Virginia provides 11 incentives to promote data center and manufacturing growth in the state or to encourage environment-friendly practices, and spending on these incentives totaled $559 million between FY10 and FY17. The data center sales and use tax exemption is by far Virginia’s largest incentive in terms of forgone revenue, representing more than one-fifth of Virginia’s total spending on economic development incentives during this period.

WHAT WE FOUND

Data Center Exemption appears relatively effective and generates moderate economic benefits

The data center exemption appears relatively effective. The exemption has a sizable influence on data center decisions to locate or expand in Virginia, and it is estimated to have a moderate economic benefit per $1 million in spending by the state. It is reasonable for the state—which has identified data centers as a targeted industry—to continue the exemption. However, available information is insufficient to accurately estimate the full fiscal impact and the economic benefits of the exemption, and the exemption has not stimulated much growth in distressed areas. Some states are taking more aggressive actions to attract data centers, which may affect Virginia’s competitive position.

Semiconductor Custom Grants did not lead to development of semiconductor industry but generated moderate economic benefits

Virginia provided sizable custom grants to attract two semiconductor manufacturers to locate and expand in the state, with the hope that a semiconductor industry would develop in Virginia. However, semiconductor activity in Virginia and the U.S. has declined over the past two decades, with much of the U.S. semiconductor activity moving overseas or remaining concentrated in a handful of states. Still, the custom grants for both semiconductor manufacturers generated moderate benefits per $1 million in spending by the state over the period reviewed.

Manufacturers Single Sales Apportionment has not resulted in employment growth but generates moderate economic benefits

Virginia adopted provisions allowing manufacturers to use single sales apportionment—a method that could reduce their income tax liability—to help stem the decline of the industry in the state. Only a small portion of manufacturers have elected to use single sales apportionment, and manufacturing employment in Virginia is growing slightly less than manufacturing employment across the U.S. However, the incentive generates a moderate economic benefit per $1 million in spending by the state. It may be difficult to improve the effectiveness of single sales apportionment without reducing its economic benefit to the state, therefore any changes should be part of a broader decision about the state’s apportionment policy.

Four tax incentives appear useful for other purposes even though they generate low economic benefits

Four tax incentives—the Semiconductor Manufacturers Exemption, Semiconductor Wafer Exemption, Pollution Control Equipment and Facilities Sales Tax Exemption, and Recyclable Materials Processing Equipment Tax Credit—have low economic benefits per $1 million spent by the state. However, they serve other purposes, such as providing more efficient tax treatment and reducing the burden of complying with environmental regulations. The recyclable materials tax credit could become more useful if the recycling industry grows.

Two tax credits to support green industry do not achieve goals and generate negligible economic benefits

Virginia’s Green Job Creation Tax Credit and Biodiesel and Green Diesel Fuels Producers Tax Credit have low rates of utilization and little effect on the activity they were designed to encourage. The Green Job Creation Tax Credit has had little to no effect on employment in green energy jobs, and the Biodiesel and Green Diesel Fuel Producers Tax Credit has had no effect on Virginia’s biodiesel production rate. Both credits also have a negligible economic benefit to the state per $1 million spent on the credits.

WHAT WE RECOMMEND

Legislative action

• Further reduce or remove the minimum job creation requirement in distressed areas or enterprise zones for the data center exemption.

• Require all data centers to report employment levels, capital investment, and tax benefit information to the Virginia Economic Development Partnership.

• Require a work group to examine Virginia’s infrastructure and other policies affecting data centers to identify (1) actions needed to maintain Virginia’s competitive position and (2) whether opportunities exist to reduce reliance on the sizable exemption without adversely affecting industry growth.

• Eliminate the Green Job Creation Tax Credit and Biodiesel and Green Diesel Fuel Producers Tax Credit.

Executive action

• The Virginia Economic Development Partnership should report to the legislature on how potential custom grants, similar to the semiconductor grants, align with state and regional industry clusters and strategic goals.

• The Department of Environmental Quality should develop a list of pre-approved equipment and facilities to expedite certification for the pollution control exemption.

The complete list of recommendations and options is available on page v of the report.