Data centers dominated 2026 session – lawmakers answered with 3-year tax incentive pause
The Arizona Legislature and Gov. Katie Hobbs enacted a three-year moratorium on state sales tax exemptions for data center operators, effective until 2029. This policy shift followed significant public backlash against proposed data center projects and extensive discussions during the 2026 legislative session concerning the industry's energy and water demands. Lawmakers aim to further examine related policies, including new reporting requirements for utilities connecting data centers to the grid.
Arizona’s 2026 legislative session was dominated by discussions surrounding the state’s burgeoning data center industry, culminating in a significant policy change. Governor Katie Hobbs and Republican legislative leaders negotiated a state budget that instituted a three-year moratorium on Arizona’s sales tax exemption for data center operators, which will lift in 2029 unless further action is taken. This move comes after intense public pushback in 2025 against proposed data center projects in cities like Tucson, Chandler, and Marana.
Gov. Hobbs highlighted that Arizona, ranking seventh nationally for data centers, has seen its tax incentives achieve their goal, but believes the pause is necessary to examine current policies. While data center proponents, like Dan Diorio of the Data Center Coalition, expressed disappointment and concern about investor uncertainty, Hobbs maintains the pause will allow for policy evaluation without a blanket moratorium on data center development itself, suggesting that data centers are suitable for locations where they don't overtax utilities or groundwater.
Beyond the tax incentive pause, Hobbs also signed a bill imposing new reporting requirements on utility companies that connect data centers to Arizona’s electrical grid. She also vetoed a bill related to an attempt to refer a Marana data center proposal to the ballot. Future legislative efforts are expected to address data center water usage and prevent residential utility ratepayers from bearing the costs of providing electricity to these facilities. However, the Arizona Corporation Commission, currently with an all-Republican supermajority, holds exclusive constitutional authority over utility rates, limiting direct legislative action on energy costs for large load users. Senate Minority Leader Priya Sundareshan plans to reintroduce a bill aimed at ensuring large load customers, including data centers, pay their fair share of energy costs.