Data Centers Used to Be a Prize. States Are Having Second Thoughts.

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.

The Tax Revolt Begins

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? It doesn't make much sense to me." — Gov. Josh Stein (D-NC)

Last 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. The growth in data centers has not necessarily yielded the local benefits that were promised." — Michael Hicks, Ball State University economist

Industry Pushback

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 month vetoed a bill that would have put a moratorium on data centers, citing the potential jobs impact, pointing to a data center at an abandoned mill site that she said would create at least 100 permanent jobs.

The tech industry 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.

"When states revise or repeal these exemption programs, it creates significant uncertainty. If you're investing, you want to know the rules of the road years out." — Dan Diorio, Data Center Coalition

Colorado's Competing Visions

The debate is playing out vividly in Colorado, where the Democratic legislative majority is weighing competing proposals. One bill would require data centers to cover their entire hourly energy demand with renewable energy and sign long-term contracts with utilities.

"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).

A competing bill would instead 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 — reflecting the tension at the heart of the national debate.

No Clear Pattern — Yet

The national debate 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. Some states are even using their incentives to pressure data centers into complying with labor or clean energy priorities.

What is clear: the era of unconditional red-carpet treatment for the data center industry is over. Communities and legislators across the country are finally asking the questions that should have been asked from the beginning — and demanding real answers before signing away billions in public funds.