Understanding Data Center Location Decisions: Evidence on the Role of State Tax Incentives

State and local governments are increasingly interested in understanding the factors that influence data center location. This paper examines a common state policy tool, state sales and use tax exemptions for data center investment, as a location factor using staggered difference-in-differences methods. Tax exemptions significantly increased data center square footage but had little effect on the number of facilities or energy use. The results indicate an estimated 50 percent “but for” effect, evidence of early-mover advantages, and declining incentive effectiveness over time, suggesting that infrastructure and other location factors may now play a larger role than tax incentives.