The Data Center Dilemma

Communities are right to be skeptical of ‘investments’ that drain resources and provide little.

By Aaron M. Renn, senior fellow at American Reformer. His writing can be found at www.aaronrenn.com.

Artificial intelligence is the hottest sector in tech. Many believe it will be as transformational as the Internet itself. 

Today’s AI systems require vast amounts of computer power to train the models. This has led to a boom in data center construction, with potentially hundreds of billions of dollars new AI-focused data centers to be built in the US in the coming years.

Unlike AI software investment, which is concentrated in the San Francisco area, data centers are being built in a wide range of areas including Memphis, Tennessee; Cheyenne, Wyoming; and Fort Wayne, Indiana. For data centers, factors such as power availability play a bigger role in site selection than concentrations of top tier AI model talent. 

This makes data centers a politically attractive target for economic development in many places. For one thing, these data centers often carry the brands of top-tier technology companies like Meta or Microsoft. Today’s data centers also have very large capital cost. Combine these, and AI data centers can generate impressive deal headlines. For example, one Nebraska article’s headline read, “Google: 2024 capital investment in NE is $930M, for a five-year tally of $4.4B”. 

Nothing makes a city sound like a tech hub like an announcement of billions of dollars of investment by blue chip Silicon Valley firms. Every mayor or governor is interested in news like that.

But while these data centers can be a positive, they are vastly overblown as economic development stories. 

For one thing they don’t employ very many people. Even a so-called “hyperscale” data centers, who trumpet their ability to perform large-scale work, only employ a maximum of about 200 people. As the Wall Street Journal recently noted, “The AI data-center boom is a job-creation bust.” The vast majority of the jobs touted as being “created” by these projects are temporary construction jobs. But even here, the workers might not even be local. They are often specialist electricians and other highly skilled workers who travel from job to job.

Also, these data centers don’t necessarily pay that much in taxes either. In some states the computer equipment installed at them is either exempt from personal property taxes or eligible for abatements. That is, the owners of these data centers don’t have to pay taxes on the equipment installed in them. A number of states also exempt data center equipment from sales and use taxes. Some states like Ohio also exempt the materials used to construct data centers from sales tax. A wide range of other incentives are often extended to woo data centers to score political points: real property tax abatements, job creation tax credits, and more. In short, not only do data centers not employ that many people, they don’t necessarily provide much in tax revenue for these communities, thanks to special breaks set up specifically for them.

Data centers are also gigantic electricity hogs. With power shortages in some parts of the country, these centers will consume power that might otherwise have been used by higher value industrial activities that employ more people. The New York Times recently reported that the costs of expanding our electricity infrastructure to serve these data centers are likely to raise electricity bills for individuals and small businesses. This is because in many places the cost of these upgrades gets spread across all electricity customers, not just the huge operations that necessitate them.

Needless to say, these data centers also don’t lead to spin off businesses, talent agglomerations, or other things that would help promote the cities where they are located as genuine tech hubs. Today, there’s no need to have physically co-located computer servers, which is why these data centers are often located far from both the corporate HQs of these companies and the end users of their software.

Put this all together, and it’s no wonder why some communities are starting to push back against proposed data centers in their backyards. A plan for a large data center in Hancock County, Indiana was dropped in the face of community opposition. But it’s not just rural communities who are rethinking them. Loudoun County, Virginia in suburban Washington has tightened up rules on data centers as well.

Local communities increasingly see large data centers, correctly, as similar to large-scale wind or solar energy installations—namely, as a form of environmental dumping by rich urban areas onto less powerful rural or exurban ones. Local communities have to deal with the loss of open land and environmental impacts, while the bulk of the benefits flow elsewhere. 

Here, as with green energy, frustrated state economic development officials seeking new investments they can promote want to strip localities of their ability to reject potential data centers. This has already happened in West Virginia, for example, where the state passed a law restricting local officials from controlling where data centers could be constructed. Pre-empting local land use control over data centers hardly suggests confidence that these are positive developments that locals would support.

America needs to build data centers to win the AI race. Those data centers, like warehouses, have to go somewhere. And like warehouses, data centers can play a positive role as part of an overall diversified economic base for a community. But they are hardly an economic development gold mine in the same way a development like an electric vehicle manufacturing plant or chip fabrication plant would be—even if there’s a Google logo plastered on the outside.