13 states scrap data center tax breaks, raising AI costs $3B/GW

Four US states have cancelled or suspended data center tax incentives since June, adding roughly $3 billion to equipment costs for each gigawatt of AI capacity built.

"If these incentives suddenly disappear, your entire business plan gets disrupted," said Dan Diorio, executive vice president at the Data Center Coalition, which has lobbied to preserve Texas's sales tax exemption.

At a 7 percent state sales tax rate, IT equipment — the largest capital expenditure for data centers — for a single 1GW AI facility rises from roughly $40 billion to $43 billion. Since servers and AI chips typically require refresh every five years, the sales tax compounds future operating and expansion costs. Washington state eliminated its equipment refresh exemption, projected to add $207 million in revenue by 2029; Arizona suspended its exemption for three years; Virginia imposed an electricity excise tax estimated at $600 million annually for the industry.

The rollback introduces a new variable into AI infrastructure economics, joining power supply, transmission capacity, and water access as factors shaping site selection and investment returns. Texas — projected by JLL to surpass Virginia as the world's largest data center market by 2030 — is the key battleground, with its legislature set to reconsider the exemption in 2027.

Texas Emerges as the Key Test Case

Texas Governor Greg Abbott in June directed the state legislature to study eliminating the data center sales tax exemption and other "outdated or unnecessary" incentives. The state already has dozens of gigawatts of AI campus capacity under construction or announced, with interconnection requests from data centers totaling hundreds of gigawatts. The Data Center Coalition's Diorio traveled to Austin for hearings to defend the exemption, which has been in place since 2013.

The stakes are high for both sides. Texas's data center power capacity is projected to exceed Virginia's by 2030, according to JLL, making it the world's largest market. But state officials increasingly view the incentives as a revenue drain, particularly as AI investment has surged without any sign of companies pulling back. The political calculus has shifted as well: voters across party lines have begun questioning whether large data centers deliver enough jobs and local economic benefit to justify tax breaks, a sentiment that has turned the issue into a rare bipartisan priority.

States Recalculate the Subsidy Math

Louisiana took a different approach, raising the bar for qualification rather than eliminating the exemption outright. Governor Jeff Landry now requires data center operators to cover all new electricity demand themselves to retain tax benefits — a condition that directly affects Meta's planned 5GW facility in the state.

Virginia, home to the world's largest data center cluster, opted for a compromise: it kept the sales tax exemption but added an electricity excise tax. Diorio estimates this adds roughly $600 million annually to industry costs, compared with more than $1 billion per year if the sales tax exemption had been removed entirely.

The industry argues it deserves treatment comparable to manufacturing. Forty states already exempt capital equipment used in manufacturing from sales tax, and the Data Center Coalition commissioned a PwC study — alongside an independent Virginia legislative audit — concluding that data centers generate more in tax revenue and economic benefits than the sales tax revenue foregone.

Nicholas Miller, a policy researcher at the National Conference of State Legislatures, expects more states to follow Louisiana's model: keeping incentives but attaching conditions such as job creation and local investment requirements. New York has already taken a harder line, passing a moratorium on new data center development.

For Microsoft, Google, Meta, Amazon, and Oracle — companies racing to build AI infrastructure — tax policy has become a new cost variable alongside power, transmission, and water. The shift could slow capacity buildout, pressure capital expenditure budgets, and reshape where the next wave of AI data centers gets built. With Texas's legislature set to revisit the issue in 2027, the industry faces a multi-year window of uncertainty over the fiscal terms of its largest expansion in history.

This article is for informational purposes only and does not constitute investment advice.