Data centers are a central part of the digital infrastructure that powers the modern economy – but they may not be the robust job engines that some proponents claim. Rather, they are more akin to traditional infrastructure projects like highways or bridges. The primary value lies in their utility, not in the jobs they create in the long term.

While there may be compelling reasons to support the construction of data centers and the improvement of other related Internet infrastructure, providing subsidies for owning and operating data centers provides only a limited return on investment for local communities.

Tax relief for data centers

A recent report from ProPublica shows how Washington state’s data center tax breaks have become one of the biggest corporate giveaways. The breaks were meant to spur job creation in rural areas and have cost more than $474 million in taxpayer money since 2018, but the majority of those benefits have gone to Microsoft – not local communities.

In Washington, the exact number of jobs created is not publicly known, but according to ProPublica, a series of data center projects with a total cost to taxpayers of $53.3 million would require hiring a total of just 260 new workers to reach the required threshold. That’s an average cost of $205,000 per job, or about three years’ salary at the state’s median income.

Although this result is just the latest of many, numerous rural states have already implemented or are considering sales and property tax breaks for data centers.

Not only do data centers not create significant jobs, they also place a huge burden on local infrastructure – everyone knows they use a lot of electricity, but few know that they also require enormous amounts of water to operate. This makes data centers in water-scarce areas particularly expensive from a resource perspective and further underscores their ineffectiveness as job creation mechanisms.

Data centers as infrastructure projects

As governments seek to stimulate economic development, it is critical to see the industries they support for what they are – not what they wish they were. While data centers are essential to the modern economy, they do not create permanent and long-term jobs any more than building a highway or bridge does.

Data center construction has become more like, rather than viewed as, infrastructure projects that form the backbone of economic activity. As a result, the private sector is trying to pass on the costs of building data centers to taxpayers – they are increasingly becoming pure business costs rather than profit centers or competitive advantages.

Therefore, it makes more sense to focus public subsidies on the construction and development of these facilities and the infrastructure needed to use them – rather than on their ongoing operation and ownership. Investments in the construction and deployment of telecommunications infrastructure can be justified in the broader context of development in underserved areas.

For example, it makes political sense to build data centers in parallel with improving digital connectivity, which in turn can attract other businesses and promote economic growth. Likewise, there are broader social benefits when data centers use renewable energy sources through subsidies.

Subsidizing the ownership of data centers, for example through property tax and sales tax breaks, is less justifiable. The technology companies that dominate the market for these centers are among the most valuable companies in the world, with market capitalizations regularly far exceeding the gross domestic product of the countries that charge for them. These companies have sufficient resources to cover their own operating costs without public support.

State governments should therefore rethink their approach to supporting data centers and focus on subsidies for the construction phase and overall improvements to internet infrastructure. At the same time, states must ensure that these investments are linked to clear public benefits, such as job creation in the construction industry, environmental sustainability, and improved connectivity for underserved communities.

outlook

Ultimately, the overarching policy goal should be to balance the need for critical digital infrastructure with the responsible use of public funds. This can be achieved by providing incentives for companies to locate their data centres where it is most profitable and to source energy for them from the most available renewable sources.

These projects should be viewed as temporary infrastructure projects rather than ongoing business support initiatives. By targeting subsidies for the construction and development of digital infrastructure rather than for the ongoing operation of data centers, state governments can better ensure that investments of public money deliver public benefits.