Data center tax breaks are on the chopping block in some states

This story was originally published by Stateline.

After years of states pushing legislation to accelerate the development of data centers and the electric grid to support them, some legislators want to limit or repeal state and local incentives that paved their way.

President Donald Trump also has changed his tone. Last year he issued an executive order and other federal initiatives meant to support accelerated data center development. Then last month, he cited rising electricity bills in saying technology companies that build data centers must “pay their own way,” in a post on Truth Social.

As the momentum shifts, lawmakers in several states have introduced or passed legislation that aims to rein in data center development by repealing tax exemptions, adding conditions to certain incentives or placing moratoriums on data center projects. Virginia lawmakers, for example, are considering ending a data center tax break that costs the state about $1.6 billion a year.

“Who is actually benefiting from these massive data centers that, in many cases, are the size of one or two shopping malls combined?” asked Michigan Democratic state Rep. Erin Byrnes, who introduced a proposal to repeal the state’s data center tax exemptions. “They have a large footprint in terms of land and energy usage. And by and large, it’s not going to be the average resident who lives near a data center who’s going to benefit.”

Over the past few years, more data centers have been built in an effort to meet the demand for digital processing power, which has rapidly increased as more artificial intelligence systems come online. Data centers house thousands of servers that are responsible for storing and transmitting data required for internet services to work.

But as local communities voice growing outrage over rising electricity prices and environmental concerns brought by data centers, such as water and energy use, lawmakers in several states are hoping to slow data center development. By limiting incentives or placing moratoriums on new projects, state legislators are hoping to give themselves more time to determine whether the massive facilities are worth losing millions or more in tax revenue each year.

Some experts also say that developers and tech companies have exaggerated some of the benefits they bring to local communities. While the promise of new jobs sounds attractive, local leaders may face other concerns, such as the effects of diverting construction resources away from other purposes and higher energy costs caused by AI, said Michael Hicks, an economics professor at Ball State University in Indiana.

“A lot of households — and the people that are elected by households — and local governments are becoming more unnerved by the public pushback to data centers,” Hicks said.

Tech developers and data center operators are concerned, however, that the changes could hurt the rapidly growing industry. And most states and localities already require developers using incentives to follow certain requirements, said Dan Diorio, the vice president of state policy for the Data Center Coalition, a lobbying group for the data center industry.

State lawmakers have to consider how changes to incentive programs could upend years of construction, which has long-term business impacts, Diorio said.

“I think data centers are very much the backbone of the 21st-century economy,” he said. “We’re generating economic activity in states, contributing to state-level GDP, contributing significantly to labor income and state and local tax revenue, and creating significant amounts of jobs. I mean, we’re just jumping into something preemptively here.”

Incentives Granted

At least 37 states offer incentives that are available to data centers, including sales tax exemptions and property tax abatements, according to the National Conference of State Legislatures. Sales tax exemptions, the most common incentive, allow data center developers to buy computers and other equipment at a much lower cost.

“I think these are one of many factors that the data centers are looking at, along with the cost of electricity, the cost of construction, land and things like that,” said Nicholas Miller, a policy associate at NCSL. “These incentives are one way that states are trying to pitch themselves as competitive to this industry.”

In 2020, Maryland implemented a program that exempts data centers from sales and use taxes if they provide at least five jobs within three years of applying to the program and invest at least $2 million in data center personal property. The first four years of the program cost the state $22 million — but $11 million of that came in 2024 alone, as the costs grew, Democratic state Del. Julie Palakovich Carr said.

Concerned about this and the impact of data centers on residents’ electricity bills, Palakovich Carr introduced legislation this year that would repeal the state’s sales and use tax exemptions for personal property used at data centers. The measure, which is under consideration in the House, would also restrict localities in the state from eliminating or reducing assessments for personal property used in data centers, which drew opposition from the Maryland Association of Counties.

The amount of money states are forfeiting to provide tax breaks for data centers is increasingly concerning, Palakovich Carr said.

“Unfortunately, that’s the turn we’re seeing across many other states,” she said. “The price starts out maybe in line with what we think it’s going to be. But over time it just costs more and more.”

Similar bills that would repeal or halt state incentives for data centers have been filed in Arizona and Georgia.

