Barcelona, Price Inelasticity and Data Centers

By Charles Houston

A few days ago, I had lunch with my good friend Robert Rood. Usually, our conversations meander, but this time I had an agenda: vacationing in Barcelona. For my wife and me, it would be a new—and likely delightful—European destination. I wanted to hear more about it from someone with firsthand experience.

Robert and his wife, Byne, had spent ten days there last October—their third visit to the Spanish city. I was eager to hear their thoughts and impressions.

Barcelona

Barcelona, like Paris with the Eiffel Tower or Cairo with the Great Pyramids, has a signature landmark: the breathtaking Sagrada Familia (Church of the Holy Family). Construction of this incredible cathedral began in 1882 and is still a few years away from completion. With spires reaching over 550 feet, the cathedral dominates the city skyline. Designed by famed Catalan architect Antoni Gaudi, the building is a masterpiece of extravagance and creativity.

Beyond the Sagrada Familia, Robert said that Barcelona offers much more: other architectural gems by Gaudi, beautiful beaches, a charming old town with a tangle of narrow streets, and a vibrant culinary and nightlife scene.

The city sounded fabulous to me, and I wasn’t alone in that sentiment—Barcelona endured twelve million tourists last year.

The City Fights Back

Barcelona’s overtourism can be measured quantitatively: ten million more visitors than residents. However, it’s the subjective experience that matters more to citizens and visitors: Are the streets overcrowded? Do shoulder-to-shoulder crowds intrude on daily life?

For Barcelona, the answer is yes, this is a huge problem. The city has taken action to manage the influx of tourists. Last year, it raised its daily tourist tax from 2.75 euros to 3.25 euros per person. Using social media shorthand: BFD (Big Freaking Deal, meant sarcastically.)

Robert’s response was telling. “I splurged on airfare and we flew Business Class. We stayed in a decent hotel, maybe three or four stars, dined wherever we wanted, and bought a few souvenirs. All in all, I probably spent $10,000. Even if you flew Economy and stayed somewhere cheaper, I don’t see how a vacation there could cost a couple much less than $5,000.”

Price Inelasticity

I have an Economics minor and I often use that lens to analyze issues. So I asked Robert if the tourist tax affected his decision-making. “What tourist tax?” he replied. When I explained the tax and its purpose, he shrugged. “A few bucks a day is diddly squat. I wasn’t even aware of it.”

This is a clear example of price inelasticity: the small increase in the tourist tax didn’t affect behavior. Price elasticity, in contrast, is when a change in price significantly affects demand.

Data Centers

Switching gears: only a troglodyte would be unaware of our growing issues with data centers. In eastern Loudoun County, residents began complaining about the overwhelming size and noise of these facilities. Eventually, their voices reached the ears of our Supervisors. Then came a sudden and new revelation: something very bad was headed our way.

Data centers are notorious energy hogs, and the rise of artificial intelligence has made this issue unimaginably worse, as AI increases power needs by ten times. If all planned new data centers are built, their power needs will far exceed the total energy currently generated in the state. Add new data centers and AI, and this looming catastrophe has no easy solution; renewable energy won’t make a noticeable dent in the problem. Can you visualize switching on the lights and nothing happens?

Meanwhile, the County would happily collect a second billion dollars annually from existing data centers, probably adding to the current quarter-billion dollars in the Fund Balance (unspent money) until they figure out how they can spend it. Spending seems to be an addiction.

Help Arrives

A friend of mine serves on the board of Loudoun’s Future, a PAC that proved effective in the 2023 local elections. The organization continues to focus on ensuring that Loudoun remains a great place to live. One of the PAC’s key initiatives is addressing the data center dilemma through fiscal policy.

Their immediate goal is to increase the personal property tax rate on data center equipment to a level that could influence data center behavior. One thought is to double the personal property tax rate from $4.20 to $8.40 per $100 of assessed value, potentially through incremental steps. The idea is that higher taxes might reduce demand for new data centers while having minimal impact on existing ones, as these facilities generate so much profit that the increased taxes should barely register. This sounds good—if citizens get specific benefits.

That tax increase should add another billion to County coffers. Unfortunately, I don’t believe this idea will gain political traction.

An Extra Billion? Spend It Wisely

The county’s attitude towards that money would likely be: “An extra billion? Let’s spend it all!” There are some excellent ways to use this windfall thoughtfully. We could eliminate the car tax, reduce property taxes, or address the effects of new power transmission lines by burying select portions or by using more efficient conductors. The new money might also support solutions for the overarching problem of inadequate power.

Will a tax increase on data centers deter new ones while not affecting the existing ones? Or would it be a mere drop in the bucket like the increased tourist tax in Barcelona? In either case, tax revenues from data centers would balloon and our vehicle taxes could be eliminated.

We should demand at least that.

Charlie Houston is a retired office building developer with an insatiable wanderlust and a finite budget. He and his wife live on a small horse farm outside Paeonian Springs.