State leaders who once courted data centers as economic engines are now reversing tax deals worth billions, with Ohio's AI-era exemption topping $1.5 billion in 2025 and reshaping hyperscaler build decisions.
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States Curb Data-Center Tax Breaks as Ohio Bill Hits $1.5 Billion
More than 10 states have paused or canceled data-center tax exemptions worth billions, as Ohio's AI-era break ballooned past $1.5 billion and triggered a voter backlash that is reshaping where hyperscalers build.
"They seem to have more money than God and they're able to build without the need for these types of incentives," said Tristan Rader, a Democratic state representative from Cleveland who is proposing new data-center taxes and requirements that developers pay more for power and electrical infrastructure.
Ohio's sales-tax exemption on servers and construction materials reached nearly $1.57 billion in forgone state revenue in 2025, more than 10 times the original estimate, with local exemptions adding $446.3 million, according to the Ohio Department of Taxation. Republican Gov. Mike DeWine paused new applications in May after Signal Ohio reported the scale. New Jersey canceled the remaining $250 million of a half-billion-dollar credit last month after a 35-4 senate vote, reversing its unanimous 2024 approval. Virginia, home to the most data centers, passed a tax on electricity consumed by operators while keeping its equipment sales-tax exemption.
The reversals could push future projects to states such as Indiana, West Virginia and Wyoming that have kept favorable tax regimes, industry executives and advisers said, potentially shifting billions in capital deployment for Amazon.com, Meta Platforms and Alphabet's Google even as the federal tax code turns more generous.
The sales-tax treatment is a crucial piece of financing because the computer chips and servers inside the facilities represent a large share of project costs and get replaced every few years. Avoiding a tax that often runs 6 percent or 7 percent on hundreds of millions or billions of dollars of equipment helps determine where a data center goes, executives said. Ohio made itself unusually attractive: its effective tax rate on data centers was 1.2 percent as of the end of 2025, the lowest of 15 states analyzed by EY's Quantitative Economics and Statistics team, versus 16.9 percent in California.
The exemptions resemble, in some respects, the treatment of manufacturers' purchases of factory inputs, designed to prevent cascading layers of the same tax on the same product. Many include job-creation and investment targets, and local governments have added property-tax abatements that in the long run can generate revenue for schools and police departments. Amazon said it has invested nearly $40 billion in Ohio data centers since 2015, creating thousands of jobs, and paid almost $11 million in state property taxes and fees last year. Meta and Google declined to comment, as did DeWine's office.
The political calculus shifted as the AI boom supersized the incentives. A decade ago, when states such as Ohio passed the provisions, data centers were a fraction of their current size and used mainly for websites and streaming. The frenzy after ChatGPT's launch in late 2022 and hundreds of billions of dollars of tech investment made the exemptions far more lucrative, catching states off guard. "It definitely happened in hyperspeed because of hyperscaling," said Tim Schram, who specializes in state and local taxes at accounting firm BDO.
The backlash has become an election issue. A city council member in Independence, Missouri, John Perkins, was voted out after he approved billions in tax incentives for a data center, and candidates are watching the dynamic ahead of November's elections. President Trump has urged voters to welcome the facilities, saying Friday that states and towns wanting to "get rich" and "create tremendous wealth" should approve data centers, while those preferring "poverty, crime, and squalor" should not. Recent polls show Americans overwhelmingly do not want data centers near them.
The federal response is split. Last year's Republican tax law restored immediate deductions for equipment purchases that would otherwise be depreciated, and future centers may use the Opportunity Zone program, which will soon offer enhanced breaks for certain rural investments. But Sen. Bernie Moreno, an Ohio Republican, plans to propose a federal tax equal to 100 percent of any state or local data-center incentive, effectively wiping out the benefit. Congress weighed a similar anti-subsidy approach in 1997, when Minnesota Democrat David Minge introduced the Distorting Subsidies Limitation Act, and again in 1999; neither advanced past the House Ways and Means Committee.
"Our industry has been knocked on our backfoot," said Steve DelBianco, chief executive of NetChoice, a tech-industry group that fights regulation, who has warned state officials that eliminating incentives would hurt their economies. Ian Boccaccio of tax firm Ryan, who is urging data-center clients to consider other state investment tax breaks, called the opposition "a passing fad" and predicted the issues would fade within two years. Industry watchers said the facilities offer too many benefits for governments to pass them up in the long run.
This article is for informational purposes only and does not constitute investment advice.
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