Politicians used to compete to lure data centers to their states. They’re starting to reconsider.
Tempted by promises of more jobs, tax revenue and the chance to be on the cutting edge of technology, more than three dozen states rolled out the red carpet for data centers in the form of tax breaks and other financial incentives.
But now a growing number of states are tempering their enthusiasm. Of the 38 states that currently offer incentives to the data center industry, at least 28 of them have weighed legislation this year to end or shrink those benefits, according to the National Conference of State Legislatures, a nonpartisan research group.
The turnabout speaks to the rapidly shifting politics surrounding data centers, as well as the real-world impacts of their construction.
North Carolina Gov. Josh Stein (D) has pointed out that sales tax exemptions for data centers — which include exemptions for electricity costs — cost the state up to $57 million every year.
“Do we really want to subsidize data center’s consumption of energy and electricity when they make everyone else’s power bills go up?” Stein said in remarks earlier this month. “It doesn’t make much sense to me.”
This week, Democratic lawmakers in the North Carolina Legislature introduced a bill that would regulate data centers and repeal some tax credits.
Officials in other states have pursued similar ideas. Washington state this year nixed a policy that let data center operators avoid sales taxes for replacement equipment. Minnesota last year scrapped tax exemptions for electricity costs.
Nationwide, lawmakers have introduced hundreds of bills that would rein in the data center industry. Some would force companies to pay more for electricity. Others would impose energy requirements or set other strict regulations.
“It’s part of a taxpayer revolt on these things,” said Michael Hicks, an economics professor at Ball State University who has studied data centers. “I think the pushback on these incentives reflects the understanding that the growth in data centers has not necessarily yielded the local benefits that were promised.”
But the shift hasn’t been universal. Many policymakers still see value in data centers, and pressure from tech and construction interests have stymied attempts to abolish tax breaks. Several states — including New Hampshire, Oregon and Colorado — have considered adding new incentives.
Maine Gov. Janet Mills (D) last week vetoed a bill that would have put a moratorium on data centers, citing the potential jobs impact. As an example, she pointed to the development of a data center at an abandoned mill site that she said would create at least 100 permanent jobs and “substantial property tax revenue” for the nearby town of Jay.
The national debate over data centers has created a free-for-all environment, with no clear partisan or regional bent. A top Texas Republican wants the state to reevaluate its tax breaks for the industry. A vocal Colorado Democrat wants to offer more financial incentives for data centers.
Some states are even using their incentives as a way to pressure data centers into complying with their policy priorities around labor or energy. West Virginia lawmakers view data centers as a way to support its coal industry, while states like Michigan and Washington are leveraging tax breaks to help meet clean energy requirements.
Looming over these conversations is the tech industry, which has warned that state-level attempts to revoke data center incentives could prompt developers to look elsewhere.
Dan Diorio, vice president of state policy for the Data Center Coalition, said states that put tax incentives on the chopping block send a message to all businesses that their tax credits may not be reliable.
“When states revise or repeal these exemption programs, it creates significant uncertainty,” Diorio said. “If you’re investing, you want to know the rules of the road years out. When a state changes those rules midstream, it significantly impacts the viability of that marketplace.”
Colorado weighs its options
The question of whether to attract or regulate data centers is playing out now in Colorado, where the Democratic legislative majority is weighing competing proposals.
One bill would establish guardrails for new tech centers, requiring them to cover their entire hourly energy demand either by generating or purchasing renewable energy. The measure also would force developers to sign long-term contracts with utilities and comply with new state codes.
“We don’t want to stop data centers, we just want to make sure we’re still able to meet our clean energy and climate goals and that we don’t use up all of our water,” said state Sen. Cathy Kipp (D), who sponsored the bill. “We’re saying that if you come to the state, you have to follow our rules.”
Critics, however, say that punitive measures like that would drive data centers to nearby states like Wyoming, which doesn’t have green energy requirements and embraces fossil fuels. That’s why state Rep. Alex Valdez (D) has proposed a competing bill that would create new tax breaks for data centers that comply with certain environmental standards and agree to make $250 million in infrastructure investments over five years.
Data centers, Valdez said, can help Colorado by funding new electric infrastructure, bringing new clean generation and even adding tax revenue to fill local budgets.
“How do we connect the need of hyperscalers to build and the dollars they have with our own public needs?” Valdez said. Breaks on sales and use taxes, he said, are a worthwhile price to pay if they come with ratepayer protections.
“The economy in America is built around states attracting businesses,” Valdez said. “Being a Democrat, being pro-worker also means you should be pro-employer. I believe the government’s priority, beyond public safety and protection of rights, is to foster economic development.”
The incentives bill was pulled from a scheduled hearing last week and it may struggle to move in a session where budget troubles already have forced lawmakers to cut public programs. But the guardrails bill has stalled too, in part because of opposition from labor and construction groups.
The Colorado legislative session ends May 13, and Kipp said she is hopeful the bill will gather enough support to move before then. Valdez, meanwhile, said he believes the two bills could be merged to create an incentive program that keeps Colorado competitive with neighboring states.
