Big tech will use Minnesota tax breaks for an influx of data centers. Nobody knows how much it will cost.

Minnesota lawmakers are under pressure to extend tax breaks for data centers as the industry is poised to grow explosively in the state.

Those sales tax exemptions are already worth about $100 million a year for data center companies, but the cost to the public is unknown if the industry grows to nearly 40 times the size of the current market, as electric utilities predict.

Neither the industry nor the state will estimate how much the tax incentives would be worth — and how much less money the state would collect as a result.

The data center industry argues that market hubs such as northern Virginia are gaining more benefits like property taxes and construction jobs than what they are losing in sales tax revenue.

Utilities say data centers can lower bills for other customers, and some worry data center companies would bypass Minnesota without tax incentives.

“Assuming that Minnesota does not stay competitive, does not be forward-looking on this type of policy, do these investments happen in Wisconsin and Illinois?” said state Sen. Grant Hauschild, DFL-Hermantown, who is sponsoring the legislation.

Others are skeptical, viewing the tax breaks as a giveaway for the nation’s largest tech companies, which don’t need them.

Rep. Aisha Gomez of Minneapolis, the top House DFLer on tax policy, said the bill to extend the tax incentives also makes it harder to discern how much they cost. That combination “is just absolute malpractice,” she said.

Pat Mazorol sponsored the original data center tax break bill when it passed in 2011, when he was a GOP state representative from Bloomington. Mazorol said the idea was speculative but aimed at bringing a high-tech industry with desirable jobs to Minnesota.

“Even at the time we were seeing just how our general society and economy was being more and more a data driven society,” Mazorol said in a recent interview.

There are now 41 Minnesota data centers that qualify for the incentives, which exempt companies from state sales tax on computers, servers, software, cooling and energy equipment and electricity use.

These data centers are for big companies, such as Land O’Lakes, General Mills, 3M, Wells Fargo and UnitedHealth Group. But in the world of data centers, they are small potatoes.

A common way to measure the size of data centers is by how much electricity they use. The Twin Cities market has about 60 megawatts of data centers, according to real estate firm CBRE.

That market could soon become much larger. Xcel Energy and Great River Energy are planning to supply data centers with roughly 2,300 megawatts of electricity in the next five to seven years.

Last year, Hauschild introduced a bill that would have extended the sales tax exemptions 17 years (until 2059) for large-scale data centers.

The legislation also would have allowed big data centers to claim an up-front sales tax exemption when buying equipment like servers, rather than applying for a refund with the state after making a purchase.

The Data Center Coalition represents tech giants such as Amazon, Google, Microsoft and Meta, as well as other companies hoping to build in Minnesota. The trade group is among the most influential supporters of the bill.

But it said it can’t estimate how much money its companies would save — and how much less the state would collect in revenue — under either the current tax incentives or the proposed changes if the market grows as planned.

The Minnesota Department of Revenue also has no projection if any of these data centers are built.

Drew Johnson is senior vice president of development at Oppidan, which is preparing sites in North Mankato and Hampton that could potentially host huge data centers for tech companies.

Johnson said he would expect a larger data center to buy equipment and energy at similar proportions as smaller ones. If that is true, and all the planned data centers are built, the corresponding sales tax exemptions could be in the billions each year. That would potentially rival or even exceed the cost of large credits that exempt Minnesotans from sales taxes for buying food, drugs or clothing.

For now, that is speculation.

In fact, the state can only estimate the sales tax break on energy for data center companies that are already operating, because that portion of the incentives is an up-front exemption.

The agency has no data on energy use from data centers, so it relies on a national report to estimate the price to taxpayers, said Revenue Department spokesman Ryan Brown.

Gomez said changing the rest of the incentives — the refunds on equipment — to an up-front exemption instead of a refund would inhibit Minnesota’s ability to accurately track those costs as well.

Hauschild introduced a similar bill again this year that is co-sponsored by the top Democrat and Republican on the Senate Taxes Committee. The legislation, which has no House companion, had no fiscal note at the time this story was published.

The Data Center Coalition was joined by clean energy developers, Xcel, Great River, Duluth-based utility Minnesota Power and others in supporting the 2024 bill. A letter signed by all those groups said Minnesota is at a competitive disadvantage and has not seen as much growth as Illinois and other hubs.

The 2042 expiration date doesn’t provide enough certainty for data center companies, the letter says. And an up-front exemption for equipment would ease the administrative and compliance work of asking for refunds, those groups contend. More than half of states have some kind of sales tax exemptions for data centers. Most are permanent.

Johnson, from Oppidan, said the exemptions are modeled after similar ones to help industries like manufacturing and farming; this is just at a much greater scale.

In Virginia, the largest data center market in the world, data center operators reported more than $900 million in sales tax benefits on more than $15 billion in equipment and software purchased in the 2023 fiscal year.

Minnesota has a higher sales tax than Virginia.

In a January 2024 letter to the Virginia Legislature, state officials said the numbers were self reported and could not be independently validated, and the figures don’t include the impact from four companies that did not follow requirements in state law to submit the information.

The state concluded the tax revenue generated by the companies over five years was $1.4 billion more than the cost of the sales tax exemption.

These tax exemptions have become a political flashpoint in other states. In Georgia, the GOP-controlled Legislature voted to pause sales tax incentives, only to see Republican Gov. Brian Kemp veto the bill last year at the urging of the Data Center Coalition.

In Minnesota, Gomez opposed Hauschild’s bill and has floated getting rid of the sales tax exemptions for data centers altogether. Gomez said the Legislature should consider the cost of tax incentives when the state is potentially facing a multibillion dollar deficit in the next few years.

“This is a corporate tax giveaway, however you want to slice it,” she said.