Data Center Tax Breaks at Risk as States Rethink Cost and Impact

Persistently high energy costs and tougher budget pressures are likely to keep data center tax breaks on the chopping block in many states, even as their lawmakers have mostly rejected a wholesale repeal of those incentives.

State lawmakers, while largely siding with industry so far this year, have sought to impose restrictions and reporting requirements on energy and water use to obtain sales tax exemptions that together have saved billions of dollars for tech giants such as Meta, Amazon, and Microsoft.

Those provisions include mandating that data centers—critical engines powering the artificial intelligence revolution—cover the cost of new power lines for their facilities, report annual water consumption to ensure local supplies are unaffected, and require prevailing wages for workers.

In recent days, governors in Ohio and Illinois have paused issuing new tax exemptions while the states study what to do about the industry. Arizona Gov. Katie Hobbs (D) and lawmakers reached a budget deal for a three-year pause on new tax exemptions. New York lawmakers passed a bill that, if signed by Gov. Kathy Hochul (D), will impose a one-year moratorium on permits for new large-scale sites.

“My impression is that the data center exemption, even if it escapes this session, will be back next session,” said Bob McNab, an economics professor at Old Dominion University in Virginia, where state lawmakers called a special session to hash out disagreements over the tax exemptions.

“There appears to be a rising tide of concern about how data centers are impacting electricity demand and the environment,” McNab said.

Seeking Strong Protections

At least nine states—including Georgia, Michigan, and Pennsylvania—have considered bills to completely repeal their data center tax incentives, according to a National Conference of State Legislatures report. None have passed as of June 8.

The fate of tax exemptions in future legislative sessions hinges on whether communities are satisfied with the added stipulations. Electric prices have soared as energy-intensive server warehouses seek access to the power grid, putting utility bills at the heart of local opposition to data centers heading into midterm elections and beyond.

States have avoided outright repeals or data center bans as they compete to land the developments and the economic benefits they might bring.

Of the 38 states that offer data center tax incentives, lawmakers in two dozen states introduced proposals to repeal or substantially curtail them, according to the NCSL report.

Maine Gov. Janet Mills (D) vetoed legislation that would’ve created a first-of-its-kind state data center moratorium. Washington scrapped exemptions—but only for the refurbishment of data centers, which generally replace their equipment every three to five years.

And Georgia Republicans rejected an attempt to repeal its exemption, a clawback driven by a powerful state legislator living down the road from a data center project that only has mixed support.

Georgia has been more focused on protecting residential ratepayers from energy price spikes, said Brad Leskoven, an Atlanta-based director of tax services for the consulting firm Cherry Bekaert. It’s a compromise approach that would limit future data center construction to serious projects and possibly build community support, Leskoven said.

The Georgia Public Service Commission wants to see “strong contracts in place specifically to make sure that the consumers outside of these data centers aren’t bearing the additional costs that might come online,” he said.

Other states, including Pennsylvania and New Jersey, are considering legislation that requires companies to pay its workers prevailing wages to qualify for tax exemptions.

But that alone may not be enough to fend off repeal efforts.

Michigan’s sales tax exemption, enacted in 2024 by the Democrat-led legislature, required data centers to pay higher electric rates than other industrial customers and to draw water from municipal systems rather than groundwater sources.

Still, a bipartisan group of lawmakers is seeking to scrap the exemption altogether. Rep. Joey Andrews (D), who supports the tax break, said he’s working on legislation expanding the ratepayer protections to the entire data center industry, not just those sites that claim the exemption.

Legislative efforts in Ohio to permanently repeal its tax break, impose a moratorium on data centers that don’t bring their own power supply, and create a new data center fee have so far have been a “spectacular loser,” said Sen. Louis Blessing, a Republican lawmaker who has been leading the charge. He’s faced opposition from the pro-business and tech-friendly wing of his party, progressives opposed to rewarding behind-the-meter power generation, and labor unions that benefit from thousands of construction jobs, he said.

Yet governors have begun to wade into the issue. Ohio Gov. Mike DeWine (R) announced on May 27 a pause in hearing new requests for tax breaks from data center facilities while a state commission studies the issue. Illinois Gov. JB Pritzker (D) suspended new exemption agreements after lawmakers failed to repeal it this year.

And a ballot initiative to ban new data centers is circulating in Ohio—a sign of growing discontent, Blessing said.

A data center under construction in Massillon, Ohio, in December 2025.

Photographer: Justin Merriman/Bloomberg

‘Unthinkable’ Shift

The data center industry contends it isn’t responsible for energy price increases. The aging power grid and the rising cost of materials and labor has pushed up the cost to deliver electricity everywhere, supporters of the industry say.

The data center issue has become radioactive within the last year, said Caleb Max, president and CEO of the National Artificial Intelligence Association, which supports more data center development to drive its technology.

The idea that states would repeal the sales tax exemption would’ve been unthinkable three years ago, he said. “Now, it’s par for the course.”

The cost of the sales tax exemption has ballooned into the hundreds of millions of dollars in many states at a time they’re looking to reduce income and property tax rates.

Forty states were under-performing their 15-year revenue trajectories as they entered fiscal 2026, leaving them with fewer resources to fund tax cuts, expand public services, and prepare for an economic downturn, according to a report in April by Pew Research Center.

Budget constraints are expected to grow next year as more states realize the full effect of the 2025 GOP tax law, which pushed a greater portion of Medicaid and Supplemental Nutritional Assistance Program costs onto the states.

In Virginia, which houses the world’s largest data center market with 232 facilities, the value of the sales tax exemptions for data center equipment soared to nearly $2 billion in fiscal 2025, according to the most recent state estimates. That’s up from just $136 million in fiscal 2022.

“While revenues continue to lead forecasts, Virginia may not be so fortunate in the coming fiscal years, especially if the war with Iran continues into the summer and the energy shock’s impacts on supply chains intensify,” said McNab, the economics professor.