With the help of generous corporate tax breaks, the state of Virginia has built up a data center industry that’s the envy of some Colorado lawmakers.
The tax incentives helped bring Virginia over $9 billion in economic investments and some 75,000 jobs. In some communities, data centers make up as much as a third of the local tax base.
But in the wake of a 2024 state audit detailing the growing environmental and financial costs for Virginia residents, public officials there have growing doubts over whether those jobs were worth the price.
A bipartisan group of lawmakers wants Colorado to follow in the footsteps of states like Virginia that offer big tech companies a blanket sales tax exemption for data centers, the energy-hungry server farms that are fueling the rise of artificial intelligence.
Proponents of Senate Bill 280 say that the estimated $15 million tax break will bring good-paying jobs to the state, and strengthen Colorado’s position as a tech industry hub.
“The reason that Colorado gets so few investments in data center technology is we’re just not competitive,” said Sen. Nick Hinrichsen, a Democrat from Pueblo who is sponsoring the bill. “If we are not competitive with our peers, the big sites will not come.”
But a broad array of taxpayer watchdog groups, consumer advocates and environmentalists say the long-term costs of data centers will far outweigh their benefits if the legislature doesn’t demand more protections for ratepayers and the environment in exchange for public subsidies.
“We’re looking at a bill that’s offering up tens of millions of dollars in tax breaks and incentives for these companies,” Parks Barroso, the clean energy manager at Western Resources Advocates said in an interview. “What are the guardrails, what are the protections for Colorado’s climate goals and for Colorado’s consumers? We’re not seeing those protections anywhere in the bill.”
The optics of offering new tax breaks to tech giants couldn’t come at a worse time.
Just this week, the legislature gave final passage to a state budget that starts July 1 and cuts spending on transportation and social programs to close a $1.2 billion shortfall. As they turn their attention to next year’s financial problems, state budget writers have begun looking for ways to scale back tax breaks — and not only those that benefit corporations. One option on the table is to temporarily eliminate tax credits for low- to middle-income families.
Moreover, tax breaks in Colorado have different trade-offs than in other states because of the way they interact with the Taxpayer’s Bill of Rights. In good economic times, a sales tax exemption would effectively shift TABOR refunds from Coloradans to tech companies like Microsoft and Google. In an economic downturn — which some forecasters are now predicting — the state would be left with fewer tax dollars to spend on public services, exacerbating the state’s budget problems.
Despite the political headwinds, this year’s proposal has made it further than a similar bill introduced last year.
The measure passed the Senate Committee on Transportation and Energy 6-3, with Democrats evenly split on the proposal and all three Republicans voting in favor. That suggests that even if the legislature rejects it again, the debate over data center incentives in Colorado isn’t likely to go away.
As Senate Minority Leader Paul Lundeen, a Monument Republican who is also sponsoring the bill, put it during the committee hearing, “Does Colorado want to participate meaningfully in the 21st century or not?”
The rising costs in other states
When Virginia in 2016 passed a law extending its data center tax breaks through 2035, legislative analysts expected it to cost the state around $50 million a year.
By 2023, the tax abatements were worth over 20 times that — $928 million.
Experts who have researched data center tax breaks say that’s par for the course.
In state after state that rolled out the red carpet for data centers, public officials largely underestimated the costs and overestimated the benefits. By one accounting, states are doling out as much as $2 million in tax breaks per job created, according to Good Jobs First, a watchdog group that researches corporate tax incentives. And that doesn’t factor in the costs incurred by ratepayers, as utilities scramble to accommodate the growing demand for electricity.
“Because of the acceleration of data center construction driven by AI, and the fact that the state incentives are typically open-ended — there’s no cap — the velocity of revenue losses by the states is very steep,” said Greg LeRoy, the group’s executive director.
“And, you know, it’s a very profitable industry,” he added. “We don’t think they need to be subsidized in the first place.”
Virginia’s data centers have covered the costs of their electrical needs so far. But auditors warn that they expect that to change in coming years.
From 2006 to 2020, electricity use in Virginia was essentially flat due to gains in energy efficiency. But the data center boom has upended that trend. Electricity demand in the state is now expected to double in the next 10 years, largely due to data centers.
Like Colorado, Virginia hopes to get 100% of its electricity from renewable energy by 2050. But to meet even half the additional demand, the audit found, the state would likely need to build a large natural gas plant every two years, undermining the state’s renewable energy goals.
