Data Centers Fuel Local Coffers, But Zoning Hurdles Rise Amid Community Concerns

Data centers, the sprawling, power-hungry nerve centers of our digital world, are rapidly emerging as a double-edged sword for local governments across the United States. On one side, these facilities offer the glittering promise of substantial new tax revenues, bolstering municipal budgets with minimal strain on traditional services like schools. On the other, their sheer scale, resource demands, and industrial nature are sparking community concerns and prompting a fundamental shift in how they are regulated, moving away from easy approvals toward more stringent local oversight. This evolving landscape highlights a critical balancing act for communities seeking to capitalize on the digital economy while safeguarding local quality of life and managing infrastructure demands.

Cashing In on the Cloud: Data Centers as Tax Revenue Engines

The primary allure of data centers for local governments lies in their potential to generate significant tax revenue. Unlike many industries, their main contribution to local coffers comes not from income taxes tied to large workforces, but from property taxes levied on the land and buildings, and, crucially, from business personal property taxes on the vast arrays of high-value servers, computers, networking gear, and other technology housed within their walls.¹ Large initial purchases of equipment, along with periodic upgrades and replacements, can also yield substantial sales tax revenues for state and local governments, although these are frequently reduced or eliminated through incentive packages.¹

This revenue stream is particularly attractive because data centers typically impose fewer demands on costly public services compared to residential developments or other types of commercial enterprises. They add few, if any, students to local school systems and generally require minimal support from public safety services once operational.⁶ This high-revenue, low-service-demand profile makes them appear as ideal fiscal contributors from a municipal budget perspective.

Northern Virginia: A Case Study in Fiscal Impact

Nowhere is the economic impact more evident than in Northern Virginia, the world's largest data center market, often dubbed "Data Center Alley," particularly in Loudoun County.⁴ Loudoun, home to over 200 data centers occupying more than 43 million square feet as of early 2024, anticipates receiving an estimated $890 million in tax revenue from the industry in Fiscal Year 2024.⁴ This figure approaches the county's entire projected operating budget of $940 million and has allowed Loudoun to maintain the lowest real property tax rate in Northern Virginia, roughly 25% lower than neighboring counties.⁴ The fiscal efficiency is striking: Loudoun County estimates it costs only $0.04 in county services for every $1 of tax revenue received from a data center, compared to $0.25 for other businesses.⁴ With planned projects potentially adding another 24 million square feet, data center revenue in Loudoun could surpass $1 billion annually.⁴

Neighboring Prince William County also showcases the industry's fiscal muscle. Data centers accounted for 74% of the county's approximately $3.1 billion in commercial tax base growth in tax year 2023.⁴ Hosting at least 44 data centers covering 8.3 million square feet by early 2024, with potential expansion to over 80 million square feet, the industry contributes around $114 million annually to county coffers – a figure that has surged more than tenfold in the past decade.⁴ Supervisors there have considered raising the tax rate specifically on data center computer equipment to generate additional millions for county services and schools.⁴ Further south in Virginia, Mecklenburg County utilized tax revenue from a Microsoft data center, operational for over 14 years, to help finance a $154 million renovation of a high school and middle school complex.⁹

The Jobs Question: Construction Boom vs. Permanent Presence

While the tax revenues are substantial, the job creation narrative is more complex. Data center construction provides a significant, albeit temporary, boost to local employment. An average data center project employs nearly 1,700 construction workers, with peak construction potentially seeing 1,500 workers on site.¹ Virginia's Joint Legislative Audit and Review Commission (JLARC) estimated the industry supports 74,000 jobs annually in the state, largely driven by this construction phase.²

However, once operational, these highly automated facilities require relatively few permanent staff. Estimates range from about 50 to 160 full-time employees per typical facility, covering roles like IT technicians, engineers, operations managers, and security.¹ While these permanent jobs are generally high-skilled and well-compensated – averaging over $90,000 annually, with management roles reaching $125,000-$150,000 ¹ – their limited number stands in stark contrast to the facility's physical size and capital investment.

This disparity between the massive tax contributions and the modest permanent job creation is a frequent point of friction. Local governments often emphasize the revenue benefits, but communities may remain skeptical about the overall economic contribution if long-term employment gains seem minimal, especially when weighed against potential negative impacts.³ This dynamic underscores the need for local leaders to clearly communicate the specific nature of the economic benefits – primarily fiscal stability and tax base diversification – rather than overstating direct job creation.

The Role of Incentives: Attracting Investment at What Cost?

