New natural gas-fired power plants in Ohio, built solely to fuel data centers owned by the likes of Google and Amazon, are eligible to take advantage of a huge state sales tax break, state officials said Tuesday, hitting several lawmakers and lobbyists by surprise.
This means Ohio could lose out on millions of dollars of tax revenue from two booming industries – big data and natural gas – at a time when state lawmakers are already slashing revenues through income tax cuts.
Plus, it’s yet another public subsidy for the data center industry, which lawmakers, regulators, grid operators and utility officials have warned are demanding more energy than the regional electric grid is equipped to supply, a dynamic likely to drive electricity prices upward.
The tax break at issue dates back to 2013, when Ohio sought to lure major technology companies to build data centers here through different tax incentives. But language in that law, which predates the modern era of massive data centers at the heart of the artificial intelligence boom, stretches the definition of “data center” to include natural gas generation plants on site owned by the technology companies.
“I was unaware of this. I don’t think it was ever brought up,” Rep. Roy Klopfenstein, a Paulding County Republican who sponsored a major overhaul of Ohio’s energy policy earlier this year, said in a phone call.
The legislation Klopfenstein sponsored, among other changes, set new rules for such “behind the meter” natural gas plants for data centers’ private use. It also decreased property tax rates for newly built natural gas plants. Both changes were aimed to attract development of natural gas generators in Ohio, in part because of the new energy demand brought by the data centers themselves.
In hours and hours of testimony on the legislation, plus dozens of private meetings, he said the apparent sales tax exemption for behind the meter natural gas plants never came up once. Other policy analysts and lobbyists contacted by Signal Ohio expressed surprise to hear about the seemingly new tax break.
Big data, big costs
Ohio offers a full or partial exemption to the state’s 5.75% sales tax to large data centers approved by state officials. But the legal definition of data centers includes all property used “to generate, transform, transmit, distribute, or manage electricity necessary to operate … a computer data center business.”
Data centers in the state, which use massive amounts of energy, have recently begun the process of building their own power sources. If a data center has won approval for the sales tax exemption, the break would apply for costs to build both the data center and a gas power plant they own, according to Andrea Lannom, a spokeswoman for the state Department of Taxation, in response to questions from Signal Ohio.
The change means a tax break designed for data centers now extends to the investors behind natural gas plants as well.
State estimates say Ohio will waive $127 million in sales taxes for data centers this year alone, an estimate that predates the behind-the-meter generation projects.
Since Jan. 1, developers have asked state officials for permits to build six new gas plants on data center campuses. These facilities could be eligible to save tens of millions in sales taxes.
No financial estimate is available for the value of the tax credit to the generation plants. But in 2023, it cost about $1,250 per kilowatt to build a plant, according to the U.S. Energy Information Administration. The plants now in the development queue for private use range from 200 to 1600 kilowatts.
Gov. Mike DeWine saved the tax break with veto pen
Earlier this year, Republicans in the statehouse voted to repeal the data center tax exemption, which also would have repealed the exemption for natural gas plants owned by the same facility.
However, Gov. Mike DeWine, also a Republican, vetoed the provision, citing the economic importance of the data centers.
The facilities – jumbles of racks, cooling equipment, and servers spread over stadium-sized campuses – consume vast sums of energy. Grid officials and state policy makers have expressed concern for years that their demand could outstrip the available power supply over the next decade. And ratepayer advocates have warned of risks that residential ratepayers get stuck paying the costs of grid investments that are only necessary because of the new data centers.
Dan Tierney, a spokesman for DeWine, said the governor supports the growing data center industry, which is coming to rely on independent power generation to remain viable. Other states offer a similar tax credit, he said, and getting rid of it would chase off that investment.
“So the bottom line is, if you’re not going to support any piece of this, it’s going to undermine the state’s ability to compete for these projects,” he said.
Six new gas plants apply to power data centers
This year alone, six data centers have announced plans or asked the Ohio Power Siting Board for permission to build. That includes:
- The AlphaStruxure Millersport, a 1600 megawatt behemoth planned in Fairfield County
- The Bluegrass Power Generation Facility Project in Fayette County, a 400 megawatt project that might add another 400 megawatts down the line
- The PowerConneX II New Albany Energy Center project, a 216 megawatt project to power an EdgeConneX data center
- The Socrates North and Socrates South projects, both 200 megawatts, to power a Meta (parent company of Facebook) data center.
Tax breaks for data centers, gas plants ‘no longer necessary,’ top Republican says
House Speaker Matt Huffman said through a spokesman that he supports ending the sales tax break for gas plants on data centers, which is “no longer necessary” given other tax breaks for new generation plants “and the dramatic expansion of data centers throughout Ohio.” He has said he’s interested in overriding the veto, but hasn’t announced any specific plan to do so.
A spokesman for Senate President Rob McColley didn’t respond to inquiries.
The Data Center Coalition, an industry trade association, declined to comment.
Data centers get local tax breaks too
There are 188 data centers in Ohio, mostly around Columbus, according to Data Center Maps, an industry consultancy. Besides the sales tax breaks, the facility owners regularly strike property tax abatement deals with local governments, lasting 15 to 30 years.
As just one example of the favorable tax treatment, take the $420 million Microsoft facility planned over 200 acres of New Albany, in Central Ohio. Last year, the New Albany City Council approved a 15-year, 100% property tax abatement deal for the facility.
That same month, the state Tax Credit Authority gave the company a 100% sales tax exemption for 15 years, in exchange for a commitment to create 20 full-time jobs. Estimates from Policy Matters Ohio, a progressive economic think tank, peg the value of the credit for Microsoft at $72.5 million.
Now, if Microsoft were to build a power plant on site, it too could avoid the sales taxes on costs of tens to hundreds of millions of dollars in equipment to build a generation apparatus. Plus, that power plant would also pay a lower property tax rate, thanks to the energy legislation Klopfenstein sponsored.
Sales tax exemption has strings attached
While the behind-the-meter gas plants are eligible for the sales tax exemption, they aren’t guaranteed to receive it.
The data centers must win approval for a full or partial sales tax exemption from the Tax Credit Review Authority, a panel of gubernatorial appointees. That exemption would apply to both the data center, and any behind-the-meter generation.
The law isn’t specific to natural gas plants – behind-the-meter solar or nuclear are eligible, though most interest thus far has been limited to natural gas, which can provide much more power over a smaller acreage than renewables.
