Subsidizing Servers: How States Are Competing to Attract Data Centers

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What Even Is a Data Center?

Put simply, data centers are warehouses filled with many computers. Data centers are used whenever we interact with the Internet: sending an email, streaming a movie and, increasingly, chatting with an AI agent. All this internet traffic is handled by the computers that fill data centers.

Data centers are not a recent invention. The first data centers were created in the 1950s and 1960s as digital technology was still in its infancy. Driven first by demand for cloud computing and, in recent years, by the AI boom, data centers are spreading fast across the United States. In fact, spending on data center construction in 2025 alone topped $61 billion. Today, an estimated 4,100 data centers are operating across the U.S., with Virginia, Texas, California, Illinois, and Georgia having the most. The largest cluster is in northern Virginia's "data center alley," with nearly 200 data centers located there.

Data centers are often grouped into three categories: enterprise, colocation, and hyperscale. Some data centers are "enterprise," where one company exclusively uses the data center. Large tech companies like Meta and Google operate many enterprise data centers and rely on them to power their digital services, including "cloud" file storage and AI agents. Other data centers are "colocation" data centers, where often smaller companies can lease space in the data center for their own purposes. Increasingly, "hyperscale" data centers are in the news. These are very large data centers (often several warehouses) that have surged in popularity recently driven by AI and cryptocurrency mining.

How data centers are defined varies from state to state. While the term "AI data center" is often used in the media, and artificial intelligence is often associated with data centers, this association is not always correct. Some data centers-especially older enterprise data centers like those proprietary to hospital systems and universities-have little to do with the recent AI boom. States have different standards to define what even qualifies as a data center: in some jurisdictions, an energy threshold is utilized, while others use expansive definitions.

Focusing on the purpose of the facility, Illinois law describes data centers as a facility "whose primary services are the storage, management, and processing of digital data…" States occasionally attach requirements to the definition. Florida's tax incentive statute defines data centers as "a facility that: has a critical IT load of 100 megawatts or higher…". This makes Florida one of the few states that explicitly measures the size of a data center by its energy consumption, which is the standard practice in the data center industry. Meanwhile, Pennsylvania's statute defines "computer data centers" as "all or part of a facility that may be composed of one or more businesses … that is … predominantly used to house working servers…" - explicitly allowing colocated data centers and requiring that the facility "predominantly" be a home for computer servers, irrespective of their purpose.

To be clear, AI has supercharged the need for data centers, and many of the large, hyperscale data centers grabbing headlines are devoted to AI. However, in states with existing data center statutes, artificial intelligence is not usually included in the statutory definition of qualifying data centers, and most data center incentives predate the recent AI boom.

Types of State Data Center Incentives

At least 38 states currently offer dedicated tax incentives to data centers, with Kansas becoming the most recent state to create an incentive in July 2025.

38 states currently offer dedicated tax incentives for data centers.

Sales Tax Exemptions

While no two states' incentives are exactly alike, all states that offer a data center tax incentive provide state sales tax exemptions.

Sales tax incentives often exempt equipment essential to the data center, like its computer servers and the software they run. Other materials used in constructing the data center, such as fences to surround the facility or concrete to construct its walls, may also be exempt from the sales tax. Certain data center infrastructure, like backup generators, is often exempt, as well.

Ultimately, the value of the sales tax exemption varies based on the state sales tax rate and the scope of goods exempted by the statute. In states with a relatively high sales tax rate and a broader sales tax base, the exemption could be more valuable.

Electricity Exemptions

State taxation of electricity varies. Some states consider electricity a service and exempt it from the sales tax. Yet the most common arrangement across the country is that residential electricity may be tax-exempt, but commercial and industrial energy users-including data centers-are subject to the usual sales tax on the electricity they consume.

Fourteen states extend their data center tax incentives to cover the electricity used by data centers in their regular operations. Because data centers have tremendous energy demands-in one year, data centers in the United States use more energy than the entire nation of Pakistan-this exemption can be quite valuable to the data centers and, in turn, costly to state governments.

By 2028, more than half of all energy used at data centers could be for AI training. (Shehabi et al.)

