Pa. passed a tax break for data centers. Now crypto-miners are taking advantage

A nuclear-powered Bitcoin mining operation in northeastern Pennsylvania, that counts actress Gwyneth Paltrow among its investors, will get an unspecified tax write-off under a recently expanded state program. 

The tax exemption program, initially created in 2016 but extended and uncapped in 2021, aims to encourage companies to establish server farms that host IT operations or store online data in Pennsylvania.

It’s unclear if crypto currency was on lawmakers’ minds when they passed the expansion. But the adjusted language, which also removed any ability to monitor how big a break each recipient will get, is expected to expand the program at a cost to taxpayers from about $5 million in 2021 to almost $90 million by 2027.

And the approval of the crypto company, known as Nautilus Cryptomine, reinforced the skepticism among some observers of Harrisburg’s habit of creating special tax giveaways in the first place.

“In a time where we literally have bridges falling down, we need to be fairly capturing vital tax revenue, especially from big businesses that can afford to pay, so we can reinvest it in our public sphere,” state Rep. Sara Innamorato, D-Allegheny, told the Capital-Star.

Under the law, companies that build such a data center and reach a few economic benchmarks — measured in the number of jobs it creates and the new investments it generates — won’t pay sales taxes when they purchase computers, cooling systems, and software for the project.

Since 2017, Gov. Tom Wolf’s administration has given out $13.7 million in tax refunds to data center owners and operators, according to the Department of Revenue. 

The agency could not release how much any given company has received, citing taxpayer confidentiality statutes. But the program’s cost is expected to balloon to $88.6 million annually by the 2026-27 fiscal year due to the 2021 changes, according to administration projections.

As of February, eight companies, including the discount retailer, Ollie’s Bargain Outlet, and Iron Mountain Data Centers, are certified to receive the exemption, according to the Department of Revenue.

To qualify, companies must invest $75 million and create 25 permanent jobs in a county of 250,000 people or less, or invest $100 million and create 45 permanent jobs in a county of more than 250,000 people. 

Earlier this year, the Department of Revenue certified Nautilus Cryptomine as meeting these goals. 

A joint venture between Allentown-based Talen Energy and Maryland-based Bitcoin mining firm TeraWulf, Nautilus aims to “be among the largest, most efficient [Bitcoin] mines in North America,” according to TeraWulf’s website. 

The mines in question don’t refer to a physical mine shaft, with pickaxes, hardhats, and carts. Instead, crypto-mining refers to a process by which computers solve a complicated equation. Once they’ve reached a solution, the owner receives a reward, such as Bitcoin, for their efforts. 

That reward is known as cryptocurrency. Originally, crypto enthusiasts envisioned digital money as a way to create a decentralized form of cash, free from government oversight.

With the market high, institutional investors are drawn to it as a store of value. Prices for a single Bitcoin currently hover around $40,000 each and have gone as high as $69,000 per-coin.

An added wrinkle is that running computers to mine cryptocurrency takes a lot of electricity. Studies have noted that most of the electricity to solve the increasingly complicated equations to create new Bitcoin comes from fossil fuel-burning power plants.

But Nautilus hopes to avoid this issue by using 300 megawatts of electricity taken directly from Talen’s Susquehanna Power Station, about 35 miles southwest of Wilkes-Barre in Luzerne County, to run the computers that will mine Bitcoin.

Using Susquehanna’s carbon-free electricity fits with TeraWulf’s mission. Overall, it proposes to create cryptocurrency “by using more than 90 percent + zero-carbon energy,” according to its website, it counts actress and lifestyle influencer Paltrow among its investors.

The company, which did not reply to a request for comment, also owns a hydroelectric plant in New York to power its crypto operations.

As for Talen, it operates 18 power plants in six states, mostly oil- and gas-fired. Susquehanna is its only nuclear plant.

Nuclear plants have struggled to adjust to lower electricity prices in recent years. Nuclear companies, including Talen, have lobbied legislators to help aging atomic generators, although that aid has not been forthcoming.

In the meantime, Talen has started to look at data centers and crypto-mining, a spokesperson said in an email.

“We believe the electrification of the world is accelerating as a result of technology adoption in nearly every aspect of human life and economic activity,” the spokesperson said.

