For about a decade, Ohio has given some of the biggest companies on the planet a sales tax break when they buy the hundreds of millions of dollars in hardware needed to build a data center in the Buckeye State.
This year alone, the incentive will cost the state an estimated $127 million in lost tax revenue as companies like Amazon, Meta, Microsoft and Google buy construction material or things like servers, routers, racks and cooling systems.
But after a glut of new data centers has imposed a massive demand for new power on the electric grid, the Ohio Senate’s version of the state budget that passed Wednesday would eliminate the sales tax break for any new developments.
What are data centers?
Data centers are the warehouse-sized stacks of computer equipment that facilitate the artificial intelligence and cryptocurrency booms of the past decade.
The facilities bring huge capital investment. For instance, Amazon said in December it would invest an additional $10 billion to build new data centers on top of $13 billion it had already announced. These builds produce thousands of short-term construction jobs, and about 10 to 50 long-term ones after they’re built, which is small-scale job-creation compared to other economic development projects. They also carry the allure of well-known consumer technology brands building a footpront in Ohio.
On the downside, they require huge volumes of water for cooling, and enormous amounts of electricity to operate, which could require huge spending on grid investments paid for by ratepayers.
The sales tax break would end under the budget only for new developments in Ohio, so the change wouldn’t affect even the long-term sales tax agreements that predate it. And it wouldn’t affect the sizable property tax abatement deals that data centers often strike with local governments. Some facilities don’t pay 75% to 100% of their property taxes for 15 to 30 years.
The Senate’s move isn’t final. The House didn’t include any similar provision in its version of the state budget, and any change would still require approval from Gov. Mike DeWine. The Senate included the provision to help cover new costs elsewhere in the budget, including a $1.4 billion hole in the budget over two years caused by a proposed income tax cut for Ohioans who earn more than $100,000 per year. Their budget also proposed ending other tax exemptions on goods and services including newspapers, rental cars, juke boxes and others.
What the industry says
The Data Center Coalition, an industry association of both well known and more obscure data center operators, sent a letter last week to Senate President Rob McColley, a Northwest Ohio Republican, urging the Senate to restore the tax exemption.
The letter emphasizes the billions in capital investments and the jobs, especially in construction, data centers create. It says the Senate’s cut will inject a lot of uncertainty into a new sector of the economy rife with outside investment.
“The abrupt end of this exemption creates challenges for Ohio’s ability to attract these very large investments in our state and position Ohio as a leader in digital infrastructure— the backbone of the modern economy,” the Data Center Coalition wrote.
Along with the technology companies, the Ohio Chamber of Commerce, a major business lobby group, plus the heads of the Affiliated Construction Trades Ohio and the International Brotherhood of Electrical Workers, signed on.
Ohio has 180 data centers
Ohio has 180 data centers, far more than neighboring Indiana (69), Michigan (52) or Kentucky (36), according to Data Center Map, an industry research firm. That’s likely due in part to Ohio’s tax breaks for the industry.
Estimates vary on how much the sales tax break costs Ohio. State economists projected it would cost $118 million in 2022, $119 million in 2023, $123 million in 2024, and $127 million in 2025. However, the state has declined to release specific amounts of revenue lost to the tax break.
An analysis of approved credits from Policy Matters Ohio, a progressive economic think tank, estimated the tax break has cost Ohio $281 million in total. Most of that benefit has gone to Quality Technology Services ($89 million), Amazon Data Services ($64 million), and an affiliate of Meta ($43 million), according to Policy Matters Ohio’s estimates. However, other centers have announced investments since it was published, meaning it’s likely a lowball.
Meanwhile, legislative analysts say the Senate’s proposal would bring in an additional $20 million per year in revenue, unless companies quickly strike deals with the state to build before any new law takes effect.
Zach Schiller, an economist with Policy Matters Ohio, credited the Republicans in the Senate with ending a subsidy for companies that don’t need it. However, he said it doesn’t do anything about the millions already claimed or some of the long term tax abatement agreements the data centers’ owners have already signed.
“While I’m glad to see they’re ending this, I don’t think it really manages to end the exemption for those receiving the largest benefit,” he said.
Draining the battery
Most Ohio’s data centers sit in the Columbus area. There, after years of flat demand, electric company American Electric Power said the region is on track to double its power demand by 2030, which could entail massive ratepayer-funded grid investments. The company for months imposed a moratorium on hooking up any new data centers, and has fought to convince regulators to pin risks and costs of grid investments onto the data centers.
The demand surge has also drawn concern from officials who operate the 13-state regional electric grid, given it’s occurring while uneconomic coal plants increasingly shut down.
Earlier this year, state lawmakers mounted a policy response, lowering taxes for developers who built new natural gas fired generation power plants. Backers voiced a simple goal: lure more natural gas generators here.
That legislation also set rules for “behind the meter” generation, where major electric customers (including data centers) can build their own private power plants on site.
The law hasn’t taken effect yet but companies are already on the move. Earlier this month, the Ohio Power Siting Board authorized construction of a 200-megawatt natural gas fired power plant on a 740 acre site in central Ohio that will power multiple data centers owned (through an affiliate) by Meta.
By deadlines set in the state constitution, lawmakers must pass a budget by July 1.
