The California Senate’s recent bill for a tax increase on data centers’ use of natural gas to produce electricity reflects growing skepticism around the balance of benefits and costs associated with data center development.
This has prompted some state legislators to reconsider incentive‑heavy approaches that previously dominated data center policy. States that once actively encouraged construction are exploring incentive repeals, threshold adjustments, moratoriums, or alternative tax mechanisms like California’s proposal.
Policy responses vary significantly by state, geography, and political composition—creating uncertainty for both developers and investors. To account for this, developer and investors should monitor proposed legislation, build financial models that incorporate multiple scenarios, and investigate other state and local incentives, even if not data center specific, to avoid surprises that could negatively impact financial performance.
Incentive Model
Statutory sales tax exemptions historically were widespread among states seeking to attract data center investment. These exemptions allowed data centers to purchase essential equipment and utilities free of, or at a reduced, sales tax rate.
To qualify, data centers typically had to meet requirements tied to capital investment, job creation, and clean energy commitments. In return, data centers realized substantial tax savings, while states anticipated increased revenue streams.
But outcomes have been mixed. Illinois’ Data Center Investment Program 2024 Annual Report noted that 27 sales tax exemptions were issued to data centers, resulting in approximately $983 million in imputed sales tax savings by the end of 2024. During 2022-2023, those same data centers generated $3.5 billion in state and local tax revenue. The report also estimated that between 2019 and 2024, data centers created 4,000 to 8,000 temporary construction jobs but only 534 permanent positions.
While Illinois realized meaningful revenue, the contrast between short‑term construction employment and long‑term job creation has led policymakers and residents to question if data center investment delivers results worth the strain on utilities and the environment.
As residents deal with increased cost of living, seeing an increased utility bill and environmental impact, but limited tangible benefits, scrutiny on data center incentive programs increases. These questions have already prompted policy changes in several states.
Policy Shifts
In 2025, Florida enacted a bill that eliminated sales tax exemptions for data centers with capacity under 100 megawatts and wouldn’t consider legacy projects.
Washington state and Arizona have taken a more sweeping approach. Weshington’s SB 6231 signed into law ends sales tax exemptions for the replacement of server equipment and refurbishment for both new and existing facilities as of July 1, 2026. Arizona’s SB 1463 proposes repealing transaction privilege and use tax exemptions specific to data centers.
Other states are opting for a more cautious path. Illinois Gov. JB Pritzker (D) supports a two‑year moratorium on new data center development to study incentive effectiveness.
As a whole, these policy moves display a shift away from incentives and toward more restrictive approaches. They reflect growing skepticism regarding data center incentives—even extending to facilities that have already invested in a state—while underscoring the inconsistency and volatility shaping the current policy landscape.
These efforts stress the need for developers and investors to stay aware and flexible as incentive programs change.
Politics, Affordability, Perception
With affordability as a top voter concern ahead of upcoming midterm elections, some residents worry that increased electrical demand from data centers could translate into higher utility bills.
These issues have attracted bipartisan attention. In Virginia, for example, a Democrat‑controlled legislature was unable to agree on a budget prior to adjournment, with sales tax exemptions for data centers emerging as a key point of division. Legislators debated whether to repeal incentives outright, as in Washington and Arizona, or to impose more qualifying requirements, as seen in Florida.
The absence of clear party consensus adds to uncertainty, though repealing or modifying incentives has gained more traction than introducing new, targeted taxes.
Alternative Approaches
Some states are exploring mechanisms designed to deliver community benefits sooner. A Missouri proposal would accelerate property tax valuation for data centers while lowering property tax rates for residents, addressing local communities’ affordability concerns by providing financial benefits earlier in the investment lifecycle, in contrast to California’s surcharge approach.
The private sector is also responding. Technology giants have announced infrastructure plans aimed at proactively addressing concerns related to electricity costs, water usage, job creation, and local tax contributions—or have pursued power supply agreements that commit to green energy use and infrastructure expansion to avoid shifting costs to residents.
These efforts suggest that some market participants understand the impact of community relations on data center incentives. They recognize that current incentives are uncertain and can be repealed or adjusted even for projects that have already committed capital to a state. Consequently, proactive engagement is a way to mitigate pressure for new taxes or restrictive policies.
What Comes Next
The California bill, which targets data centers with 20 megawatts or greater capacity, isn’t the norm, but scrutiny and policy instability are for the near term. The California bill is just one example of a state experimenting with a targeted tax on large‑scale energy consumers while seeking to address affordability concerns for residents.
Developers and investors should factor this evolving landscape into planning and financial models but should remember that the rules governing incentives and taxation are increasingly subject to change.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
Author Information
Jake Kaplan is a partner in the KPMG state and local asset management tax practice, specializing in tax compliance and consulting with an emphasis on the real estate and infrastructure sectors.
Write for Us: Author Guidelines
To contact the editors responsible for this story: