The state of Ohio has been especially generous with a tax break for companies operating data centers, the vast facilities that enable the internet services we all use. If the investments announced by Amazon, Google, and Microsoft in the past two years are all covered by the tax break, the state and localities could lose out on almost $1.6 billion in sales-tax revenue, with only modest job-creation to show for it.

Because artificial intelligence demands enormous amounts of electricity, these data centers could increase electric rates for Ohioans. The huge expansion of this industry has other states questioning the wisdom of such giveaways to some of the wealthiest companies in the world. Ohio needs to rein in this giant tax break.

First created in 2013, Ohio’s sales-tax exemption covers computer data center equipment, as well as materials used in constructing the centers. The Ohio Tax Credit Authority, a five-member board headed by the director of the state development department, approves the initial exemption. To qualify, a company must make at least $100 million in capital investment over three years and pay annual compensation to employees of at least $1.5 million. One recent example: The Tax Credit Authority on Oct. 28 approved a 15-year sales tax exemption estimated to be worth $72.5 million for Microsoft covering three new data centers in Licking County. The $1 billion investment is to create a minimum of just 20 new jobs.[1] Exemptions as originally granted to Meta and Google called for creation of at least 50 and 30 jobs, respectively, each at an estimated cost of more than $1 million per job.[2]

Getting a fix on the total cost of this tax break is not easy. Ohio’s tax expenditure report, which estimates the value of state tax breaks, pegged that at $127.4 million this fiscal year.[3] The Ohio Department of Development has provided some estimates, as with Microsoft, Meta, and Google, of what they would be worth at the time the initial exemptions were approved. According to the department, as of late September, 13 such agreements had been approved, covering nearly $5.1 billion in investment but generating just 356 jobs and $31.6 million in annual payroll. That works out to a revenue loss for the state alone of $281.9 million. However, once you add in the loss of local sales-tax revenue, losses are more than $343 million: nearly $1 million per job.[4] However, neither the state’s tax expenditure report nor the development department estimates above include the new centers announced recently, like those of Amazon and Google cited earlier, which could dramatically increase the cost of the exemption. Amazon’s latest $10 billion investment alone, announced December 16, could mean an exemption of more than half a billion dollars between now and 2030. If Cologix receives a 75% sales-tax exemption on the full $7 billion it plans to invest on a campus of eight data centers in Johnstown,[5] as it did with an earlier investment, that would cost the state more than $300 million in sales-tax revenue. This also reduces sales taxes flowing to counties and transit agencies.

Tax credit agreements between the state of Ohio and the companies getting them stipulate that they must annually report the amounts of their sales-tax exemptions covered in the state law.[6] However, some of the largest such agreements reviewed by Policy Matters Ohio may give companies the right to reject public disclosure of these reports.[7] Policy Matters Ohio has asked for copies of these reports from the state and also made requests of the companies, so far without result.

What’s more, the biggest of these data-center operators don’t even have to get approval for these tax breaks as they expand; the Ohio Tax Credit Authority’s original approval gives them open-ended ability to avoid paying the tax on their facilities if they meet certain investment thresholds. For instance, based on its existing and announced investments, Amazon will qualify for the exemption through 2055.[8] This is based on an agreement effective in 2014, which at the time was estimated to cost $77 million in sales-tax revenue, but conceivably could end up costing 20 times that much without additional public scrutiny or requirements for approval.

Are these giant tax incentives needed to lure data centers here? Not according to the executive responsible for Microsoft’s data centers in North America. “I can’t think of a site selection or placement decision that was decided on a set of tax incentives,” the company’s Bo Williams told The New York Times.[9]

These facilities have other consequences, too. Huge growth in data centers is under way and expected because of the gigantic computing capacity needed for artificial intelligence. Leaving aside privacy and other concerns about AI, this will use large amounts of electricity and place stress on the electrical grid.[10] American Electric Power is seeking guarantees in a case before the Public Utilities Commission of Ohio that the enormous capacity required for data center expansion will be covered by the operators.[11] Intervenors in the case from Walmart to the Ohio Consumers’ Counsel (OCC) are concerned that these facilities could boost electricity costs for businesses or individuals.[12] The OCC has already tried to prevent AES Energy (Dayton Power & Light) from shifting costs to consumers if planned investments to serve an Amazon data center in Fayette County don’t pay off. [13]

All of this underlines this question: Why do we want to provide massive subsidies to some of the wealthiest corporations when the result could be higher costs for Ohioans and Ohio businesses? The gigantic growth of electricity demand from data centers also could threaten progress in cutting greenhouse gas emissions.[14]

Ohio is not the only state where the energy impact of data centers has become an issue. For instance, in Georgia, the legislature last spring approved a two-year pause on new data center sales-tax exemptions while the state examined the effect on the energy grid. That measure was vetoed by the governor.[15] An analysis in Georgia found that that state’s sales tax exemption had a negative fiscal impact: Increased tax collection from construction and operation was not high enough to offset the forgone state tax revenue.[16] In late 2023, more than two dozen nonprofits, homeowners’ groups, and residents formed a Virginia Data Center Reform Coalition seeking regulatory and rate-making reforms.[17] While there hasn’t yet been new regulation, the recently issued report by the Joint Legislative Audit and Review Commission there has certainly raised that possibility.[18] Legislators from Connecticut to South Carolina have been taking up the issue.[19]

In addition to the sales-tax exemption, many Ohio data centers also get local subsidies through property tax abatements.[20] It’s worth noting that Ohio does not tax tangible property like data-center equipment. In Virginia, the largest site for data centers, Loudoun County, received more than $600 million in property taxes from data centers in 2023, the vast bulk of which was from taxes on equipment Ohio doesn’t levy.[21] So Ohio is providing large, invisible subsidies in the form of lesser property taxes on data center equipment than some other states. Some of the data center operators also receive other state subsidies. For example, even prior to its recent announcement that it would invest another $10 billion in Ohio data centers, Amazon was getting a Job Creation Tax Credit, so it is credited with much of the state income tax paid by its data-center employees.[22]

Recommendations

The General Assembly should consider ending this costly tax break. Data center operators are in a frenzy of expansion with the growth of AI. While this would not end the benefits already extended, it’s clear the cost going forward would be substantial, based on the giant expansions AEP has cited and recent expansion announcements. In Virginia, data centers and tenants reported saving $928.6 million in sales taxes from that state’s exemption in Fiscal Year 2023.[23]

Short of an outright end to the tax break, other measures could include:

• Requiring all reports to be made public that are currently submitted, including amounts of investment by type under the statute, amount of the exemption each company receives, job creation and payroll. Reports should also include energy and water use.
• Setting a cap for the total amount of the tax break allowed per job or each year, as is done with a number of other tax expenditures. Good Jobs First, a leading authority on accountability for tax breaks, recommended in 2016 capping such tax breaks at $50,000 per job.[24]
• Ending open-ended extension of the tax break to future investment without specific consideration of new exemptions by the Tax Credit Authority.
• Requiring 60-day notice prior to such sales-tax exemption decisions, including all key details of the investment and value of the exemption.
• Guarantees, whether through rate-making by the Public Utilities Commission of Ohio or separate act of the General Assembly, that data center growth will not increase electric rates for other customers.
• Following up on electric use with a regular independent audit of electricity use of data centers and their effect on the grid.

Ohio should curb this expensive tax break.