Data Centers Are Heavily Taxed. How Much is Too Much?
A 90% effective tax rate is possible if exemptions are eliminated
Nationwide, data center investment is off the charts, fueled in no small degree by the AI boom. Some states are welcoming data centers with open arms, eager to claim additional tax revenue and enjoy the economic benefits of these new operations—and, in some cases, hoping to jump-start their own tech sectors. Other states are more ambivalent or even antagonistic toward data center investment.
There are sound economic reasons for cities and states to attract data centers. Meanwhile, evidence is mounting that, while these operations can be a source of significant new tax revenue, the investments will go elsewhere if taxes are too onerous. I’ll explore this below, expanding upon a paper I recently published with the Tax Foundation.
SALT News and Updates
At a rehearing, Colorado’s title board denied title setting for a proposed graduated rate income tax ballot measure, determining that the proposed initiative violated the state’s single subject rule. The initiative will not appear on the 2026 ballot.
Several Alabama cities are challenging the state’s Simplified Sellers Use Tax regime, designed to provide a single point of tax collections and administration for remote sellers. A key point of dispute is the ability of large multistate corporations to use the system even if they also have physical presence (distribution centers, stores, etc.) in the state. Alabama is one of only three states without central sales tax administration, and obligating remote sellers to remit to each jurisdiction separately raises “undue burden” arguments under the U.S. Constitution.
The 5% one-time wealth tax ballot measure in California has been given a title (“Imposes One-Time Tax on Certain Individuals and Trusts”) and can now be circulated for signatures.
State and Local Taxation of Data Centers
In a new Tax Foundation paper, I calculate tax liability for a $1 billion model data center in twelve representative jurisdictions across the country. This edition of The SALT Road provides some additional analysis and expands on some arguments advanced in that paper, which I encourage you to read for a more comprehensive treatment of the subject. (The paper, while not terribly long, runs 14 pages. This newsletter, mercifully, does not.)
California has a lot of data centers: 326 by one count, or 7.6% of all data centers nationwide. That’s not terrible, but it’s a surprisingly mediocre performance for the state that lays claim to Silicon Valley and is at the epicenter of AI development. California represents 14.0% of GDP but, despite being a tech-oriented state, only hosts the aforementioned 7.6% of data centers, ranking 38th on the ratio of share of data centers to share of GDP, sandwiched between Alabama and Kansas.
California imposes the nation’s highest tax burden on data centers, largely because its high-rate sales tax applies to purchases of servers, chips, and other data center business inputs.
Virginia, the historic “home of the internet,” offers considerably better tax treatment. It leads the nation with the most data centers (670) and the highest ratio of data center share to GDP share (15.5% of data centers, 2.6% of GDP). But even Virginia’s historic advantages have not been enough to stem the tide of new data center developments in lower-tax systems.
Texas does quite well, with 429 data centers. But states that really punch above their weight (in addition to Virginia) include Oregon, Iowa, Montana, Nevada, North Dakota, Arizona, Wyoming, and Ohio. Each state has its own advantages.
Oregon imposes lower tax liability than other West Coast states while still offering proximity to Silicon Valley and Seattle. Many of these states have low utility costs, an important consideration for data centers, and the climates of northern states reduce cooling costs. But there’s another reason these states stand out: the data center industry is heavily taxed, making tax burdens a high-salience issue, and these states offer better tax treatment than many of their peers.
The largest data center investments, unsurprisingly, are going to lower-tax jurisdictions. The OpenAI/Oracle “Stargate” project, which could ultimately entail $500 billion in capital investment, is being developed in Texas, and Google recently announced $40 billion in new investment across three Texas campuses, while the “Frontier” data center facility will bring a $25 billion investment to a single Texas location.
AWS, meanwhile, plans a $15 billion data center expansion in Indiana and $10 billion investments in both Mississippi and North Carolina. A multi-tenant $10 billion campus is also under construction in Mississippi, while Meta is making a $10 billion single-site investment in Louisiana. In the next tier down, Google has large investments planned in Iowa and Arkansas, and a variety of companies are opening new facilities in Ohio, Pennsylvania, Wisconsin, and elsewhere.
Nowhere to be found: California or other high-tax states. Even historically competitive Virginia isn’t attracting new data centers at the same rate, though several significant projects are still underway.
It’s one thing for Texas to outcompete California, but when Iowa, Louisiana, and Mississippi are emerging as better locations for the largest data centers while historic tech-heavy states aren’t even on the map, something notable is happening.
In my recent paper, I estimate that a $1 billion data center faces an average effective tax rate of 48.3% on its profits before targeted incentives, with three-quarters of that tax burden being location-dependent. Data centers are highly capital-intensive operations that require frequent upgrades to servers and chipsets. They face significant taxes on their real property, and, depending on state-level policy choices, can also be exposed to extremely high sales and business tangible personal property tax burdens.
In many states, sales tax exemptions for data centers are structured as an incentive, available only if investment and job creation targets are met. This leads many to regard the exemptions as preferential treatment, but it's actually the opposite: business inputs are supposed to be exempt from the sales tax. Making that exemption conditional is worse than ideal treatment, not better.
Some states provide temporary abatements of tangible personal property (TPP) taxes on data centers’ machinery and equipment (servers, chipsets, chillers, etc.). These exemptions are somewhat more preferential, though they’re generally available on the same terms provided to other businesses with substantial capital investment. Ideally, moreover, property tax would only be imposed on real, not tangible, property. While it’s unfortunately quite common, taxing capital investment is poor policy.
If data centers didn’t get the benefit of sales tax exemptions and didn’t receive their current levels of TPP tax relief, I estimate their all-in effective tax rate would hit a ludicrous 90.1%.
If states choose to subject capital-intensive businesses to sales and TPP taxes on all of their equipment, these taxes—which are not tied to ability-to-pay—can wipe out virtually all profits. That’s a good way to ensure that investments go elsewhere.
For more on data center taxation, you can read my recent paper here.
Obligatory Marketing Note
My new consultancy provides tax policy research, writing, and other services. If you are in the market for tax policy research or know someone who is, please let me know.
Please Share this Substack
If you find this Substack valuable, please do me a favor and share it with colleagues and others who may be interested. And if you haven’t yet subscribed (it’s free), please consider doing so!