Further complicating the economic picture is the widespread use of tax incentives. Facing intense interstate competition, more than 30 states offer specific tax breaks to lure data center investment, and municipalities often negotiate additional local incentives.¹ These commonly take the form of property tax abatements and, most significantly, sales and use tax exemptions on the expensive computer equipment, servers, and building materials, which can represent enormous savings for developers.¹ Abatements can sometimes eliminate 100% of taxes owed and extend for 30 years or more.¹

Proponents argue these incentives are necessary, aligning data centers with existing manufacturing exemptions and ensuring that the investment, which might otherwise go elsewhere, occurs locally.¹⁴ A 2022 study in Georgia suggested 90% of data center activity there was due to the state's incentive program.¹⁴ Virginia advocates also contend that state-level cost analyses often overlook the significant benefits that flow directly to local governments through property and equipment taxes.¹⁴

However, critics and watchdog groups like Good Jobs First argue these incentives are becoming excessively costly. Their research suggests at least 10 states forgo over $100 million annually in revenue due to data center exemptions, primarily from sales tax waivers on equipment that needs frequent replacement.⁵ In some cases, the forgone revenue may exceed the taxes the data centers actually generate, leading to a net negative fiscal impact for the state, as one Georgia study indicated for 2021.¹⁴ Furthermore, many exemptions are uncapped in value or duration, creating budget uncertainty for states as the industry, particularly with the advent of power-hungry AI, continues its rapid, costly expansion.⁵ This heavy reliance on incentives can diminish the net benefit received by the state and locality, potentially fueling public opposition if the perceived economic gains don't seem to justify the costs and local impacts.

Table 1: Data Center Economic Impact Snapshot: Select Virginia Counties

Sources: 1

Note: Job estimates are typical ranges per facility; total county employment depends on the number of facilities.

From By-Right to Big Questions: The Shifting Zoning Landscape

While the financial benefits are compelling, the sheer scale and operational characteristics of modern data centers are generating significant friction within communities, leading to a fundamental reevaluation of how they are regulated at the local level.³ The rapid expansion, particularly of hyperscale facilities that can occupy vast tracts of land, has brought potential negative impacts into sharp focus for residents and local officials.⁸

Key community concerns often include:

• Noise Pollution: Constant humming from massive HVAC systems and the roar of diesel backup generators during testing or power outages can be a significant nuisance, especially near residential areas.³
• Visual Impact and Aesthetics: Data centers are often large, windowless, utilitarian structures surrounded by security fencing and dotted with external equipment, which can clash with community character and visual preferences.³
• Resource Consumption: The industry's enormous appetite for electricity raises concerns about grid stability, the need for new transmission lines, potential cost increases for all ratepayers, and the environmental impact of power generation.¹ Significant water usage for cooling in some designs also draws scrutiny, particularly in water-stressed regions.²
• Land Use Conflicts: Intense demand for suitable sites can drive up the price of industrial land, potentially squeezing out other types of businesses.⁷ Locating these industrial-scale facilities near homes, schools, parks, or historic resources can lead to compatibility issues and opposition.³

Understanding the Zoning Shift: By-Right vs. Conditional Use

Historically, many local zoning ordinances did not specifically define or regulate data centers. They were often treated implicitly under broad categories like "light industrial," "manufacturing," or even "office" use, frequently allowing them "by right" in designated zones.¹³

• Permitted By Right means a proposed land use is automatically allowed within a specific zoning district as long as it meets the pre-defined, objective standards written in the ordinance (e.g., setback distances, height limits). Approval is typically handled administratively by planning staff without public hearings or discretionary votes by elected officials.²⁶ This process offers developers maximum speed and certainty.

However, spurred by the growing community concerns, a distinct trend has emerged, particularly in areas with high concentrations of data centers: localities are amending their zoning codes to require a higher level of scrutiny through Conditional Use Permits (CUPs) or Special Exceptions (SEs).³

• Conditional Use / Special Exception means a use may be allowed in a zoning district, but only after a detailed review determines it meets specific criteria and conditions outlined in the ordinance, and often, additional site-specific conditions imposed during the approval process. This requires a quasi-judicial or legislative decision involving discretionary judgment by a planning commission and/or the local governing body (e.g., Board of Supervisors, City Council), almost always including public notice and hearings.¹⁵ This process gives the locality significantly more control to address potential impacts and ensure compatibility, but it introduces substantial uncertainty, time delays, and potential political hurdles for developers.²⁶

This shift from administrative check-offs to discretionary public reviews fundamentally alters the development landscape. Local zoning codes, rather than state-level incentives, are becoming the primary arena where the future of data center projects is debated and decided.³ It empowers local communities and their elected representatives to weigh the benefits against the impacts on a case-by-case basis, demanding more from developers in terms of mitigation and community engagement.

