Nebraska’s Tax Code Lets It Compete for Data Center Investment

The Midwest grows many things—including, increasingly, data centers. That’s good news, generating substantial local tax revenue, creating high-paying jobs, and expanding economic opportunities. 

With 39 data centers (about 19 per 1 million people), Nebraska punches above its weight nationally, while trailing neighboring Iowa, which boasts the second-highest number of data centers per capita at 32 per 1 million people (105 total data centers). Illinois and Ohio have also emerged as competitive markets for data center projects, with these four midwestern states all ranking among the top twelve for data centers per capita. 

Source: Data Center Map; author’s calculations. 

Data center jobs pay quite well, but the real impact is in indirect employment. Data centers are constantly reinvesting due to the industry’s rapid pace of change, and that capital investment creates jobs for local contractors, suppliers, and construction workers. Data centers can also serve as anchors for broader tech ecosystems, with tech companies expanding operations near large “hyperscale” operations. Colocation facilities, meanwhile, build out the capacity necessary to support local technology businesses. 

A 2022 NetChoice study concluded that a single $750 million hyperscale data center would support 1,290 jobs and generate $269 million in economic output during construction, with ongoing direct employment of 100 people and indirect employment of 200 more, driving $82 million a year in additional economic output. Nebraska’s 39 data centers include $4.4 billion in capital investment by Alphabet (Google) alone, and another $1.5 billion or more from Meta (Facebook). The NetChoice study projected that by 2035, data centers could contribute $4.8 billion to Nebraska’s economy, supporting over 14,000 jobs with $1.1 billion in compensation. These data center investments also contribute substantially to local tax revenues, while the additional economic activity they create boosts both state and local coffers. 

But the continued growth of Nebraska’s burgeoning tech sector is not guaranteed. A recent Tax Foundation analysis calculated tax state and local tax liability for data centers in twelve jurisdictions across the country, including Papillion, Nebraska. A $1 billion data center in Papillion faces about $7.9 million in state and local tax liability on about $33 million in net revenue, for an effective tax rate of 24%. This is among the lowest burdens in the study, after Charlotte, North Carolina (12%) and Cheyenne, Wyoming (21%). Neighboring Iowa was not included in the Tax Foundation analysis, but a data center in West Des Moines would face an estimated $9.5 million in state and local tax liability (29%), higher than Nebraska’s rates, but still sufficiently competitive to attract substantial investment, particularly from Microsoft. 

Nebraska Edges Out Iowa on Data Center Tax Competitiveness 

Source: Tax Foundation; author’s calculations. 

The proper tax treatment of data centers is no different from that of any other type of business. Property taxes should be limited to real property (land and structures), not business tangible personal property (machinery and equipment). Sales tax should only apply to final transactions, not intermediate purchases (business inputs). 

Nebraska, like most states (including neighboring Iowa) exempts purchases of servers and other data center equipment from the sales tax. Nebraska’s exemption is available through quality jobs investment and mega-project tracks under the ImagiNENebraska incentives program. The incentives program can also provide investment and wage tax credits. Nebraska initially exempts servers and other machinery and equipment from tangible personal property (TPP) tax as a further ImagiNE incentive, but taxes such equipment for mature operations. Iowa, by contrast, exempts TPP from tax in perpetuity. However, Iowa classifies certain fixtures as real property whereas Nebraska treats them as tangible property, somewhat eroding the benefit of Iowa’s policy.  

Iowa also exempts data centers’ electricity purchases from the sales tax, saving a $1 billion data center an estimated $1.3 million per year, whereas Nebraska subjects data center utilities to sales taxation. Lower property values and lower property tax rates in Papillion, however, yield lower overall tax burdens in Papillion, Nebraska compared to West Des Moines, Iowa. 

With cool weather, low utility costs, a central location along the I-80 fiber corridor, and low tax burdens, both Nebraska and Iowa are poised to attract more data centers in the future. Nebraska has chipped away at Iowa’s head start with a competitive tax environment, which has proven a boon not only to the state’s economy but also to local revenues. According to Tax Foundation estimates, $1 billion in data center capital investment in Papillion yields about $7 million in local tax revenue each yearon $33 million in profits, an impressive local return. 

With the right tax choices, Nebraska can continue to attract data centers, creating new jobs, expanding the local tech sector, and providing a valuable new source of local tax revenue. Maintaining Nebraska’s competitive edge deserves to be a policy priority.