State governors and legislatures across the US, once eager to attract data centers, are now moving to cancel sales tax exemptions. This shift could add billions of dollars to the cost of each gigawatt-scale AI project, with equipment procurement expenses potentially rising by over 7%. Analysis from the National Conference of State Legislatures (NCSL), a research and industry group for state lawmakers, and The Information shows that this policy pivot has accelerated significantly this summer, though it has not garnered widespread attention. Four states have already scaled back or paused data center tax incentives, while lawmakers in nine other states are considering bills to repeal related benefits.

The driving force is clear: bipartisan governors and legislators are responding to criticism that, during the initial frenzy of computing capacity construction, states offered overly generous incentives to attract tech giants like Microsoft, Google, Meta, Amazon, and Oracle. Officials now claim that these tax breaks have led to a loss of local revenue and that such policies may no longer be necessary to lure businesses. Some states are not entirely abolishing all tax incentives but are instead raising the bar for tech companies to qualify for exemptions. For example, they may require companies to commit to creating a certain number of jobs or to fund complementary public infrastructure. Meanwhile, local city and county governments can still set similar conditions and offer property tax reductions to attract investment.

The cancellation of tax benefits is just one of many factors driving up the cost of AI data centers. Tech companies are now facing electricity costs that far exceed expectations, while also needing to invest in supporting infrastructure like water supply and transmission lines. In several states, companies must also purchase new equipment to meet power regulator requirements, preventing data centers from overloading the grid or causing equipment damage. These rising costs are continuously squeezing the profit margins of tech companies and data center operators. Recently, this cost pressure has begun to affect debt financing terms for some data center projects.

The elimination of sales tax exemptions on chip and server purchases will be particularly impactful for the tech industry. Companies previously relied on these tax benefits to make projects commercially viable. Many projects, such as Meta's planned multi-gigawatt computing campus in Louisiana, were hesitant to finalize investments until the state government introduced such tax exemptions. The core reason is that IT hardware is the single largest expenditure for an AI data center; operators typically need to update chip equipment every five years or so. As previously reported, a gigawatt-scale computing campus involves approximately $40 billion in IT equipment investment, with land, buildings, non-IT equipment, and backup power infrastructure totaling about $19 billion (backup power can supplement or replace public grid supply). A one-gigawatt power supply can meet the electricity needs of a medium-sized city like Denver. For example, if a state imposes a 7% sales tax, the tax on a $40 billion equipment investment for a gigawatt project would add nearly $3 billion, raising the total cost to about $43 billion.

Texas faces the most significant policy change risk. Data from JLL forecasts that by 2030, Texas's computing capacity will surpass Virginia's, making it the world's largest data center market. Last year, Texas Governor Greg Abbott attended a groundbreaking ceremony with Google CEO Sundar Pichai. However, in June of this year, Abbott suddenly proposed to the state legislature that the next session should repeal the data center sales tax exemption, along with other outdated and unnecessary incentives. The stakes are high: the Lone Star State already has tens of gigawatts of AI computing campuses under construction or announced, and grid operators have received hundreds of gigawatts of new power connection applications. Dan Diorio, Senior Vice President of State Policy and Government Affairs at the Data Center Coalition (DCC), a trade group representing leading tech companies and data center operators, recently rushed to a hearing in Austin to try to preserve the tax benefit, which has been in place since 2013. The state legislature will reconvene in 2027 to deliberate the issue. Diorio stated, "If the incentive policy is suddenly canceled, the entire business plan for a company will be thrown into uncertainty."

Other states are following suit. Washington state, home to Amazon and Microsoft, ended the sales and use tax exemption for data center equipment upgrades and renovations last month, despite industry opposition. The state government estimates this change will generate $207 million in new tax revenue by 2029. Arizona announced a three-year moratorium on its data center sales tax exemption last month. A growing number of voters hold a one-sided view that AI data centers harm local economies, labor interests, and water resources. Objectively, it is difficult to argue that tech companies deserve special tax treatment different from ordinary businesses. On the other hand, if regions like Texas already have advantages in terms of a market-driven regulatory environment, companies may still continue to set up operations even if tax policies change. Diorio stated that the industry is "willing to negotiate with state legislatures to add conditions," linking tax benefits to performance metrics like job creation and local investment. He noted that 40 states already provide tax exemptions for manufacturing capital equipment purchases, and AI data centers should receive the same treatment. A study commissioned by the coalition from PwC and an independent report from the Virginia state legislature's audit agency both show that the direct and indirect tax revenue and economic benefits generated by data centers outweigh the local sales tax revenue forgone. Objectively, there is also a large body of case studies and quantitative data supporting this view.

Considering the significant economic stimulus, centrist Democratic Virginia Governor Abigail Spanberger and the state legislature did not directly abolish the data center sales tax exemption. Instead, they reached a compromise: a new tax specifically on electricity consumption. Diorio revealed that after the new rules take effect, data centers across the country will face a combined annual tax increase of about $600 million. If the exemption were directly canceled, the total sales tax burden on companies would exceed $1 billion. In Louisiana, Meta plans to invest $50 billion to build a data center cluster that can scale up to 5 gigawatts. Governor Jeff Landry signed an executive order in June stating that companies must fully bear the cost of their own power-related infrastructure to continue enjoying tax benefits. The order aims to push power regulators to implement a plan that prevents ordinary residents from bearing the supporting costs brought by data centers. Nicholas Miller, a policy researcher at the National Conference of State Legislatures, predicts that more states will follow Louisiana's lead by setting conditions that companies must meet to qualify for tax exemptions. Using the repeal of existing incentives as a bargaining chip "is one of the tools states have to negotiate for better terms from projects." He believes the core of the negotiation is not about blocking projects but "weighing the pros and cons to ensure local communities receive a fair return." In contrast, a more stringent option is to directly suspend approvals for new data centers, as New York state has just done. The industry may have to passively accept some of these tax policy adjustments. For the giants, a difference of several billion dollars is not an unbearable cost.