In Virginia, success with data centers indicates a road map for economic diversification

Published March 13, 2018 by Bobbie Kilberg

The technology sector has long been the backbone of Northern Virginia’s economy. But, unlike 20 years ago, the technology of today is increasingly cloud-based and data centers are the core infrastructure that allows companies worldwide to innovate and grow. Fortunately for our region, Virginia has emerged as the country’s largest data center market. That’s right. Virginia has more data centers than anywhere else in the country.

So why is Virginia such an attractive location for data centers? Importantly, Virginia has leveraged and promoted its strengths. Infrastructure is a key factor. Data centers rely on electricity, and the cost and reliability of power in this region is a valuable selling point. In addition, Northern Virginia has an abundance of fiber cables offering desirable network connectivity. New construction of major subsea cable landings in Virginia Beach will further expand the region’s connectivity to both Europe and South America. The data center industry also relies on highly-skilled tech and construction talent, something Northern Virginia has in strong supply. And Virginia’s climate and low risk of natural disasters make it a relatively safe location for data center construction.

These strengths have played a large part in the commonwealth being selected for data center construction and expansion in recent years.  But smart public policy also is a significant factor in Virginia’s competitiveness. Data centers are a capital intensive industry, and they replace their capital equipment more frequently than many manufacturers and other capital intensive businesses, often resulting in their bearing a more a significant tax burden relative to other industries.  Virginia’s targeted incentives have been crucial to its ability to compete with other states for this capital intensive, economically valuable industry. 

When Virginia enacted its first data center sales and use tax exemption in 2008, only five other states offered such incentives. Today, 30 states have incentives that are targeted at attracting data center investment and jobs. Some Virginia localities are ramping up their competitiveness by offering additional incentives. The competition is fierce, because data centers are huge contributors to state and local economies.

A recent report published by NVTC and produced by Richmond-based Mangum Economics highlights the economic contributions the data center industry makes to Virginia’s economy and the impact is significant. In 2016 alone, data centers were responsible for directly and indirectly supporting approximately 43,275 jobs, $3.2 billion in labor income, and $10.2 billion in economic output in the commonwealth. And these are not just technology jobs. 4,617 of the supported jobs and $254.3 million of the labor income statewide were construction-related in 2016.

Over the last five years, data centers have experienced employment and wage growth that is four times the statewide average across all private-sector industries. The high wages in the industry have a disproportionate impact on state income tax revenue, by far the largest source of revenue for Virginia state government.

Additionally, the sector generates significant tax revenue for local governments, allowing localities to draw less from the state general fund for school budgets. Loudoun and Prince William Counties, for example, each receive more than $8 in tax revenue from data centers for every $1 they spend providing services to data centers and their employees.  It’s no wonder states and localities are fighting fiercely to attract them.

And the benefit extends beyond tax revenue and economic impact. For example, Virginia’s data centers have emerged as one of the driving forces in the development of renewable energy resources in Virginia. More than 744-megawatts of solar generation is either operational or under development in the commonwealth today, and 580-megawatts, or 78 percent, of that capacity is directly attributable to partnerships with leading data center companies.

As the backbone of the modern technology economy, data centers continue to offer immense opportunities for Northern Virginia and the entire commonwealth. In a time of uncertain federal budgets, data centers are crucial to promoting diversification in Virginia’s economy, which has historically relied heavily on federal spending.

Maintaining Virginia’s competitive position in the fight to attract and retain this valuable industry will be critical to ensuring Virginia remains a top global destination for tomorrow’s technology companies.

Bobbie Kilberg is president and CEO of the Northern Virginia Technology Council, a membership and trade association representing about 1,000 companies and organizations in the Greater Washington region’s technology community.