U.S. states pause data-centre tax breaks as AI boom drives up public costs

U.S. states that spent years offering tax incentives to attract data-centre investment are beginning to reconsider the deals as the artificial intelligence boom pushes the cost of the incentives far beyond earlier projections.

Ohio, New Jersey and other states have moved to pause, reduce or reconsider tax breaks for data-centre operators, amid growing concerns about lost public revenue and the demands the facilities place on electricity grids and local communities.

The shift was highlighted in a report by The Wall Street Journal, which found that the rapid expansion of AI has dramatically increased the value of tax incentives originally introduced when data centres were much smaller.

In Ohio, the state’s data-centre sales-tax exemption cost more than $1.5 billion in foregone revenue in 2025, according to state data cited by the Journal. That was more than 10 times the state’s original estimate of about $136 million.

The scale of the cost triggered political backlash in the state. Republican Governor Mike DeWine in May directed the Ohio Tax Credit Authority to pause consideration of new data-centre tax exemption requests while lawmakers examine the economic and other effects of the rapidly expanding industry. The pause does not cancel exemptions already approved for existing projects.

The Ohio case illustrates how quickly the economics of data-centre incentives have changed.

The state introduced the sales-tax exemption more than a decade ago to attract investment by allowing technology companies to avoid sales taxes on equipment such as computer servers.

The incentive helped make Ohio an important destination for data-centre investment.

But the emergence of generative AI has dramatically increased the scale of computing infrastructure being built. Companies including Amazon, Meta and Google’s parent company Alphabet have secured incentives for data-centre projects, while the amount of equipment covered by the tax exemption has grown sharply.

The result has forced states to reconsider whether the economic benefits of attracting data centres justify the revenue they give up.

From tax incentives to public costs

The debate is no longer only about tax revenue. Large data centres require substantial amounts of electricity and can create new demands for power generation, transmission infrastructure and water for cooling.

In Ohio, lawmakers are examining the industry’s effects on the electricity grid, utility rates, the environment and local economies. Environmental and consumer advocates have argued that the state should ensure data-centre developers bear more of the costs created by their operations.

The scale of the subsidy has also raised questions about whether the jobs created by data centres justify the public revenue being forgone.

Ohio’s 2025 exemption cost the state more than $1.5 billion, while the original estimate for that year was $135.8 million. The state also lost local sales-tax revenue from the exemption.

Ohio is not the only state reassessing its policy. New Jersey recently cancelled the remaining $250 million of a data-centre tax-credit programme that had been approved in 2024. The move came after lawmakers reversed course on a programme that had initially received unanimous support in the state Senate.

Other states are taking different approaches. Virginia, which has the largest number of data centres in the US, has retained its sales-tax exemption for data-centre equipment but has introduced a tax on electricity consumed by data-centre operators.

The approach reflects a broader attempt to shift some of the infrastructure costs of the AI boom back to the companies benefiting from it.

The AI infrastructure question

The backlash does not necessarily mean states are abandoning data centres. The facilities can bring billions of dollars in investment and generate economic activity. That remains a powerful incentive for governments seeking to attract technology companies.

But the rapid expansion of AI has changed the calculation. Tax incentives designed when data centres were relatively modest facilities are now being applied to enormous campuses requiring vast amounts of computing equipment and electricity.

That has created a new policy question for governments: how much public revenue should be sacrificed to attract an industry whose infrastructure requirements are themselves becoming a significant public cost?

The answer could have implications beyond the US. As countries compete to attract cloud-computing infrastructure and AI investment, governments elsewhere may also be tempted to offer tax holidays, subsidised power or other incentives to technology companies.