Tax, Subsidies, and Incentives

Many sales and use-tax exemptions for data centers include exemptions on power purchases. Where localities are not preempted by state law, localities should tax all electricity use with no exemptions, increase the daily rate during energy emergencies (e.g., heatwaves), and require that a portion of tax be funneled into local projects and energy infrastructure.

Cities may consider limiting or banning corporate tax subsidies for data centers, especially as such restrictions relate to local property and sales taxes. 

If they have to be granted, local property-tax abatements should be short-term (research suggests not longer than three years¹) and should grant no more than 50 percent abatement of tangible and intangible property. Before granting any tax breaks, local officials should commission or perform independent return-on-investment or cost-benefit analysis of proposed incentives. Those studies should be available for public inspection at minimum 90 days ahead of incentive approval.

Note: State-level sales and use-tax exemptions abate both state and local sales tax portions. Localities must consult state law to determine any preemption concerns or conflicts.

1. Timothy J. Bartik, “Rethinking State Economic Development Strategies: Or, How to Maximize Benefits for State Residents’ Earnings per Capita,” W. E. Upjohn Institute for Employment Research, December 18, 2019, https://research.upjohn.org/cgi/viewcontent.cgi?article=1062&context=presentations. ↩︎

As a condition of tax breaks, localities, when there is no conflict with law, can require companies to abide by strong labor conditions. See Establish Local Fair Labor Requirements to learn more, including the limitations of labor requirements given that data centers are not significant job creators.

Property taxes are the largest single source of revenue for K-12 education, so localities should ideally prohibit abatements of property taxes that funnel into schools. At minimum, where there is no conflict with state law, localities should give school districts the power to opt in or out of any abatement deal, for a negotiated duration and percent.

Because sales and use-tax exemptions for data centers are enacted at the state level, local community leaders can and should speak out against these tax breaks given that they pull valuable money away from communities. The state-enacted sales and use-tax exemptions abate both state and local portions of the tax, effectively preempting local control.

Where legal, jurisdictions may consider instituting taxes on data centers or peripherals.

Note: Revenue generated from PILOT agreements is significantly less than what would be generated from full taxation, so local governments should force data centers to pay fair taxes and deprioritize PILOT programs.

Report at least annually to the public the name of the subsidized company, the amount and type of tax breaks each project is getting, the number of jobs created, and wages paid to workers by job type, as well as the total amounts of property tax and local portion of the sales tax abated for all projects.

As stated by Good Jobs First:¹ “Explicitly disqualify data centers from sales and use-tax exemptions, corporate income tax credits (for investment or hiring), personal income tax diversions, and utility tax exemptions.” 

States should also disqualify data centers from local property tax abatements, millage rate preferences, and exemptions on power purchases.

1. Kasia Tarczynska, “Data Centers: Key Reforms for State Subsidy Legislation,” Good Jobs First, September 23, 2025, https://goodjobsfirst.org/data-centers-best-reforms-for-state-subsidy-legislation. ↩︎

As a condition of tax breaks, states can require companies to abide by strong labor conditions. See Establish State Fair Labor Requirements to learn more, including the limitations of labor requirements, since data centers are not significant job creators.

Property taxes are the largest single source of revenue for K-12 education, so states should ideally prohibit abatements of property taxes that funnel into schools. At minimum, states should give school districts the power to opt in or out of any abatement deal, for a negotiated duration and percent.

States should reject the development of special economic zones designed to spur data centers.

If and where special economic zones provide favorable tax conditions to data centers, states should proactively exempt data center development from existing special economic zone legislation.

Note: While this can potentially mitigate harm, revenue generated from PILOT agreements is significantly less than what would be generated from full taxation, so states should instead force data centers to pay fair taxes and deprioritize special economic zones, including those with PILOT programs.

Data centers are incorrectly framed as “economic development” opportunities. The reality is that state and local governments are granting data centers sales and use-tax exemptions, stripping valuable tax money away from communities. This is especially true for public schools, since property taxes remain the largest source of K–12 funding. These subsidies pull valuable tax dollars away from governments and exacerbate municipal budget crises. At the same time, data centers are driving up utility rates, making people’s bills more expensive, and exacerbating an affordability crisis. Federal policymakers can act to ensure that public dollars are not underwriting speculative AI growth while our households and government budgets are subject to increased austerity measures.

Repeal or Roll Back Federal Tax Incentives and Subsidies Given to AI Firms and Data Center Speculators

Repeal or roll back all federal tax subsidies and credits for data center infrastructure, such as the 100 percent bonus depreciation for IT infrastructure and data center equipment under Public Law 119–21¹ or the 45Q credit for carbon sequestration technologies.² 

Prohibit Corporate Tax Abatements for Data Centers

Federal policymakers can explicitly disqualify data centers from economic development incentives, including sales and use-tax exemptions, corporate income tax credits (investment or job creation), personal income tax diversions, utility tax exemptions, and local property tax abatements or millage preferences, regardless of whether the subsidy is offered through a data-center-specific statute or a general economic development program.³

1. Public Law 119-21, 119th Cong., 1st sess. (July 4, 2025), 139 Stat. ↩︎
2. 26 U.S.C. § 45Q (2023). ↩︎
3. Kasia Tarczynska, “Data Centers: Key Reforms for State Subsidy Legislation,” Good Jobs First, September 23, 2025, https://goodjobsfirst.org/data-centers-best-reforms-for-state-subsidy-legislation. ↩︎