Scrutinizing the Deal: How Local Leaders Should Evaluate Data Center Incentive Packages

Local leaders must rigorously evaluate data center incentive packages, as projected benefits often fall short due to tax exemptions and infrastructure costs. A disciplined framework is essential to weigh revenue against abatements, infrastructure demands, job realities, and community impacts to ensure net community benefit.

David Chen

October 24, 2026 · 6 min read

When a data center developer comes to town promising hundreds of millions in capital investment, the single most important question is not whether the project is good or bad, but how the benefits and risks are allocated between the company and the community. Analyses of existing incentive programs suggest the net fiscal return is often far smaller than projected, because tax exemptions and infrastructure obligations quietly erode the headline gains. A recent state-level review in Virginia, the state with the largest concentration of data centers, found that each dollar the state spent on its data center sales tax exemption returned only 48 cents in state revenue.

The practical task for a local government is therefore a disciplined weighing of projected tax revenue against abatements, infrastructure costs, job realities, and community effects, and this article offers a framework for doing exactly that.

Understanding Data Center Economic Impacts

Data centers do generate real public revenue. They contribute through property taxes, sales and use taxes, utility taxes, and corporate income taxes, and a national estimate cited by the World Resources Institute found that total government revenues associated with the data center sector grew from $66 billion in 2017 to more than $162 billion in 2023. That growth is why so many states and cities compete aggressively for these facilities.

But the same analysts caution that many jurisdictions offer sizable tax incentives to attract data centers, meaning the actual gain can be far smaller than the headline figure suggests. Those benefits must also be weighed against long-term public costs, including investments in water systems, electrical substations, transmission lines, roads, and emergency services. A Brookings-convened symposium on rural data center development highlighted that the key consideration is not their inherent value, but rather the distribution of benefits and risks, and how effective governance, local authority, and transparency can ensure communities gain maximum advantages while safeguarding their interests. Financial incentives, compressed timelines, and confidential negotiations, the symposium noted, make that allocation harder to see.

Policy Reforms for Maximizing Community Benefits

Reform advocates at Good Jobs First, a nonprofit that tracks corporate subsidies, argue that existing state legislation can be amended to improve public returns. Their proposed reforms include excluding cryptomining facilities from data center incentive codes and from other applicable incentives such as capital investment or electricity rate reduction programs. They also recommend excluding the local share of the sales and use tax from incentive programs—or, where the local share can be abated, amending the law to give each body of government, whether state, county, city, or school district, sole discretion over whether to abate any share of that revenue for each proposed project.

Accountability reforms include requiring a state performance evaluation of the data center incentive program every three years, tied to program sunsets, and requiring a state agency to develop data collection procedures from incentive recipients to enable that evaluation. Good Jobs First also recommends commissioning state audits covering electricity demand and rate hikes, water demand and availability, permanent job creation, air quality, and fiscal rate of return.

Sustainability conditions are another emerging lever. Michigan's 2023 data center incentive package, as described by the U.S. Green Building Council, added distinctive requirements: qualifying enterprise data centers must connect to municipal water systems rather than relying on groundwater withdrawals, use clean energy, and meet specific energy efficiency targets—provisions added during final negotiations after public and environmental advocacy groups raised concerns. More broadly, states and localities are increasingly tying public incentives to green building practices, particularly third-party certifications such as LEED, making sustainability a central component of many incentive structures over the past three years. These reforms allow local entities to better control their fiscal impact and ensure data centers contribute to broader community goals.

Decision Framework for Data Center Incentive Proposals

The framework below executes the central analytical task: weighing projected tax revenue against the costs of tax exemptions, infrastructure upgrades, and resource demands across four dimensions. Applying it to any proposal yields a clear assessment of whether the package is likely to produce a net positive economic return for the community, and identifies specific terms for negotiation.

Decision matrix for evaluating a data center incentive proposal
Dimension	Key question	Evidence-based evaluation criterion	Negotiation point
Fiscal impact	What revenue remains after abatements?	Virginia's legislative auditors found each incentive dollar returned 48 cents in state revenue; a proposal should be modeled net of exemptions, not on gross investment.	Limit abatement duration and share; preserve local tax streams.
Infrastructure costs	Who pays for upgrades?	Water systems, substations, transmission lines, roads, and emergency services are long-term public costs that must be weighed against gains; tariff arrangements may shift grid costs to other ratepayers.	Explicit cost-allocation terms for each upgrade category.
Job creation	How many permanent jobs, at what skill level?	Employment per square foot is low compared to other industries; positions range from janitorial to specialized engineering, and may not match local workforce needs.	Specific, dated, enforceable local-hiring commitments.
Community and environmental effects	Are resource demands and impacts disclosed?	Michigan's model ties incentives to municipal water connections, clean energy, and efficiency targets; disclosure of resource demands enables meaningful review.	Sustainability conditions and public disclosure requirements.

Decision matrix for evaluating a data center incentive proposal

Dimension

Key question

Evidence-based evaluation criterion

Negotiation point

Fiscal impact

What revenue remains after abatements?

Virginia's legislative auditors found each incentive dollar returned 48 cents in state revenue; a proposal should be modeled net of exemptions, not on gross investment.

Limit abatement duration and share; preserve local tax streams.

Infrastructure costs

Who pays for upgrades?

Water systems, substations, transmission lines, roads, and emergency services are long-term public costs that must be weighed against gains; tariff arrangements may shift grid costs to other ratepayers.

Explicit cost-allocation terms for each upgrade category.

Job creation

How many permanent jobs, at what skill level?

Employment per square foot is low compared to other industries; positions range from janitorial to specialized engineering, and may not match local workforce needs.

Specific, dated, enforceable local-hiring commitments.

Community and environmental effects

Are resource demands and impacts disclosed?

Michigan's model ties incentives to municipal water connections, clean energy, and efficiency targets; disclosure of resource demands enables meaningful review.

Sustainability conditions and public disclosure requirements.

Using this matrix, a leader works from evidence to judgment: if the net-of-abatement revenue does not cover the community's share of infrastructure costs, or if permanent job commitments are vague, the proposal as written is unlikely to yield a net positive return, and the identified terms—abatement structure, cost allocation, hiring commitments, sustainability conditions—become the negotiation agenda.