Earlier this month, a group of Ohio House members largely representing urban areas of the state introduced a bill to prohibit property tax exemptions for data centers.
Property tax exemptions are a significant tool that can have a big impact on local government budgets. When evaluating whether prohibiting property tax exemptions for data centers are a good idea, it’s worth asking a few key questions that I like to ask about a range of policy issues: does it work, does it help, and who does it impact?
Okay, first, “does it work.”
The point of a property tax exemption is to give an incentive for a company to develop a project at a given site.
While older literature on economic development incentives says that only about 2-25% of economic development projects make their decisions based on incentives, newer studies that focus specifically on data center incentives imply this number could be closer to 33% for data centers.
While my inclination was to think that property tax incentives would follow the path of past incentive programs, recent analyses of data centers seem to be saying otherwise.
Now for “are they good.”
There are a few questions we need to answer for this. One is this: what is the opportunity cost of a property tax exemption?
Exempting a data center from property taxes means less money available for schools, county government, townships, and municipalities.
Even if data centers are highly sensitive to exemptions and one-third of them change decisions based on these incentives, this could still mean hundreds of millions of dollars in public funds left on the table for the two-thirds of data centers that aren’t making decisions based on incentives.
Another consideration is what the real social impact is of attracting data centers.
We know data center construction leads to more construction spending, wages, and capital investment.
So do subsidies for sports stadiums, but the economic consensus is that these subsidies are an economic development shell game rather than creation of new economic value.
Data centers could be similar: they could just displace other economic development that is bound to happen on its own.
Further social impacts that need investigation center on utility costs and environmental and public health.
Energy-heavy data centers will either drive up electricity costs and water costs and lead to burning of fossil fuels if they pull energy from the grid and water from public water systems or lead to construction of new gas-fired power plants if their energy generation is pushed behind the meter.
This will lead to higher carbon emissions and the degradation of air quality and associated asthma and lung disease that comes with emission of NOx, PM2.5, and SO2 into the air.
Lastly, the question of “who benefits” matters here.
Much of the benefits of data center construction will accrue to investors and data users who live outside of the state.
Carbon emission costs will generally be felt by people across the world as they exacerbate climate change.
On the other hand, both economic development benefits like jobs and public health costs like asthma and lung disease will be felt by local communities.
A final consideration is this: the state tends to give local communities wide range to use economic development incentives because different localities have different challenges when it comes to economic development.
A total ban on property tax exemptions for these purposes would potentially cut some communities off from economic development that could help them.
But data centers are a big deal. It may be that making this policy at the state level is the most straightforward way to regulate an industry that is changing rapidly in the buckeye state.
This commentary first appeared in the Ohio Capital Journal.
