THE COSTS OF TAX INCENTIVES

We don’t get it.

Over the years, many cities and states have handed out tax incentives with the notion that they are supposed to have a good return on investment. They’re supposed to bring in jobs and have a ripple effect in neighborhoods in which the incentivized project is located.

But that often seems to be an illusion. Elected officials nearly always play up the potential benefits and downplay costs. Fortunately, the Governmental Accounting Standards Board has a standard that entities report lost revenue. But residents aren’t inclined to read government annual reports.

If they were more aware of the tradeoffs between education or health care and the money spent on tax exemptions, it’s our guess that they’d be less than thrilled when a governor or a mayor announced the exciting news about the next big tax-incentive-based economic deal.

We’ve written about this in the past, but are moved to bring it up again, as the huge desire for rapidly expanding data centers has led some states – including Virginia, Illinois and Georgia to use tax incentives to attract these sexy new installations.

“Data centers are Exhibit A for what states should not be subsidizing in 2026,” Greg LeRoy, executive director of Good Jobs First, an organization that gathers much of the best data pertaining to tax incentives, told us. “States themselves report losing 52 to 91 cents on the dollar on their sales and use tax exemptions. Data centers are causing stress on electric grids, driving up electricity prices, taxing water supplies, and creating very few permanent jobs.”

Consider some numbers from Georgia. Currently the state is expected to forgo some $2.5 billion to data center tax exemptions according to the state’s own data. “That’s 664 percent higher than the state’s previous estimate of $327 million,” according to Good Jobs First, “a reflection of the speed at which the industry is extracting public money from communities across the country.”

Policy makers often use the so-called ‘but-for’ argument to make the case that if they weren’t forgoing millions, or billions of dollars in exemptions, they’d lose the potential for new economic development to other cities or states.

But as we’ve studied this topic over the years, that’s never seemed to hold up in the real world. Far more important than tax incentives is the presence of a skilled workforce. This is particularly true in high-tech sectors, in which proximity to research universities is a major benefit.  Beyond that the costs of labor are a major factor.

Then there’s the speed with which a company can move forward. High on the list of disincentives to businesses are lengthy periods – months or even years – to turn a plan into reality. Additionally, the quality of life of a city or state carries a lot of weight. Housing  affordability is a major factor for businesses. If workers must make a long commute to get to the office, that will mean that a company may have troubles in attracting sufficient talent – even in parts of the country in which there are ample talented potential workers.  

There’s some powerful evidence that these other factors carry more weight to potential corporate employers. Georgia had a lot going for it in terms of existing infrastructure and low energy costs, and according to the Carl Vinson Institute at the University of Georgia. “in the absence of the exemption, 70% of data center construction activity in the state would have occurred anyway and . . . the remaining 30% could be attributed to the tax exemption.”

David Brunori, Senior Director at RSM US LLP, has written extensively about this topic. We asked him to see if he could add anything. Here’s what he wrote; “A more philosophical reason for opposing incentives is that the government is literally picking winners and losers in the marketplace. The government has a hard enough time doing traditional governmental stuff. Government economic planning has never worked very well.  Data centers are a great example. 

Many states have encouraged investment in data centers without regard to markets. Now in many states there is a glut of data centers. Moreover, most governments did not consider issues such as energy consumption and land use when providing incentives”

Finally, promises made by companies to deliver thousands of new jobs may not ever come to pass. In some instances, the jobs never materialize, in others the jobs aren’t genuinely new to the region but are simply a factor of shifting an employee from one employer to another. 

At least entities that carefully measure the benefits of tax incentives are less likely to throw dollars out the door. But more often that doesn’t come to pass. According to Good Jobs First in 2025, only about 7 percent of U.S. cities disclose both the jobs promised and the jobs actually created. Without this transparency, the public never knows when a project has failed to deliver.

In a column written by Ellen Harpel, Founder of Smart Incentives and Randall Bauer, Director, PFM Group Consulting, explained, entities should take the following into account:

• “Consider both requirements (such as contractual obligations that the company must meet) and requests (information that would be helpful to have but may not be contractually required).”

  
  

• “Data should allow tracking of milestones to show outcomes achieved and incentive payments made. Data insights can also be used to address projects that are not in compliance.”

• “Compliance data is valuable for both internal and external use. Internally, managers can see how well programs are performing and which programs are most effective at generating the outcomes the government cares about.”

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