A $165 billion bond authorization reflects data center subsidy boom

A New Mexico county last week advanced a massive data center project that calls for an eye-popping $165 billion of taxable industrial revenue bonds as a way to access tax breaks, one of the latest local governments to offer generous incentives to tech companies racing to build the facilities across the country.

Doña Ana County commissioners approved an initial resolution to issue three series of bonds.

They are not destined for investors in the municipal bond market, but would instead be purchased by an affiliate or parent of the companies involved in the “self-funded” development. This type of IRB serves as a vehicle for obtaining property and other tax breaks through a mechanism used by the state to spur economic development.  

There is no sign the proliferation of data centers, which already numbered 5,426 as of March, according to Statista, is slowing. June census data showed construction spending on the projects totaling $40 billion. 

The building boom carries credit implications for governments that house the centers. Many cities and states looking to capitalize on the economic development are offering generous tax breaks, structured in some cases with IRBs, as in New Mexico, or as straightforward exemptions on property and sales taxes, with the latter usually applied to construction materials and data center equipment. 

The tax breaks can add up to hundreds of millions of dollars over the often decades-long life of the incentive programs. In addition to the lost revenue, local and state governments are grappling with the centers’ massive demand for power and water that is pressuring local resources, driving up costs and becoming a flashpoint for local political opposition. 

State and local subsidies are rampant for data centers, which first seek places with low power costs, water, and a lot of open and cheap land, according to Kascia Tarczynska, a senior research analyst at Good Jobs First, a nonprofit, nonpartisan watchdog on economic development incentives.

“The subsidies come at the end like a cherry on the top after they make the site selection decision,” she said, adding that the absence of tax breaks would not likely derail projects.

These incentives, which are offered in 32 states, have proven to be costly, according to an April report by the organization. Texas projected a $1 billion revenue loss for fiscal 2025, making it one of the most expensive subsidy programs for any industry in any state, the report said. In Virginia, a major hot spot for data centers, a Joint Legislative Audit and Review Commission review said an exemption for state retail sales and use taxes provided $928 million in tax savings to the projects in fiscal 2023.

Good Jobs First recommended that states immediately cancel data center incentive programs, noting they primarily benefit profitable tech-world giants like Amazon, Microsoft, Apple, Meta and Alphabet.  

Nuveen, in an April commentary, said positive credit implications for local governments may be increased tax revenue, a larger tax base, and an influx of higher-paying jobs. But local governments that offer generous tax incentives could “miss out on some, if not all, of these positive trends,” the firm said. Nuveen added that more than half of states have some form of tax incentive for data centers to locate in their states, and local municipalities often also negotiate additional tax incentives.

In Louisiana, Meta announced in December it would build a $10 billion data center months after state lawmakers passed a legislative package that, among other things, offers a 20-year exemption on state and local sales tax for data centers. The bill’s fiscal note last May said it would decrease “state general fund by tens of millions of dollars or more each year, possibly through FY 2059. Local revenue will be impacted by a like amount.”

As part of the deal, Meta said it would invest $200 million in local infrastructure improvements, including roads and water systems.

In New Mexico, the road to so-called Project Jupiter in unincorporated Doña Ana County was paved with the February announcement of a memorandum of understanding between the state and developer BorderPlex Digital Assets that outlines incentives and pledges to facilitate permitting for the project.

“This groundbreaking partnership further cements our reputation as a national leader in advanced manufacturing and global trade,” Gov. Michelle Lujan Grisham said in a Feb. 25 statement. 

By issuing the bonds, Doña Ana County, which has about 225,000 residents, serves as a conduit to provide the project with a property tax abatement, personal property exemption on equipment, and a gross receipts tax and compensating tax deduction, according to Christopher Muirhead, the county’s bond counsel. 

“It creates a structure where the county is technically the owner of the property so that it is not subject to taxation,” he told the commission at its Aug. 26 meeting. “When the project ends, whether that’s at 30 years and the bonds retire, or 20 years, or the company leaves, that property goes immediately back to the company, or its creditors. The county is not, will not be the operator of that project.”

Companies involved in the project would negotiate payments in lieu of taxes to the county for each year bonds are outstanding, according to the resolution. 

Series A bonds totaling up to $15 billion would finance microgrid, power generation, and battery storage facilities, while up to $25 billion of Series B bonds would fund four data centers, according to documents released by the county. Series C bonds of up to $125 billion would finance data center equipment. 

Lanham Napier, BorderPlex’s chairman, addressed concerns raised by residents about electricity, which, according to the state’s MOU, could include nuclear energy in the future, as well as water use.

“We’re not going to use the infrastructure that’s here, we’re going to bring new infrastructure. We’re going to fund that privately,” he said at the meeting. “We’re going to build power generation resources. We will run a portfolio approach that is compliant with the New Mexico Energy Transition Act. We will invest dollars in water infrastructure.”

Napier also said the project will result in thousands of construction jobs and create more than 700 permanent jobs once the data centers are in operation. 

Tarczynska cautioned that the number of permanent jobs promised by data centers may not materialize. 

“The plans of these companies might change very quickly,” she said. “Who knows what this industry will look like in the next five years, in the next 30 years?”

Super-sized IRBs for data centers popped up this year in other states, including Arkansas, Kansas, and Missouri, which have bond-linked incentive programs similar to New Mexico’s, according to Good Jobs First. 

Officials in DeSoto, Kansas, a city of around 6,500 25 miles southwest of Kansas City, approved a development agreement on Aug. 21 for a multi-phase data center campus to be built in an existing commerce center, as well as a framework for issuing up to $50 billion of taxable IRBs. The conduit financing makes developer Mount Sunflower Properties LLC eligible for an up to 10-year property tax abatement and sales tax exemptions. Property tax abatements are structured through payment in lieu of taxes agreements.

The Port Authority of Kansas City, Missouri, took up the conduit issuance of up to $100 billion of taxable IRBs last week for Project Kestrel, which will consist of six hyperscale data centers totaling as much as 1.8 million square feet.