Examples of Regulatory Tightening:

• Loudoun County, VA: In a landmark move, the county eliminated by-right development for data centers in key industrial zones (General Industry, Industrial Park, Mineral Resources/Heavy Industry), now requiring a Special Exception approval involving public hearings before the Planning Commission and Board of Supervisors.¹⁷ The county also designated data centers as a "conditional use" rather than a "core" or "complementary" use in several planning areas and is developing detailed performance standards in a second phase of zoning updates.²⁴
• Fairfax County, VA: Adopted comprehensive new standards in September 2024, including mandatory full enclosure of operating equipment (unless mechanically infeasible), size limits (e.g., 80,000 sq ft) for by-right development in certain industrial districts, minimum 200-foot setbacks from residential lot lines (300 feet for ground equipment), a one-mile minimum distance from Metro stations, mandatory pre- and post-construction noise studies, and architectural design requirements. Data centers unable to meet these standards now require Special Exception approval.¹⁵
• Prince William County, VA: Proactively established a Data Center Opportunity Zone Overlay District to concentrate development and amended its Comprehensive Plan with policies addressing setbacks, visual screening, and noise limits for facilities near incompatible uses.⁷
• Arizona Municipalities: Cities like Phoenix and Chandler have adopted data center-specific regulations. Phoenix approved rules governing location (directing them away from employment centers) and external design.¹⁵ Chandler amended its code to classify data centers as a primary use permitted only within specific planned area development zones.¹⁵

Developing Use-Specific Standards

Beyond changing the approval process, localities are also writing detailed substantive standards specifically for data centers into their zoning ordinances.³ Common elements include:

• Minimum setback distances from residential zones, schools, parks, or historic sites.⁶
• Objective noise level limits at property lines and requirements for noise impact studies.¹⁵
• Requirements for screening (walls, landscaping) or full enclosure of outdoor equipment like generators and cooling units.⁶
• Architectural design standards to mitigate the visual impact of large, blank facades.⁶
• Building height limitations.⁶
• Restrictions on location within certain planning areas or proximity to transit.¹⁵

This period of rapid regulatory evolution creates challenges. Many jurisdictions are essentially playing "catch-up," trying to adapt decades-old zoning codes to a new, high-impact land use that wasn't previously contemplated.¹³ This can lead to uncertainty for developers as standards are debated and revised. It underscores the need for municipalities to engage in proactive planning, clearly defining where data centers are appropriate and what standards they must meet, rather than relying on ad hoc decisions. For developers, navigating this shifting landscape requires flexibility, thorough due diligence, and early engagement with local planning staff and communities to address concerns head-on.

The Data Center Checklist: What Attracts Development?

While zoning regulations increasingly shape where and how data centers can be built, fundamental site selection criteria determine if a location is viable in the first place. Successfully attracting data center development requires a specific set of local resources and infrastructure capabilities.

Power is Paramount: Reliable, abundant, and competitively priced electricity is the non-negotiable foundation for any data center.²¹ These facilities consume vast amounts of energy, often 10 to 50 times more per square foot than typical office buildings.¹ Key power considerations include:

• Grid Capacity and Reliability: Proximity to high-voltage transmission lines and electrical substations with sufficient available capacity is critical.²⁵ The local grid must be stable and reliable to ensure the near-constant uptime data centers require.³²
• Dedicated Infrastructure: Large data center campuses often require upgrades to the existing grid and may necessitate the construction of dedicated substations on or near the site, adding complexity and cost.³⁴
• Renewable Energy Access: Increasingly, data center operators seek access to renewable energy sources (solar, wind, hydro) to meet corporate sustainability goals and potentially lower long-term energy costs.²⁵ The immense power demand is not only a site selection driver but also a major source of regulatory and community concern, particularly regarding grid strain and the need for new generation and transmission infrastructure.² Power availability constraints in established markets like Northern Virginia are a primary factor pushing development into new regions.¹⁷

Connectivity is Key: Data centers are nodes in the global network, requiring robust, high-capacity, and redundant fiber optic connectivity.¹³

• Network Proximity: Location near existing long-haul fiber routes and major network interconnection points (Internet Exchange Points or IXPs) is crucial for minimizing latency (data travel time) and maximizing performance.¹
• Redundancy and Diversity: Access to multiple fiber optic providers and diverse physical routes into the site is essential for resilience against network outages.¹³ Carrier-neutral facilities, which allow tenants to connect with various network providers, are often preferred.³²

