State and Local Governments Are Reversing Course on AI Data Centers and Tax Breaks

The Dane County Board in Wisconsin is currently considering an 18-month moratorium on new hyperscale data centers, a move prompted by increasing concerns over taxpayer subsidies, high electricity demand, and limited long-term job creation. This proposed halt would specifically target data centers exceeding 5,000 servers or 10,000 square feet, affecting new zoning permits and site approvals within the county, including the state capital of Madison. The discussion highlights a growing sentiment among local governments that the benefits of data centers, particularly in terms of long-term employment, may not outweigh the associated risks and costs to communities.

This reconsideration in Wisconsin is part of a broader national trend where states and local governments are reevaluating incentives offered to the rapidly expanding AI-driven data center industry. John Stief, a reporter for The Center Square, explained that many jurisdictions are finding that the substantial tax breaks, particularly on electricity and sales tax, are far exceeding initial projections. For instance, Ohio Governor Mike DeWine recently paused new sales and use tax exemptions for data centers after the cost of these breaks was found to be ten times higher than anticipated, reaching $1.5 billion instead of $150 million. Similarly, Washington State and Minnesota have also begun to roll back some data center tax incentives.

Concerns extend beyond financial incentives to include significant strain on power grids and water supplies. One large data center project in Port Washington, Wisconsin, is projected to consume as much electricity as the entire city of Los Angeles. Residents in various localities, like those in Virginia's Hanover County, are voicing strong opposition. In Hanover County, the Board of Supervisors voted this week to reject a proposed 427-acre data center campus, which would have included five data center buildings and up to three substations, citing massive electricity demands and potential impacts on the eastern part of the county.

The rapid growth of AI infrastructure has created a dilemma for lawmakers who want to attract technological development but also protect taxpayer interests and local resources. The complexities of taxing data center operations, including electricity use, server purchases, and property taxes, remain largely unresolved, leading more communities to seek a pause in development to develop comprehensive long-term plans.