Lower-than-forecast tax revenues from data centers and a huge anticipated request for funding from the school system may mean supervisors have to make some tough calls when they work on the next annual county budget.
County staff members are still working to figure out why data center tax revenues—which for years have grown even faster than forecasts—this year grew more slowly, but the difference appears to be some combination of COVID-19 pandemic impacts such the microchip shortage, and, more worryingly, possibly a long-term shift in the industry.
The total assessed value of the computer equipment inside Loudoun data centers—the source of the bulk of the tax revenue the county government gets from those operations—came in about $1.1 billion dollars short of forecasts in 2021, at $10.1 billion compared to $11.2 billion, according to a report presented to the Board of Supervisors’ finance committee July 13. That equates to about $60 million less in tax revenue than anticipated.
While the shortfall is large, Assistant Director of Budget and Finance Caleb Weitz noted it is less than 3% of the county’s overall General Fund revenues.
Forecasts based on how quickly new buildings had been filled with servers in the past were off this year as data center operators took longer to outfit those buildings, as well as taking longer to replace older equipment in their existing buildings. That equipment depreciates quickly—for tax purposes, in its first year it is assessed at 50% of the purchase price, decreasing each year until from the sixth year on it is assessed at 10% of the purchase price.
The county has spent years trying to hone its data center tax forecasts, with those revenues typically coming in higher than even the county’s lofty expectations. While that’s a good problem to have, it is one that supervisors and county staff members in the past have worried results in the money not being used as efficiently as it could be. Trying to a fill a hole in the budget, said finance committee Chairman Matthew F. Letourneau (R-Dulles), is an unfamiliar position for Loudoun.
“We’re in a little bit of an unenviable spot,” Letourneau said. “We worked really hard to accurately predict our data center revenue and then use more of it, only to find ourselves now in the position where we ended up overestimating for reasons that are understandable.”
County staff members hope to fill that $60 million hole through a combination of premiums from selling bonds and possible higher-than-budgeted revenues offsets in other areas. With Loudoun’s perfect credit rating, bidders on Loudoun bonds often offer more than the face value of the bond, resulting in additional funding for the county. In addition, the county government typically tries to estimate future tax revenues conservatively, possibly offering up some more money.
Whether the shortfall is attributable more to the COVID-19 pandemic, and therefore a one-time issue, or caused by larger shifts in the industry, remains to be seen, Weitz said.
“I think it’s really too early to tell until we see at least next year’s tax levy, and maybe the tax year 2023 levy, to be able to sort out what was COVID noise versus what was changes in the industry,” Weitz said. “What I think I can confidently say is, it’s definitely a mixture of both.”
Loudoun Economic Development Executive Director Buddy Rizer said the data center industry has shifted as big cloud computing providers like Microsoft, Amazon and Google build new facilities to allow them to account for sudden demand, and are able to carry the cost of holding onto those facilities as they are not immediately filled to capacity with server racks.
“The other problem is, is that we’re way out in front of everybody else, so we don’t have anything to point to, you know, where there’s a test case somewhere else,” Rizer told the finance committee. “I think that for me, we should look for a trend. … I think it’s hard to predict at this point without knowing more how much of this was the seismic change that happened because of COVID.”
It was also another warning to supervisors about being overly dependent on data centers—this year, taxes on data centers brought in enough money to cover the entire county operating budget, about a third of the overall operating budget with the other two-thirds going to schools. Supervisors in the past decided to hedge its bets on the data center revenue by sending some of that money to one-time expenses, hoping to insulate the county from small dips. Nonetheless the county has come to be increasingly reliant on the industry to balance the local government budget, with data center revenues on track to eclipse real estate taxes, the main source of income for Virginia localities. The county has also retained a consultant to review the county’s tax policy and forecasts for data centers, Weitz said.