Water for Cooling: While not all data centers use water for cooling (some rely solely on air cooling), many larger facilities employ systems that require a significant and reliable water supply.⁶

• Availability and Cost: Access to sufficient water resources is a key site consideration.²⁵
• Sustainability: As water scarcity becomes a greater concern, interest in using reclaimed or non-potable water for cooling is increasing, offering potential cost savings and environmental benefits.³⁴ Climate conditions also play a role, as cooler, drier climates can reduce cooling loads and costs.²² Water usage, like power consumption, can be a point of community concern.²

Land Requirements: Data centers require significant acreage, typically on land zoned for industrial or similar uses.²

• Size: Minimum site sizes often start around 40 acres, allowing for multiple buildings, support infrastructure (like substations), and security buffers.³⁴ Hyperscale developers may seek parcels of 100 to 300 acres or more.¹⁷
• Topography and Hazards: Sites should be relatively flat to facilitate construction and located away from areas prone to natural disasters like floods, earthquakes, or severe weather, as well as human-made hazards or vibration sources (e.g., airports, rail lines).¹⁹ The intense competition for suitable, infrastructure-rich industrial land is driving up prices in primary markets and fueling the expansion into secondary and tertiary locations.⁷

Workforce and Regulatory Environment: While data centers have low permanent staffing levels, access to a skilled workforce for both the construction phase and ongoing IT operations remains a factor.¹ Some large operators run workforce development programs in conjunction with their facilities, which can provide broader benefits to the local economy.¹ Equally important is a stable and predictable regulatory environment, including clear zoning rules and consistent tax policies, which provides confidence for the massive, long-term capital investments involved.²²

The critical nature of power, fiber, and water infrastructure means their availability largely dictates where data centers can be built. Existing, robust utility networks are a powerful magnet, often outweighing other traditional economic development factors.¹⁹ Communities cannot simply zone land for data centers; they must ensure the underlying infrastructure can support these demanding facilities, often requiring strategic planning and investment in partnership with utility providers.¹⁹

This infrastructure-driven reality, combined with saturation and regulatory tightening in primary markets, is fueling the rise of secondary data center markets across the U.S., including the Midwest and parts of the South.¹⁷ These regions often offer available land, potentially lower power costs (sometimes with better access to renewables), and perhaps initially, a less complex regulatory pathway.¹⁷ This geographic shift presents significant opportunities for communities outside traditional tech hubs, provided they possess or can strategically develop the necessary foundational infrastructure. However, it also suggests that the regulatory scrutiny and community debates seen in places like Northern Virginia may eventually emerge in these newer markets as they mature.

Conclusion: Balancing Growth and Governance

The rapid expansion of the data center industry presents local governments with a complex equation. The potential for substantial tax revenue, capable of funding essential public services and stabilizing municipal finances, is undeniable.³ However, this economic opportunity comes intertwined with significant challenges related to community impacts and resource demands.² Noise, visual blight, strain on energy and water infrastructure, and land use conflicts are real concerns that communities are increasingly unwilling to ignore.³

Successfully navigating this landscape requires a proactive and strategic approach from local governments. Effective, forward-thinking land use planning is paramount. This involves updating zoning ordinances to specifically define and regulate data centers, moving beyond outdated industrial classifications.¹³ Establishing clear, use-specific standards for setbacks, noise, aesthetics, and environmental protection can provide predictability for developers while addressing legitimate community concerns.³ The trend toward requiring conditional use permits or special exceptions, while adding complexity for developers, reflects a necessary shift towards greater local control and site-specific review for these impactful facilities.²⁶

Crucially, zoning and planning must be tightly integrated with infrastructure capacity. Attracting and sustaining data centers hinges on the availability of robust, reliable power, fiber, and, where needed, water infrastructure.³⁰ Local governments, in collaboration with utility providers and potentially developers, must engage in strategic infrastructure planning and investment to support the industry where it aligns with community goals.¹⁵

As the digital transformation continues, driven by cloud computing, AI, and the Internet of Things, the demand for data center capacity will only grow.¹⁷ Communities that thoughtfully balance economic development ambitions with diligent environmental stewardship, robust infrastructure planning, and responsive local governance – informed by data and potentially guided by resources from industry groups like the Data Center Coalition ¹⁰ – will be best positioned to harness the benefits of this critical 21st-century industry while mitigating its inherent challenges.

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