Counties face tax structure question on data centers
Key Takeaways
Data centers represent some of the most capital-intensive land uses a county can host, and a single facility could represent billions of dollars in investment and require power equivalent to a mid-sized city.
The local fiscal impact of that investment varies depending on state and local tax structures and the authority available to counties. County authority over taxation, land use and permitting also varies widely across states, and counties may be responsible for addressing local impacts even when key decisions are made or constrained at the state level.
Data center development presents a range of considerations for counties, including energy and water demands, land use, infrastructure needs and community impacts. Understanding the fiscal impact is important because large-scale development can affect the resources available to fund county services and meet local needs.
For county officials, the key question for evaluating the fiscal impact of a project is whether a data center that brings external investment also creates lasting public value. The answer depends on three factors:
- What portions of the facility are taxable under state law
- How much authority the county has over taxation, zoning and permitting
- What protections and community benefits are secured before a project is approved
Local conditions vary, making local decision-making and flexibility critical as counties navigate complex decisions around data center development.
What is actually taxable?
A data center's announced investment value is not necessarily the same as its taxable value. Although land and buildings are generally taxable in most states, much of a data center's value may be tied to the equipment inside the facility. Servers, networking equipment, electrical systems, backup generators and cooling infrastructure can represent a substantial share of a project's total investment, but whether those assets are subject to local taxation, often as business personal property (BPP), varies considerably by state.
When evaluating revenue estimates or incentives, consider:
- Which project components are taxable (referred to as “the taxable base”)
- How they are assessed
- Whether any state or local exemptions apply
County authority over these issues varies considerably across states. State law may determine what property counties can tax, whether local governments can establish tax rates or classifications and how much control counties have over land use and permitting. Understanding that state and local framework is an important first step in evaluating the fiscal impact of a proposed project.
Data center fiscal and governance models
Data center projects operate within different tax, regulatory and governance frameworks across the country. The models below provide a practical framework for understanding how counties generate revenue and how different state and local frameworks can shape long-term community value.
Counties and states may fit more than one model simultaneously. For example, a state may offer significant tax incentives for data center development while still allowing counties to collect substantial local tax revenue. Likewise, local fiscal authority varies drastically between states, and some counties may even have different levels of fiscal authority within the same state. The table below is not intended to place jurisdictions into fixed categories but to help county officials understand the fiscal and policy environment in which they are operating.
Model | Description | Revenue Potential |
|---|---|---|
Tax Base Model | Strong local taxing authority — property and equipment taxes drive revenue County revenue comes primarily through recurring local revenue streams associated with data center development, particularly property taxes on real property and, where authorized, business personal property (BPP). These jurisdictions may also receive local sales tax, income tax, impact fees or other revenue. Counties in this model generally retain meaningful local taxing and land-use authority, making fiscal outcomes more closely tied to the taxable value of development. | High |
State Incentive Model | Mechanism: State exempts some taxes — counties retain meaningful revenue and authority State incentives often reduce taxes associated with data center development, particularly through sales and use tax exemptions on equipment purchases and other tax reductions designed to attract investment. Depending on which level of government levies the affected tax, these incentives may reduce state revenue, local revenue or both. Counties may still retain meaningful local revenue streams and authority. In many states, counties may generate significant revenue where BPP taxation remains available. | Moderate–High |
Growth Model | Speed and scale drive development — local fiscal returns vary States and local governments prioritize attracting large-scale development through infrastructure investment, utility readiness, streamlined permitting and other policies designed to accelerate growth. Tax incentives may also be part of the strategy, but the defining feature is the emphasis on development and the infrastructure needed to support it. County fiscal outcomes depend on project scale, available local revenue streams and which infrastructure and service costs fall locally. | Variable |
Preemption Model | State controls valuation, siting and revenue distribution State law limits county authority over taxation, siting, zoning, permitting or other development decisions, reducing local control over fiscal and community outcomes. State policy may also determine how locally-generated revenue is distributed. Counties in this environment may have fewer tools to shape project terms, making it especially important to understand which authorities remain at the local level. | Low–Variable |
Note: Models are intended as a planning framework, not a state-by-state classification. A county's position may differ depending on its specific taxing authority, zoning authority and ability to negotiate local agreements. Revenue potential reflects relative fiscal authority under each model, not a projection of actual outcomes.
Negotiated agreements may operate across these models rather than functioning as a separate fiscal environment. Where authorized, counties may use PILOTs (payments in lieu of taxes), tax abatements, development agreements, host community agreements or community benefit agreements to establish revenue commitments or address local impacts. The availability and structure of these tools depend on state law and the authority available to the county.
County decision framework
Understanding the legal, fiscal and operational framework that will shape project outcomes is essential when weighing a data center proposal. The questions below focus specifically on tax structures, revenue and related county costs. Other considerations, including environmental and community impacts, private property rights and local priorities, may also factor into county decision-making.
Question | What to consider |
|---|---|
Which tax framework applies? |
|
What is the true taxable base? |
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How do incentives affect local revenue? |
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What authority does the county have? |
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What costs will the county bear? |
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Does public value exceed public cost? |
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Data centers can represent a significant source of tax revenue for counties, but fiscal outcomes vary considerably across states and local jurisdictions. Two facilities with identical investment values can generate substantially different revenue depending on what is taxable, how property is assessed, what incentives apply and what authority counties have under state law. As counties evaluate proposed projects, understanding the taxable base and the interaction between state and local tax policy is just as important as understanding the scale of a project’s investment.
Tax revenue is one part of the broader fiscal picture. Infrastructure and public service costs can also shape the long-term fiscal impact of a project. Ultimately, data center development decisions are shaped by local conditions, state and local authority and the range of fiscal, infrastructure and community considerations facing each county. Preserving local flexibility allows counties to weigh these factors based on the needs and priorities of their communities.
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Webinar
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As the first webinar in NACo's Fall Data Center Webinar Series, this session will provide county officials with a foundation for understanding data center development before exploring the fiscal and economic considerations counties face.