In summer 2025, Minnesota amended its tax incentive to remove the sales tax exemption that large data centers previously enjoyed for their electricity usage. Minnesota also created a new fee for large-scale data centers to be levied annually based on energy use. Whether other states will follow suit is unclear, but energy concerns are clearly top of mind for many legislators.

Property Tax Incentives

Because property taxes are almost always administered locally by counties, cities, and school districts, fewer states offer statutory property tax incentives to attract data centers. However, 11 states offer data centers a state-wide property tax incentive.

In Montana, which has no statewide sales tax, data centers enjoy a reduced 0.9% property tax, while in West Virginia data center assessments are lowered to a so-called "salvage value," which cannot exceed 5% of the total value of the data center. In other states, including Mississippi and Indiana, municipalities are specifically authorized to reduce data centers' property tax, but given discretion as to whether they do so. A 2024 review by Indiana's Legislative Service Agency, the most recent available, found that zero municipalities in the state had done so.

Because property taxes fund local governments like school districts and municipalities, a key consideration for states offering property tax incentives is how to backfill, or reimburse, lost local revenue. In Montana, the state covers the first five years of lost property tax revenue. Alabama's statute explicitly prohibits data centers from paying less to school districts.

States are increasingly considering payments-in-lieu-of-taxes (PILOTs) to sweeten the deal for the municipalities that host data centers. In Connecticut, where data centers can receive significant exemptions from the property tax, prospective data centers are required to sign Community Host Agreements with their host municipalities. These agreements require that data centers receiving a property tax abatement contribute fixed amounts to the localities-essentially, an annual lump sum payment.

Incentive Conditions and Requirements

Tax incentives often come with conditions that the data center must meet to qualify for the incentive-these requirements include investment, employment and energy use.

Investment

Thirty-one states require a minimum amount of capital invested to receive tax incentives, ranging from $2 million in certain parts of Maryland up to $450 million in populous parts of Kentucky. Often, data centers have three to five years to satisfy the investment threshold.

Likewise, at least nine states consider geographic factors. In Maryland and Virginia, the investment threshold is lower if the data center is built in an opportunity zone or in distressed municipalities. Other states, including Kentucky and Wisconsin, offer a variable investment threshold depending on the population of the host county, mandating lower investment thresholds for data centers in rural counties to qualify for the tax incentives.

Jobs

In addition to capital investment, 23 states require that data centers create jobs to receive tax incentives-from five new jobs in Maryland to 100 in Massachusetts. Tax incentive statutes often require that the jobs be permanent and full-time. Wyoming has a unique requirement; the data centers must create "a number of jobs that is appropriate to the size and stage of development," as determined by the state's business council. Meanwhile, Ohio has no required number of jobs, but the beneficiary data center must have a total payroll of at least $1.5 million.

Besides requiring that the data centers create some number of jobs, at least 11 states require that those jobs pay well-often either a set percentage above the county or state median wage. In Maryland, data center jobs must pay at least 150% of the state minimum wage, while in Tennessee, data center jobs must pay at least 150% of the state average wage.

Energy Use

Besides investment and employment criteria to qualify for incentives, states consider energy and environmental requirements for data centers. Data center operational outages due to maintenance or other technical issues place strain on the wider electric grid. To combat this, states including Kentucky and Texas require that data centers have both uninterruptible power supplies and backup generators on site to qualify for the tax incentives.

Additionally, driven by concerns over the rising cost of energy, tax incentives in Illinois and Washington require that data centers earn green building certifications, such as LEED or Energy Star, to maintain their tax-exempt status. Meanwhile, West Virginia requires that data centers use coal-generated electricity to qualify for the state's sales and property tax exemptions.

Other Considerations

On the other hand, not everyone is sold on data centers. Incentives are expensive and state budgets face mounting uncertainty amid slower revenue growth and a leaner federal funding environment. Popular opposition to data centers is mounting nationwide, including rural areas that are popular with new data centers, and public officials across the country are working to strike a balance between local concerns and economic development. Amid a federal push to preempt state AI regulation, states are considering new ways to reduce expenditures and raise revenues-including changes to data center incentives.