This requires zero-carbon, low-cost and reliable electricity, which Talen argues it can provide, while also investing in more renewable energy and battery technologies. And the Susquehanna facility is the company’s first crack at adapting to the changing world.

The project would build two centers, a Talen spokesperson said — one for data storage, one for crypto mining. Each project will employ 1,000 construction workers, Talen claimed, while running each center will require 50 permanent jobs. 

Talen did not address questions about compensation but added that the project would create $1 million to $3 million more in property tax revenue. The plan also calls for expanding local fiber-optic networks, which along with other infrastructure improvements, Talen hopes will “create investment opportunities exceeding $1 billion.”

The tax break did not play any role in its decision to expand into data centers or crypto, Talen added. But the program’s expansion “will help attract data center tenants to Pennsylvania as it helps put the state on level footing with other areas,” the spokesperson said.

For Innamorato, one of the handful of legislators to vote against the exemption’s expansion, companies’ own demand for data centers is part of why she opposed it. 

“Even with these companies using carbon-neutral power, this program is poorly-targeted, wildly expensive in terms of cost-per-job, and almost certainly ‘incentivizes’ economic activity that would have happened anyway, or that displaces other, more cost-effective and impactful development policies and public investments,” she told the Capital-Star.

It’s unclear how big Talen or other beneficiaries’ tax breaks will run. The initial data center exemption, passed in 2016, was capped at $7 million in refunds a year until 2029. But lawmakers uncapped it last year and extended the benefit until 2032 in a companion bill to the commonwealth’s 2021-22 budget.

At a press conference after signing the budget in late June 2021, Wolf took credit for the tax break’s expansion, arguing it would attract construction jobs to Pennsylvania. 

“I’m sure it came from other people too,” Wolf said, “but I think it was a good idea, so I’ll take credit for it.”

Under this expanded program, the state also won’t be able to track the exact cost of the credit, Department of Revenue spokesperson Jeffrey Johnson said. 

The old data center program gave companies an annual refund for the qualifying expenses. But the new program will instead give each qualifying company a certificate that they present at the time of purchase to not pay sales tax upfront. State law, meanwhile, does not require either the exemption recipient or the merchant to report the exempted sales tax.

Both Nautilus and Talen-subsidiary Cumulus Data, which will use Susquehanna’s second data center, have been certified by the Department of Revenue to receive the tax exemption.

Construction on the data centers started in September and is set to be completed in the spring of 2022. Nautilus and Cumulus haven’t received a discount yet, a spokesperson noted, but now that the companies have been certified, “they will utilize” the tax break “as permitted under the legislation.”

Talen’s crypto mining efforts may not end with Susquehanna, either. The company is reportedly looking into crypto mining with power from two gas plants; one in-state, in the Lehigh Valley and another out-of-state, in Texas.

As companies often claim the tax breaks through a string of shell companies, it’s hard to say if Nautilus is unique in receiving the credit set aside for data centers, experts noted. But tax incentives for data centers aren’t unique to Pennsylvania. 

The rise of big data companies, such as Amazon, Facebook, and Google, has led to pressure on state legislators to hand out perks to companies to attract jobs, noted Pat Garofalo, a state policy analyst with the Washington D.C. based American Economic Liberties Project, an anti-monopoly think-tank.

“They have a story that sounds compelling about [data centers] being job creators,” Garofalo told the Capital-Star. “They prey on the desperation of places that have been left behind and focus on rural depressed economies, places harmed by 30 years of bad trade and bad tech.” 

But it’s unclear if the incentives provide states with any economic bang for their development bucks.

A 2016 report by the Washington D.C.-based watchdog group, Good Jobs First, looking at 11 projects, found that each data center job cost taxpayers almost $2 million in incentives.

The short-term construction jobs help, but permanent jobs at the data centers are often janitorial or security jobs handled by subcontractors, Garofalo noted.

The Pennsylvania tax exemption does require that recipients have a payroll of $1 million within four years of applying for the tax break. But that only works out to between $22,000 to $40,000 in annual compensation to each data center worker.

Seeing a company committed to creating digital currency further compounds concerns that the state won’t win out, noted Greg LeRoy, the executive director of Good Jobs First.

“I can’t think of a less productive use of tax breaks and cheap electrical power” than cryptocurrency, Leroy said. “If I was a state legislator and I heard this was going on, I would be scrambling to get amendments in those bills.”