Because of the growth in demand, the state’s largest utility expects consumer bills to rise three times as fast over the next 10 years as they did the previous 16, the Washington Post reported. Residential utility bills could rise as much as $37 a month by 2040 to fund the expansion, auditors said.
Today, lawmakers in a number of states that successfully attracted data centers have buyer’s remorse.
In Georgia, lawmakers passed a bill last year to pause their tax breaks, after their own state audit found that the economic activity generated from $50 million in tax breaks is only expected to generate $15 million in new tax collections this year. The state’s governor vetoed the bill, which also would have studied data centers’ effects on the state’s rising utility bills.
In addition to commissioning the audit, Virginia lawmakers are batting around proposals to require more energy efficiency as a condition of receiving tax breaks; they’ve also debated legislation to insulate ratepayers from the costs of expanding the grid.
In Colorado, supporters and critics alike agree that the stakes are high, and the right regulations are needed — but the two sides are far apart on how to protect ratepayers and keep the state on target to meet its clean energy goals.
“The stakes of getting this right are enormous,” said Rebecca White, the director of the state Public Utilities Commission. “Particularly for ratepayers.”
The push for stronger protections
When Virginia first created their tax incentives in 2009, only seven other states offered such incentives, according to the Northern Virginia Technology Council.
Today, more than 30 states do. And across hours of testimony, data center developers told state lawmakers that tech firms simply won’t build large data centers in Colorado without them — not when they can go to dozens of other states and build them sales tax-free.
To Hinrichsen, it’s personal. In committee testimony, he said he grew up in Michigan, where he saw what the loss of manufacturers did to communities.
“I watched my hometown die,” he said. Now he wants to help his adopted hometown of Pueblo avoid the same fate when its coal plant goes offline in 2031.
There’s no doubt data centers create jobs — but there’s a caveat. The vast majority of those workers come and go during the construction phase. A typical 250,000-square-foot data center employs only about 50 people on a permanent basis — half of them contractors — compared with 1,500 workers at the height of construction, according to the Virginia report.
In Colorado, many of the bill’s opponents say they’re not against data centers. But if the state is going to use taxpayer money to lure them here, they say, Colorado residents should get more in return.
They want more assurance that tech companies, not ratepayers, will foot the bill for expanding Colorado’s transmission infrastructure to accommodate the larger electrical loads.
And they want an explicit guarantee that data centers will get their electricity from renewable sources.
An earlier version of the bill would have offered additional tax breaks to data centers that get at least half their electricity from renewables. (Even that would fall short of the state’s goal of 80% renewables by 2030.) The latest version of the bill has only vague provisions saying that such projects should provide additional clean energy beyond what’s already required in state law.
Without an explicit target, environmental groups worry Colorado utilities could follow the lead of those in other states that have used the AI boom as a reason to extend the life of coal plants and build more natural gas facilities, which emit planet-warming greenhouse gases. On the other hand, if incentives were tied to the use of renewable energy, like a geothermal project Google is partnering with a utility to build in Nevada, data centers could help the state reach its climate goals rather than hinder it.
“A state policy could use this current data center environment across the country for good,” Barroso said. “Unfortunately, I don’t see that type of innovative or constructive policy reflected in the bill itself.”
It’s not just outside interest groups. Polis administration officials have been lobbying for changes, saying the bill doesn’t do enough to allow state regulators to protect the climate, ratepayers or the state’s limited water resources, which data centers use to cool their equipment.
White, with the Public Utilities Commission, wants amendments, too, saying the bill would take away some of the PUC’s authority to review such projects, preventing it from fulfilling its regulatory mission to balance the needs of utilities and their customers.
Supporters counter that their bill does require the companies to make concessions. To qualify for the tax break, the firms would have to participate in workforce development programs and they’d have to create at least 25 jobs paying, on average, 10% more than the area median wage. Data center operators also have to meet certain energy efficiency standards and certify that their project won’t cause “unreasonable cost impacts” to other ratepayers.
But while the bill says utilities “may” charge data centers the entire cost of expanding transmission and distribution lines, it would also allow them to recoup some of those costs from other customers. The measure requires the PUC to approve those costs if they provide system-wide benefits.
With just two weeks left in the legislative session, the bill remains a long-shot to pass both chambers. While it has bipartisan support, including the top Republican in the Senate, it might not even make it to the chamber floor.
First, the bill has to survive the guillotine of the Appropriations Committee, where it’s competing with dozens of other proposals for funding.
Budget writers for months have been warning their colleagues against starting new programs that require additional staff to administer. This bill would do just that, at an initial cost of $700,000 next year.
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