Data Centers: Balancing Economic Benefits and Resource Demands

Across the country, communities are exploring how to attract data centers as part of their economic development strategies. These facilities can generate significant tax revenue, and while they provide a limited number of jobs, those jobs typically offer well-above-average wages.

However, data centers are among the most energy-intensive building types, consuming 10 to 50 times more energy per square foot than a typical commercial office, according to the U.S. Department of Energy. Data centers also require large quantities of water to cool buildings full of servers. Considering these substantial impacts on local resources, many communities wonder whether the tax incentives used to attract data centers are justified.

This overview defines the types of data centers, explores their economic promises and infrastructure challenges, and examines the public policy implications, including the growing debate over the effectiveness and impact of tax incentives.

Types of Data Centers

Data centers vary in financial, technical, and ownership structure:

• Enterprise data centers: Built, owned, and operated by companies to serve their customer base. 

• Managed services data centers: Operated by third parties (e.g., an IT services provider) on behalf of companies. 

• Colocation data centers: Companies rent space in a third-party data center which provides the infrastructure (building, cooling, bandwidth, security) while the company manages their own servers.

• Cloud data centers: Hosted cloud service providers like Amazon Web Services (AWS) or Microsoft (Azure).

Source, Cisco

Rising Energy Demands

Despite their differences, all data centers are heavy energy consumers, a demand that’s only increasing with new technologies. Goldman Sachs reports that a ChatGPT query uses nearly 10 times the electricity of a Google search. As AI grows, data center power demand is expected to rise 160% by 2030. According to a 2023 Newmark market report, the increasing use of AI and machine learning requires more power and cooling than many existing data centers can handle, driving demand for new facilities.

Even tech leaders like Google, committed to renewable energy and efficiency, are grappling with the challenges of AI. As reported by Data Center Dynamics, Google’s 2023 emissions rose 13% compared to the previous year, and 48% over five years as a direct result of increased energy use related to AI.

What does this mean for communities?

As the demand for data centers grows, developers are seeking new sites with reliable electricity (often renewable or carbon-free), excess water capacity, and access to redundant high-speed internet connections. In return, data centers offer solid capital investment, ample tax revenue, and a small number of high-paying jobs.

Electricity, water, and high-speed connections are primary considerations for developers

• Electricity: Data centers use 10 to 50 times more electricity than a typical commercial building of the same size. They depend on zero unplanned downtime, requiring reliable power from two redundant substations and onsite backup power. Note: Many data center operators or their customers want most or all of the power to come from renewable or carbon-free sources to meet climate or emissions goals, and they usually specify this upfront. 

• Water: Running all that processing hardware generates substantial heat, requiring an equally substantial cooling system. Cooling systems (HVAC and liquid) can use 500,000 gallons of water a day or more—sometimes much more.

• Internet: High-speed internet with redundant connections from multiple ISPs is critical.

Good taxpayers, but not great job creators:

• Taxes: Data centers can be large taxpayers, which may be used to offset real estate taxes for homeowners or fund schools and infrastructure. Many states offer tax incentives for data centers, though they have increasingly come under scrutiny.

• Jobs: Data centers don’t create many jobs, but the jobs they do create tend to be well-paid. Data centers with $1-2 billion in capital investment might create 50-100 direct jobs, compared to 10-20 times that number in manufacturing. However, data center jobs often pay an average of $100,000, compared to $50,000-$60,000 for manufacturing.

Growing Controversy

Data centers were once welcomed by states and economic developers with the same tax incentives offered to any large economic development project, but that’s changing as states grapple with their high energy and water consumption, along with the thought that the incentives are secondary drivers of data center site selection—behind access to abundant electricity and water.

Data centers are driving the first net increase in electrical demand in a generation

As noted above, data center power demand is expected to grow by 160% by 2030, contributing to the first significant rise in overall electricity demand in over 40 years. This growth is creating an urgent need for increased power generation capacity across the country. Policymakers rightly wonder whether the electric grid can expand fast enough to keep up with the rapid development of new data centers. 

Adding to the challenge, many data center operators and their clients, such as Google, Amazon, and Microsoft, want to source renewable energy to meet their climate goals. Most states offering incentives to attract data centers also have their own clean energy goals. 

The key question for policymakers is: Can we add enough new clean energy to the grid to meet both our own needs AND the growing demands of power-hungry data centers?

Water is a finite resource, and data centers use a lot of it

Unlike electricity, new water resources can’t simply be created. Rivers, reservoirs, and aquifers have fixed capacities and are facing ever-increasing demands. In many areas, there is already limited water to go around. Policymakers are now taking a closer look at economic development projects with high water usage, particularly in regions like the American Southwest, where water resources are especially limited.

Is Attracting Data Centers Worth It?

Policymakers are increasingly questioning whether tax incentives to attract data centers are justified, giving their strain on resources. 

This debate is unlikely to end in the near term. On one hand, data centers remain essential to business and modern life, and provide needed jobs and tax revenue for communities. On the other hand, they pose significant challenges to local infrastructure, straining our energy and water resources. These dueling realities will be on the minds of policymakers for the foreseeable future, and we’ll see these debates play out in legislatures and in communities across the country.