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In the heart of Data Center Alley, tax revenue from digital infrastructure has fallen far short of expectations.
Tax revenues from data centers in Loudoun County, Virginia, fell $60M short of projections this year, a significant shortfall that could have repercussions beyond Northern Virginia’s digital infrastructure hub, Loudoun Now reports. While some county officials insist the lower-than-expected revenues are a short-term, pandemic-generated problem, others fear that cracks may be appearing in a data center-centric development model that municipalities around the country have sought to emulate.
“When this revenue source, a single line item, becomes such a huge component of the revenue side of our budget … if that single sector or that single industry starts to have economic difficulty, or the next new scientific achievement happens which means the way data centers work as we understand them now becomes an outdated model for providing this service, then that really then creates what could be a huge budget problem very quickly,” County Administrator Tim Hemstreet told Loudoun Now.
The bulk of Loudoun County’s revenue from data centers comes from taxes on the assessed value of the equipment inside of them, mainly servers and other computer infrastructure. An aggressive depreciation schedule on this equipment has been one of the primary carrots luring data center developers to Loudoun County, with the taxable value of servers decreasing by 50% after just one year. This model has been widely replicated elsewhere.
With new data centers constantly under construction and existing operators frequently replacing equipment to keep up with changing technology, the county has always maintained a significant inventory of digital equipment taxed at the highest level. Until 2021, tax revenues routinely came in significantly above projections.
Yet in data released by the county late last week, the total assessed value of digital equipment in Loudoun data centers was revealed to be $1.1B short of projections. That amounts to a $60M hole in the county’s school and operations budgets.
“We’re in a little bit of an unenviable spot,” said County Finance Committee Chairman Matthew Letourneau, according to Loudoun Now. “We worked really hard to accurately predict our data center revenue and then use more of it, only to find ourselves now in the position where we ended up overestimating for reasons that are understandable.”
Speaking at a meeting of the county’s finance committee, some officials pointed to issues stemming from the coronavirus pandemic, particularly the chip shortage and other supply chain interruptions that limited access to new servers. Others pointed to changes in how hyperscalers like Amazon and Microsoft build out their digital infrastructure — they are building data centers with empty excess space so they can scale up quickly to meet future demand.
Yet some officials and industry experts say this reflects a worrying trend for Loudoun County and other data center hubs that rely heavily on tax revenues from digital infrastructure. There are signs that data center operators may be replacing equipment less frequently as the chip and server innovation slows and equipment shelf life increases.
“I think it’s really too early to tell until we see at least next year’s tax levy, and maybe the tax year 2023 levy, to be able to sort out what was Covid noise versus what was changes in the industry,” said Caleb Weitz, the county’s assistant director of budget and finance. “What I think I can confidently say is it’s definitely a mixture of both.”
The announced shortfall comes amid growing unease in Northern Virginia about how closely the region’s fate is now tied to the data industry. Taxes from data centers, which account for much of the county’s school and operating budgets, are on pace to eclipse property taxes as the county’s main form of revenue.
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