital spending from their taxes in the year that it was spent. (Under prior tax regimes, they had to spread their claimed deductions over many years.)
There's been some robust debate on social media among tax policy wonks about whether full expensing is in fact a tax subsidy. Wherever one lands on that debate, data centers are hardly the only kind of business that can currently claim this exemption.
Excluding them from this exemption, as Warner and Wyden's bills would do, would make the tax code more riddled with favoritism.
The backlash to data centers is driven in part by the fact that the country is going through a data center boom. Thousands of facilities are in the development pipeline. As data centers being built, the fiscal implications of how they're taxed grow as well.
The distinction between a cronyist tax advantage and a neutral decision to not levy a particular tax on a certain type of economic activity can be a fuzzy one. Some data center projects do benefit from the former.
But the current rush to tax data centers more heavily has nothing to do with making the tax code more fair. It's a punitive shakedown of a disfavored industry that will make the tax code less fair and all of us poorer.
