Why U.S. States Are Reconsidering Data Center Incentives: Navigating Shifting Policies and Sustainability Expectations

As the digital economy grows—fueled by Artificial Intelligence (AI), cloud computing, and business tech upgrades—data centers are now seen as essential infrastructure. In response, many U.S. states have competed aggressively to attract these facilities through tax exemptions, abatements, and regulatory flexibility. However, rising concerns about energy use, resource strain, and local community impact are prompting states to revise how they offer and assess incentives. Companies seeking to grow must understand these changes to avoid long-term risks and comply with regulations.

Rising demands and growing concerns

Hyperscale and AI-focused data centers require significant utility resources, particularly power and water. As facility demands grow, state and local governments are encountering new challenges:

• Energy Strain: Heavy electricity consumption raises concerns about grid stability, costs, and environmental impact.
• Water Use: Cooling systems that use water are under scrutiny, especially in drought-prone areas, leading to stricter reviews and limits.
• Land and Community Impact: Local opposition is growing due to rezoning issues, noise from generators, and limited economic benefits for the community.
• Few Long-Term Jobs: Despite big investments, data centers create relatively few permanent jobs, raising concerns about the value of public incentives.
• Calls for Transparency: Lawmakers and advocacy groups are demanding clearer evaluations of public costs versus private gains, which can cause delays or changes in incentive programs.

States reassessing incentive structures

Several major states are reexamining their incentive programs to address sustainability, fairness, and infrastructure issues.

Georgia

Georgia has long attracted major data center projects from companies like Microsoft, Meta, and Google. In 2024, lawmakers proposed pausing new sales tax breaks for data centers to evaluate their environmental and utility impact. Although the governor vetoed the bill to maintain investment flow, it reflects a shift toward more cautious and conditional incentive policies. 

In 2025, the state’s focus shifted to utility cost allocation, particularly through Senate Bill 34, which aimed to make data centers pay for their grid impacts (although the bill stalled).

South Carolina

Major data center operators continue to invest in South Carolina, thanks in part to tax-friendly policies. But growing concerns about energy use and low job creation have prompted lawmakers to propose reviewing who gets these incentives. No regulatory changes have been passed yet, but investors should take note of the state’s shifting tone.

Texas

Texas continues to attract major data center projects thanks to its deregulated energy market and strong tax incentives. Crusoe’s $3.5 billion facility in Abilene shows the scale of investment. In 2025, the state passed Senate Bill 6, adding transmission fees and emergency shutoff rules for large power users to help protect the grid during peak demand. These changes could impact future project costs and planning.

Virginia

As the global leader in data center concentration, particularly in Loudoun County, Virginia, offers attractive tax exemptions and infrastructure support. However, growing public concern around grid stress and environmental impact has led to a state-sponsored study evaluating how data center growth affects power costs and infrastructure. Companies operating or expanding in the state should anticipate greater policy clarity and possibly stricter environmental performance metrics in the coming years.

States enhancing or expanding incentives

While some states are reassessing their approach to data center incentives, others are strengthening or broadening theirs to remain competitive in the growing AI and cloud infrastructure sectors. Kansas and Michigan are two examples of states taking proactive steps:

Kansas

Senate Bill 98, which took effect on July 1, 2025, offers a 20-year sales tax exemption for data centers that invest at least $250 million, create 20 or more jobs, and meet specified infrastructure and environmental standards.

Michigan

Senate Bill 237, enacted on December 30, 2024, significantly extends and broadens tax exemptions for data center equipment. It prolongs sales and use tax exemptions for qualified data centers through December 31, 2050, and introduces similar incentives for enterprise data centers that meet defined investment and job creation thresholds. Furthermore, data centers located on brownfield redevelopment sites or former power plant locations are eligible for exemptions through December 31, 2065. This legislation aims to spur data center development, drive economic growth, and enhance Michigan’s technological infrastructure.

Strategic tips for data center operators and investors

If you’re planning new data centers or choosing locations, keep these tips in mind:

• Changing Policies: Incentives may become more conditional and tied to sustainability or infrastructure contributions, resulting in increased rules and uncertainty.
• Community Relations: Engaging with local communities and showing clear public benefits can reduce opposition and increase the success of your projects.
• Infrastructure Costs: More states are requiring operators to pay for infrastructure, particularly in the energy sector. It’s important to check grid capacity and future regulations before investing.

Conclusion

The U.S. data center incentive landscape is evolving rapidly, with states placing greater emphasis on sustainability, community impact, and infrastructure costs. Companies that proactively align their growth strategies with these priorities will be better positioned to secure incentives and maintain strong community support. At SSG, we specialize in helping organizations navigate this complex and shifting environment. From identifying the right incentive programs to negotiating terms and managing regulatory challenges, our team provides expert guidance to ensure your projects meet evolving policy requirements and maximize value.