JLARC: Data centers received $2.7B in state tax cuts

In Virginia, data centers are often exempt from paying retail sales and use taxes. The exemption adds up.

From fiscal 2015 to fiscal 2024, data center tax exemptions totaled $2.7 billion, according to an annual report on Virginia’s spending on economic development incentives that the Joint Legislative Audit and Review Commission released earlier this month.

Overall, Virginia gave $5.2 billion in tax incentives and grants during that time period to woo companies to locate in Virginia or expand operations already based in the commonwealth. The sales and use tax exemption for data centers accounted for 53% of that total.

Since 2010, Virginia has offered an exemption to the state’s retail sales and use tax as a way of attracting large data centers. The exemption isn’t set to expire until 2035.

“The data center exemption … has become the largest economic development incentive that the state is supporting,” Kimberly Sarte, associate director for ongoing oversight and fiscal analysis at JLARC, said Tuesday.

And, it seems likely to grow.

In fiscal 2024, Virginia exempted data centers from $1 billion in tax. That’s up from $685 million in fiscal 2023. The growth, JLARC explains, is due to the rapid pace that new data centers are being built along with data center expansions.

“The size of the exemption will just continue to increase as data centers continue to grow and continue replenishing equipment that is exempted,” Sarte said.

In an Oct. 29 response to the JLARC report, Jason El Koubi, president and CEO of the Virginia Economic Development Partnership, noted that in a 2024 report on data centers in Virginia, JLARC included an analysis of how data centers impact Virginia’s economy.

“Notably, the analysis estimated that the data center industry supports an impressive 74,000 jobs, $5.5 billion in labor income, and $9.1 billion in Virginia [Gross Domestic Product] overall to the state economy annually,” he wrote.

The same report found that in fiscal 2023, capital investment in Virginia data centers, exceeded $24 billion and that data center investment represented 84% of the total capital investment across all economic development projects announced by  VEDP between fiscal 2022 and fiscal 2024.

In his letter to JLARC, El Koubi highlights that the JLARC report on incentive spending states that incentives on data centers are rising in proportion to capital investment.

“Virginia – and the nation – are experiencing the highest levels of infrastructure-related capital expenditure, as a share of GDP, since the railroad boom of the 1880s,” El Koubi wrote in the letter.  “These investments are driving critical economic activity and generating substantial tax revenues across the commonwealth at a time when federal workforce reductions and spending cuts are exerting temporary pressure on Virginia’s economy.”

Of the state’s incentives from fiscal 2015 to fiscal 2024, sales and use tax exemptions made up 66% of spending, while tax credits and other measures accounted for 13%. The remaining spending went to grants like the Commonwealth’s Development Opportunity Fund, which is considered a “deal-closing” fund that’s employed at the governor’s discretion.

Collectively, the state’s grant programs awarded $2 billion to 5,000 projects during the time period captured in the report. Completed projects receiving grant funds, the JLARC report stated, created about 59,000 jobs and $16 billion in capital investment or other spending.

Of companies that received grants, the majority (63%) made the investments they promised. However, only 28% met job goals, and only 41% met wage goals.

Between fiscal 2015 and fiscal 2024, grant awards totaling $258 million were canceled, reduced or recaptured because the projects did not move forward or meet their goals, according to JLARC, which is the oversight agency of the Virginia General Assembly.

Of completed individual projects that received a Commonwealth’s Development Opportunity Fund grant only 38% met their capital investment goals. However, other projects that received the grant exceeded their capital investment goals. As a collective, all of the projects that received Commonwealth’s Development Opportunity Fund grants created 83% of the total capital investment expected and achieved 52% of their job creation goals and 136% of average wage goals.

“When you look across grant programs collectively, they tended to do a better job,” Sarte said.

Editor’s note: This story has been updated