Colorado isn’t alone in weighing the benefits of tax incentives for data centers under the specter of broader economic and budgetary troubles. Tax breaks created when data centers were relatively small enterprises have left states missing out on millions of dollars in potential revenue.
Astate assessment in Pennsylvania estimated that the commonwealth could spend nearly $2 billion on data center incentives by 2031. A Wisconsin state evaluation says the state is missing out on $1.5 billion during the construction of data centers and an additional $369 million a year once projects are completed.
Minnesota’s reversal of the sales tax exemption on electricity is expected to save $140 million over four years.
Even business-friendly Texas may take another look.
Texas Lt. Gov. Dan Patrick has asked the state Senate to study the “costs and consequences” of tax exemptions in what has emerged as one of the country’s fastest growing data center markets.
Patrick — a Republican who also leads the state Senate — said this year that the cost of tax exemptions has ballooned from $14.6 million in 2014-2015 to a projected $3.3 billion for 2028-2029.
The Legislature is not in session this year, but could bring up the exemption issue next year.
Divided public, divided politicians
While there are signs of growing opposition to data centers, the sentiment often hasn’t translated into lawmakers enacting major legislative action to rein them in. And in some cases, states are moving in the opposite direction by opening their doors wider to welcome new data center development.
Illinois Gov. JB Pritzker (D), a potential 2028 presidential candidate, has called for a two-year pause on data center tax incentives in response to rising electricity bills. But with less than two months to go in the legislative session, that idea has failed to gain traction in the General Assembly amid industry backlash.
A similar lobbying push by the tech industry secured a change to a bill in neighboring Indiana that could have produced tens of millions of dollars in payments to cities and counties as an incentive to host data center projects.
The Indiana Senate in February approved a measure that would have forced data centers to contribute 1 percent of savings from their sales tax exemptions from equipment and electricity to the local governments hosting the projects.
By the time the proposal was inserted into a wide-ranging tax bill, the local government incentive had been watered down to encompass 1 percent of tax savings only on electricity. Gov. Mike Braun (R) signed that bill, as well as one requiring a study on the cost of data center tax incentives.
In Arizona — which established some of the first data center credits in 2013 to help the state recover from the economic recession — Gov. Katie Hobbs (D) called on legislators this year to scrap what she called a “$38 million corporate handout.” But a bill repealing the incentives fell flat amid political wrangling.
A recent POLITICO poll speaks to the public’s split views on data centers.
Thirty-seven percent of the roughly 2,100 U.S. adults contacted in mid-January for the survey said they would support a new data center built in their area.
That’s more than the 28 percent who said they would oppose it, as well as the 28 percent who said they would neither support nor oppose it.
One factor is proximity. Respondents to the POLITICO poll were less likely to support the construction of a new data center near their home than they would the buildout of a new highway, delivery warehouse or low-income housing.
That attitude has spilled over into local politics. Opposition to a nearby data center recently led the residents of St. Louis suburb to unseat half its city council. Similar frustrations are playing out in Georgia, in races both big and small.
In Oregon, Gov. Tina Kotek (D) has tried to find a middle ground.
She has warned that data centers could strain the grid, and she has convened a committee that could recommend policies to rein them in. But Kotek also has opened the door for the state to start offering tax breaks for certain new data centers by making them eligible for an expanded Enterprise Zone program that offers local property tax cuts for new investments.
“Let’s build on our strengths by improving our ability to be competitive in a challenging economic environment,” Kotek told lawmakers in support of her incentives bill.
Oregon legislators, however, were unconvinced of the benefit. They blocked data centers from getting enterprise zone tax breaks until the summer of 2027.
Other states have tried to turn data center incentives into tools for achieving their policy goals, especially around energy.
States such as Michigan, Arizona, Washington and Illinois require that data centers meet clean energy or energy efficiency requirements. Others condition incentives on hiring local workers, investing a certain amount or bringing a consistent power supply.
In West Virginia, lawmakers have considered legislation that data centers can only get tax incentives if they rely on coal power. That’s part of a larger effort by Gov. Patrick Morrisey (R) and energy interests to leverage the data center boom to boost the state’s fossil fuel sector.
Diorio of the Data Center Coalition said states who want energy efficiency should keep their equipment incentives on the book. Washington’s recent reversal, he said, will make it more expensive for existing facilities to swap out equipment on a three to five year basis, which in turn can bring in better equipment.
“That ensures that they can provide essential infrastructure and do more with less, to get more compute out of those servers,” Diorio said. “You want the newest and the latest technology in there. You want that incentive in there so there’s an ability to continually refresh.”
Hicks, the economics professor, said shifting attitudes toward data center incentives also reflect a change in the market. Tax breaks that once applied to 1,000-square-foot cloud computing systems may not make sense when AI developers are now building complexes that sprawl over millions of square feet and have on-site power generation.
“Nobody thought they’d get as large as they are,” Hicks said. “These AI sites are so large, it can be shocking. Nobody expected this kind of magnitude of growth, and the incentives may not be designed for that.”
Reporters Arianna Skibell, Adam Aton, Shelby Webb and Mike Lee contributed.