“When we look at potential subsidies for businesses, I’m really looking at it from a frame of incentivizing new behavior rather than just giving away money for things that the companies were going to already do anyways,” Palakovich Carr said. “I think it’s really important that once these things get put in place, we look at the data and see what’s happening on the ground.”

In 2024, Michigan enacted sales and use tax exemptions on certain data centers through at least 2050.

Now, with developers looking at more than a dozen sites for potential data centers, public sentiment has soured, said Byrnes, who had voted against the measure. Communities across the state began organizing in an effort to stop data centers from coming to their neighborhoods because of environmental concerns and energy costs, she said.

The outcry prompted Byrnes to co-sponsor a bipartisan package of three bills that would repeal the 2024 law.

“We’re taking a stand with this legislation to say that we don’t believe data centers should be offered these exemptions,” she said. “I believe it aligns with public sentiment.”

Lawmakers in a handful of states — including New York, Oklahoma and Vermont — have filed bills that would place a temporary moratorium on all data center projects and require studies of their impacts.

Georgia Democratic state Rep. Ruwa Romman introduced a measure this session that would put a moratorium on new data center projects until March 2027. The proposal would give the legislature time to study the impact of data centers on the state’s natural resources, environment and other areas.

“We have such a beautiful state and it would be a damn shame to completely and utterly wreck it and its landscape for short-term gain,” Romman said. “These data centers aren’t bringing jobs. They’re saying they’re bringing the revenue, but there’s a ton of fine print on the revenue that’s coming in. So, I’ve been urging my colleagues from every side of the political spectrum to just take a beat.”

In 2021, the Oklahoma legislature approved a measure from current Republican House Speaker Kyle Hilbert that excludes new data centers from qualifying for an exemption program that allows certain manufacturers not to pay property taxes for their first five years in business. Any data centers that qualified for the program in the five years prior to the law, however, can continue to apply for exemptions.

This year, as more project proposals were made, Hilbert introduced legislation to ensure no data centers could “slip through the cracks.”

“These aren’t the days of being able to build a data center, cut deals with NDAs, then start turning dirt before the constituents even know what’s happened,” Hilbert said. “Those days are over, and data centers need to be proactive in their messaging and talking to people about their concerns.”

Costs vs. Benefits

Last year, Virginia, home to the most data centers in the country, gave up $1.6 billion in sales and use tax revenues from data centers, state data shows. That’s a 118% increase from the previous year, according to a report from Good Jobs First, a watchdog group that focuses on economic development incentives. Another report from the group said Georgia is expected to lose at least $2.5 billion to data center sales tax exemptions this year, 664% higher than the state’s previous estimate.

Virginia state lawmakers are considering legislation that would require data centers to achieve high energy efficiency standards and decrease their use of diesel backup generators in order to be eligible for the state’s sales and use tax exemption. The measure, which passed the House, is now moving through the Senate.

Before the end of his term, former Virginia Gov. Glenn Youngkin, a Republican, suggested a provision in his proposed state budget that would extend the data center tax incentive from 2035 to 2050. The Senate’s budget bill, however, would end the incentive altogether on Jan. 1, 2027. It’s not clear if state leaders, including current Democratic Gov. Abigail Spanberger, support the measure.

While states can put a specific number on the tax losses, it’s much more difficult to determine how much data centers contribute to local communities and the state, Miller said.

Virginia brings in a significant amount of revenue from the property taxes for each facility. Local construction firms, restaurants and other small businesses also benefit from ongoing projects, he said.

“This is the big question,” Miller said. “With all economic development projects, it’s generally a lot easier to measure the cost of the incentive directly versus the benefits.”

The changing incentive landscape may cause instability within the data center industry, said Diorio, of the Data Center Coalition. Data center projects are large-scale capital investments that play out for several years, but changing policies could upend that progress.

“When states look at these policies or consider abrupt ends to programs, that creates significant market uncertainty,” Diorio said. “It will have a significant long-term impact on the viability of that market for data center development. Industries are very responsive to market signals, and any kind of uncertainty will bring up a red flag because you’re looking to invest for the long haul.”

Stateline reporter Madyson Fitzgerald can be reached at mfitzgerald@stateline.org.

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