States Rethink Data Center Tax Incentives as Costs Soar

As the presence of data centers has rapidly expanded, so too has the fiscal impact of associated tax incentives. The fiscal note for Virginia’s first data center-specific tax incentive estimated an impact of about $1.5 million annually. Today, the same incentive has a fiscal impact of $1.6 billion annually. The figure is often framed as lost revenue, but that’s not entirely accurate. It’s unlikely that these projects would’ve concentrated in Virginia without these incentives. It’s true that the Comprehensive Annual Financial Report (CAFR) reports that the amount of unabated taxes in Virginia is $1.6 billion, but this is reflective of a massive capital and economic investment in the Commonwealth (after all, tax incentives are, by design, tied to the size of the investment). After years of implementing and expanding incentives to attract these investments, some states are taking another look at their incentive packages.

Data Center Tax Incentive Structure and Economic Impact

Many states provide tax incentives to data center projects, but you won’t always find them clearly referenced in the statute. While some states do provide specific incentives for data centers, other states have simply expanded existing investment tax or enterprise tax credits to include data centers. In other states, data centers qualify for incentives simply because they require a large capital investment.

The most common incentive is a sales tax exemption for equipment, cooling systems, power infrastructure, software, etc. used in the data center. Some states also provide tax credits for wages paid, but this underscores the uniqueness of data center incentives. Traditionally, incentives are offered to companies and projects which provide the community with a certain number of jobs. Data centers do require large crews to construct a facility, and facility construction takes many years, so there is an initial employment benefit. However, day-to-day operations require relatively small teams (generally between 15-100 employees depending on the size of the facility). But this does not mean that data centers lack economic value. One report estimates that each direct job in the data center industry supports more than six jobs elsewhere in the U.S. economy. And even with tax incentives, data centers are substantial taxpayers in their communities. The same report estimates that over a six-year period, total tax payments from data centers equaled more than $715 billion. Not to mention, technology investment is driving a huge portion of GDP growth in the United States.

Virginia Legislative Response to Data Center Tax Incentives

Nearly 100 bills have already been introduced or carried over into this year addressing the tax treatment of data centers. Virginia in particular has introduced several bills to limit or cap tax incentives.

Current Virginia Bills Limiting Data Center Incentives

Some of the legislation is broad – like HB 897 which makes the sales tax exemption contingent on data centers meeting new energy standards. Some of the legislation is punitive, including SB 393, which imposes a data center land conservation tax of $3/square foot on facilities above 25,000 square feet. And the last tranche of bills are designed to provide additional transparency, like HB 784, which requires an annual report disclosing information about each data center operator who receives a sales tax exemption and whether they’ve met job and investment goals.

Governor Spanberger's Position on Data Center Tax Policy

Governor Spanberger (D) has made it a priority for the state to consider the impact of data centers, but she’s not necessarily opposed to extending tax credits. Last year (prior to the election), in response to a question about extending the incentives, she said, “I’m open to extending them philosophically, but I do think we need to comprehensively evaluate what they bring to communities.” It’s difficult to know how aggressively a legislature will act after regaining a trifecta, but our best guess is that, despite some concerns, the legislature still recognizes the economic value that data centers have brought Northern Virginia, and don’t want to hamper the opportunity for other parts of the state to attract these projects as well. It’s likely that their focus will be on increasing transparency and perhaps energy standards rather than tackling the tax question in a big way this year, but interested parties should still keep a careful eye on the Commonwealth. We will have clarity on which way Virginia is going to move soon. There’s an upcoming crossover deadline on February 18th, and the session is scheduled to adjourn on March 14th.

Nationwide State Legislative Activity on Data Center Tax Policy

A few other tax bills that are important to watch in this space include SD SB 135, introduced by Senate President Pro Tem Karr (R) which prohibits the state from authorizing any tax incentives to data centers, as well as other restrictions on energy costs and water consumption. Similarly, Georgia SB 410 would repeal the sales tax exemption for data centers (sponsored by Senator Brass (R)). And Maryland HB 560, introduced by Ways & Means member Del. Palakovich Karr (D) which would repeal existing incentives. While bills repealing or limiting exemptions are most notable, a number of proposals would expand or create new incentives, including in Colorado, New Mexico, and Washington.

Upcoming Legislative Hearings on Data Center Incentives

If you want to hear what legislators are saying about this issue, there are several scheduled hearings in the next few weeks. These upcoming hearings may offer early insight into how serious states are about re-evaluating their incentives.

• NH HB 1739, which, in part, would create new incentives for large-scale data centers: February 3rd
• NE LB 1131, which would eliminate the personal property tax exemption for data centers: February 4th

Track State Data Center Policy

Last year, states considered hundreds of data center bills, and we expect activity to continue growing in 2026. To stay on top of this rapidly evolving landscape, we've launched MultiState Policy Watch: Data Centers – a subscription featuring legislative analysis, trend summaries, and expert insights across energy, tax, water, zoning, and other policy areas impacting data centers. Sign up here.