Cost

A 2025 review found that at least 10 states forgo more than $100 million annually on data center tax incentives, with Texas and Virginia each foregoing as much as one billion dollars annually. A February 2026 estimate from Pennsylvania's governor found that the commonwealth is poised to spend nearly $2 billion on data center incentives by 2030.

Facing these high price tags, in early 2026, Illinois Gov. JB Pritzker called for a two-year pause of his state's data center tax incentives, driven in part by cost concerns. Likewise, legislators in at least seven states-including Arizona, Connecticut, Georgia, Maryland, Michigan, Pennsylvania and Washington-have considered bills to repeal their states' tax incentives, often citing the high cost of incentives.

Like other tax incentives, states have several available options to rein in the cost of incentives.

Accountability and Enforcement

Often driven by a desire for regular oversight and closer evaluation, many states choose to "sunset"-include a specific end date for a program in statute-their tax incentives. Thirteen states set sunset dates for their data center tax incentives, from 2029 in Illinois to 2055 in West Virginia. Besides end dates for the data center incentive program, some states limit the length of the incentive for individual recipients.

While no new applications for a data center tax incentive may be accepted after the sunset date, individual data centers may have different end dates for their tax incentives. Eighteen states set separate, statutory incentive length requirements, ranging from 10 (the most common) to 50 years. These incentive lengths are sometimes tied to the amount of capital invested by the data centers, with more costly projects receiving longer tax incentives.

Investment thresholds may also be tied to specific clawback provisions in statute. If data centers fail to invest enough capital (or create enough new jobs), state law may require that the incentivized data centers pay back some or all of the tax write-offs they received. At least 23 states have specific clawback provisions in their data center statute, which may require annual recertification of the data center's eligibility, as in Arkansas, or may require repayment, often with penalties and interest, if the data center fails to meet the statutory minimum, as in Iowa, Texas and others.

As states face tighter budgetary conditions and flattened revenues, pressure may continue to mount on a variety of tax incentives, including expenditures for data centers.

Energy usage

Meeting the growing energy demands of data centers has become a top concern for state policymakers. While many different kinds of data centers exist, a typical AI-data center may use as much electricity as 100,000 homes; data centers under construction today could use up to 20 times that amount. Data centers already account for 4% of the total energy demand in the United States, and their power needs could increase 50% just next year.

As discussed above, lawmakers in some states address energy use concerns in the design of the data center incentive. Twelve states attach some kind of energy requirement to their tax incentives, most often a requirement for uninterruptible power supplies to the data center or sustainable design certificates.

In Kansas, which just adopted its incentive in 2025, data centers are required to enter a 10-year electricity purchase agreement with their local utility. Such requirements could allow for longer-term grid management and more informed planning by local utilities, i.e., if a utility knows a decade in advance of data center power needs, it can better develop infrastructure.

Other states create requirements about what sort of energy the data centers must use. In West Virginia, data centers are required to derive a majority of their energy from coal, reflecting the economic and energy considerations of local communities in the Mountain State. Massachusetts and Maryland take a different approach, requiring that data centers use carbon-free energy.

Additional Policy Considerations

Data centers also touch several other policy considerations, including transparency and labor. The use of non-disclosure agreements to withhold information about proposed data centers has drawn scrutiny from state lawmakers interested in requiring greater transparency in economic development projects. A bill proposed in New Jersey would specifically prohibit NDAs in data center construction, while a bill in Florida primarily addressing electricity and water use at data centers would also require public notice of prospective data centers.

In February 2026, New Jersey became the second state (after Minnesota) to require that construction workers who build data centers receive at least the prevailing wage for their work. Lawmakers in Pennsylvania are considering a similar bill that would amend the commonwealth's data center tax incentive to require that contractors and subcontractors constructing or expanding data centers pay their workers "not less than the prevailing minimum wage and benefit rates," as defined by the U.S. Department of Labor. Data centers that fail to meet this requirement could lose Pennsylvania's exemption from the state sales and use tax.