Jaw-dropping numbers: Loudoun’s data center tax revenue could top real estate taxes in just a few years.

While the real property tax is expected to remain fairly steady through 2030, Loudoun’s computer equipment tax revenue is soaring.

By Michael Neibauer – Managing Editor, Washington Business Journal

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Virginia jurisdictions, lacking the authority to implement a local income tax, are largely dependent on real estate tax revenue to feed their annual budgets. It would be virtually unheard of for any other revenue source to top what residential and commercial property owners pay each and every year.

But Loudoun County is heading that way. And, of course, the source is data centers. Well, more accurately, what’s inside the data centers.
In fiscal year 2020, Loudoun collected roughly $330 million in tax revenue from computer equipment found in data centers, according to a presentation county staff recently made to the Loudoun board’s finance and government operations committee. Data center real property taxes were responsible for another $70.4 million, future and fixture taxes $20 million and business license taxes another $2.6 million.

By fiscal year 2026, Loudoun projects it will generate roughly $1.37 billion just from the personal property tax it levies on computer equipment. That’s the baseline. The downside scenario is $1.06 billion, and the upside is $1.48 billion, per the staff report. By 2030, computer equipment tax revenue could range from $1.5 billion to $2.5 billion. The county’s entire fiscal 2021 budget is $3 billion.

Real property tax revenues, meanwhile, are expected to approach and then just barely top $1 billion during the next decade.

We write often about the fiscal impact data centers have had on Loudoun’s budget, allowing the county to consistently reduce its real estate tax rate even as its population continues to soar — and demands for county services rise.

But these numbers are unprecedented and even a bit concerning, to the point that county staff is recommending a reduction to the general personal property tax rate, the shift of some tax revenue to one-time needs or the establishment of a separate tax for just data center computer equipment, “with specific consideration to the over-reliance of the County on this single revenue,” per the staff report.

The challenge being, computer taxes can just as easily be lost as they are gained. If Virginia were to end its lucrative data center tax incentives, or Loudoun were to take some action that drives data center developers away, or other locations became more desirable — the occupants could move their equipment elsewhere fairly easily.

“The data center industry is growing rapidly but is also dynamic, with advances in technology driving equipment replacement every few years,” Loudoun staff wrote. “The majority of the investment is in the equipment rather than the physical buildings. While Loudoun has become a premier location for data centers, as fiber becomes more abundant and more communities understand the significant tax advantages, there are more location opportunities for data centers to choose for future investment cycles.”

The ever-present threat of a data center exodus, even if unlikely, is one reason why Loudoun’s Department of Economic Development has prioritized the diversification of the county’s revenue base, said Buddy Rizer, the agency’s director.

“We are obviously proud of our data center growth and the impact it has had on the fiscal conditions in Loudoun, especially during uncertain economic times like these,” Rizer said. “But our goal remains the same, to create a more diverse and sustainable commercial base and to never be too dependent on any one product line. Our Metro developments and growth in our health IT, specialized manufacturing and cyber-security clusters are going to be key to Loudoun’s future.”

But let’s look closer at the stunning growth of data centers in Loudoun County, based on the numbers provided in this county staff report.

At the beginning of 2012, there was 5.5 million square feet of data centers in Loudoun containing $657.8 million worth of taxable computer equipment. By the beginning of 2020, there was an estimated 20.1 million square feet of data centers containing $7.86 billion worth of computer equipment — all taxable at $4.20 per $100 of assessed value. The equipment’s value depreciates, but it is typically refreshed every three years.

Over the next 10 years, Loudoun estimates 20 million more square feet of data center facilities to come online, though the projected growth begins to decline as soon as 2025. Data center land in Loudoun is regularly selling for $750,000 to $2 million-plus per acre, but some locations that might be tempting for developers are now being identified as off limits by county leaders.