The political backlash over data centers is making its way to state and municipal tax policy. Last week, Ohio suspended its tax breaks for data center development, and lawmakers in other states are considering proposals to follow suit.
Illinois’ tax breaks for data centers started in 2019, and a report in 2024 found that over its lifetime, the policy had granted $983 million in tax benefits for 27 data center projects.
“This is one of the most heavily subsidized industries in the world right now,” said Anthony Elmo, who researches state tax policy with the nonprofit corporate watchdog group Good Jobs First. “We fundamentally do not believe that they need a single dollar of taxpayer money to site a data center.”
Illinois ultimately wrapped up its legislative session without taking action on data centers. But the newfound scrutiny from lawmakers reflects a growing movement against tax policies that are causing states to lose out on billions in potential revenue.
Opposition to data centers is growing as frustrated residents pack public meetings across the country to voice opposition to proposed facilities in their area. Both Republicans and Democrats are increasingly skeptical of data center development projects and their potential impact on water and energy resources, as well as how projects could change specific local areas. The political backlash is making tax breaks — once thought of as smart economic development policy — a target for reform and repeal.
Fallout in Ohio
Ohio has a sales tax exemption for data centers to purchase equipment such as computer chips and servers.
Ohio Gov. Mike Dewine suspended the tax break last week in response to reporting from Signal Ohio that the policy cost $1.6 billion in 2025 —11 times more than the $136 million originally estimated.
Dewine continued to tout the economic benefits of data centers, including $27.2 billion in capital investments that he said are coming to Ohio from projects that benefitted from tax breaks in 2025. However, with the Ohio General Assembly taking up a study of data centers, Dwine said, “I believe it is appropriate for the Ohio Tax Credit Authority to pause its consideration of new data center tax exemptions while the full impact of data center growth in Ohio is being reviewed,” in a press release.
Before the pause went into effect, two more data center projects were approved for tax breaks, according to Signal Ohio.
In response, the Data Center Coalition, an industry group, told Axios that the “uncertainty and unpredictability” in Ohio could put the state at a “competitive disadvantage.”
What’s the national picture?
For several years, tax incentives for data centers flew largely under the radar.
In total, 38 states have some form of tax break or incentive for data center development, according to the National Conference of State Legislatures. The policies cross a range of possible revenue streams such as exemptions from sales and use tax or local property tax abatements. The sales tax exemptions can cover IT equipment, construction materials and even the electricity needed to keep computers running.
Most policies date back to the 2010s, when demand for cloud computing power drove relatively moderate growth in data centers that keep the internet running smoothly. But the scale of data center development has ballooned with the advent of artificial intelligence.
Electricity demand forecasts show how fast the industry is expanding. In 2025, about 40 gigawatts-worth of data centers were connected to the power grid — enough to consume the power produced by 20 Hoover Dams. By 2035, the electricity demand from data centers is expected to increase to 106 gigawatts — more than double the demand of California’s power grid — according to a December report from Bloomberg NEF.
The Data Center Coalition said sales and use tax exemptions are a “critical factor for the data center industry in considering markets to locate and expand,” on its website.
Tax break blowback
The explosion of data centers is causing a large divide between how much foregone tax revenue was expected from tax breaks and the reality. Ohio is only one example.
In Texas, the cost of sales tax exemption for data centers was estimated at $14.6 million in the state’s 2014-15 biennial budget. In the 2028-29 biennium, it’s estimated at $3.3 billion, according to the Texas Senate Finance Committee.
In Georgia, tax breaks initially estimated to cost $327 million have grown by more than seven times, reaching $2.5 billion for fiscal year 2026.
The total value of data center tax breaks is difficult to estimate, Elmo said, because about 15 states do not make the data publicly available. He told Straight Arrow that the total is well into the tens of billions each year, possibly as high as $90 billion, but it’s impossible to know without public disclosure.
Elmo, whose formal title is Public Education Defender, said the tax policies come at the cost of taxpayers as a whole and affect the quality of public services, such as education.
“We should incentivize other types of businesses, small, medium-sized businesses. You get a better return on that than incentivizing a data center,” Elmo said.
What’s next for Illinois?
Illinois lawmakers had plans for comprehensive regulation of artificial intelligence aimed at protecting electricity ratepayers through a law called the POWER Act. But the bill failed to pass before the legislative session expired on May 31.
Back in February, Illinois Gov. JB Pritzker proposed pausing the state’s data center tax abatements for two years, but he left it to the state legislature to approve that in the final budget.
“The last thing we should be doing is handing out tax breaks and incentives to these profitable corporations,” said state Rep. Robyn Gabel, D-Evanston, during a rally on Saturday, according to Capitol News Illinois.
The legislature did not pass a suspension of tax breaks, drawing criticism from advocacy groups.
“House and Senate leadership is woefully out of touch with the affordability concerns of Illinoisans who are demanding to see Big Tech pay their fair share,” the Illinois Clean Jobs Coalition said in a press release.
The POWER Act, however, still has a chance to pass in the future. Negotiations are expected to continue through the summer with the goal of reintroducing legislation in the fall.
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