With increasing controversy about the placement and resource needs of data centers, the National Conference of State Legislatures has provided a timely April update about the 38 states that have tax incentives to encourage data center development within their borders.

The report provides substantial detail about a complex topic, noting that the US has 4,100 data centers currently, but that they differ in size and nature. It cites Virginia, Texas and California as the states with the greatest concentration of data centers, with Georgia and Illinois also mentioned as dominant players. As the use of artificial intelligence has greatly advanced, more new and proposed data centers are larger, with far greater energy and water demands than many of the past. As the report explains, “AI has supercharged the need for data centers and many of the large hyperscale data centers grabbing headlines are devoted to AI.” 

While the report explains that tax incentives play a role in data center attraction, other factors are also involved including the availability of land and labor, as well as the price and availability of electricity and “whether the region is prone to natural disasters.” 

The update provides substantial individual state data, including details about the different kinds of tax incentives, recent changes in policy and links to authorizing statutes and other relevant details, including varied state rules for qualifying for the incentives.

It also provides information about the different taxes that are affected by exemptions. Sales tax exemptions are used the most heavily, with multiple differences both in administration and rules. The report also points out that “sales tax exemption varies based on the state sales tax rate and the scope of goods exempted by the state.”

Property tax exemptions are less common, as they are more heavily the province of local governments, but 11 states do offer a state-wide property tax incentive. Some states, for example, Mississippi and Indiana, provide an authorization for municipalities to reduce data center property tax, but whether this occurs is up to the local government.

A major attraction of data centers in states, cities and counties is the increase in tax revenues, the belief they promote local economic growth and the creation of jobs.

Controversy over tax incentives arises because they cut into those revenues and in terms of the creation of jobs, that factor tends to be most significant during construction, but when in operation “data centers create far fewer permanent positions.”

Concerns about resource needs, the potential impact on residential utility rates and increased community resistance have spurred more attention to the efficacy of data center tax incentives and the report provides information on recent changes. For example, in summer 2025, Minnesota amended its policy to “remove the sales tax exemption that large data centers previously enjoyed for their electricity use. It also created a fee “for large-scale data centers to be levied annually based on energy use.”

In addition, “in early 2026, Illinois Gov. JB Pritzker called for a two-year pause of his state’s data center tax incentives, driven in part by cost concerns.” The report points out that “at least seven states – including Arizona, Connecticut, Georgia, Maryland, Pennsylvania and Washington – have considered bills to repeal their states’ tax incentives, often citing the high cost of incentives.”

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