Adam N. Michel
The AI boom and resulting data center backlash are taking several forms. One dimension is the growing concern over subsidies. The latest estimates from Good Jobs First show that data center tax exemptions in Georgia, Texas, Virginia, and Ohio could reduce revenue by more than $1 billion a year in each state. The National Conference of State Legislatures counts 38 states with data center tax incentives.
But not every deviation from the revenue-maximizing tax base is created equal.
Data centers should be treated like every other industry. Government policy should neither penalize nor favor specific sectors or types of investment. However, as is the case with tax expenditure analysis more generally, the term “tax subsidy” often describes two fundamentally different things.
The first is neutral treatment of economic activity that would otherwise be penalized by poorly designed taxes. Sales taxes are meant to fall on the price of your monthly streaming subscription, not the servers and electricity that help deliver the video. Exempting data center equipment, manufacturing equipment, or any other business input isn’t a subsidy. It simply stops the state from taxing your monthly subscription twice, once in production and again at the final sale. Any industry-specific carve-out should be expanded to other industries, not repealed.
The second is a genuine privilege that unduly narrows an existing and correctly scoped tax base and is often granted on a discretionary basis to specific firms or activities. If a county cuts a single data center’s property tax bill in half for a decade, it is implicitly subsidizing that business relative to the warehouse down the road that pays in full.
This distinction is not always clear or self-evident, but it matters because the largest dollar figures in the data center subsidy debate fall into the first category, which looks more like neutral treatment than subsidy. The billion-dollar numbers from Good Jobs First are almost entirely sales and use tax exemptions for data center business inputs that a well-designed sales tax should not tax in the first place. The size of the true subsidies is not regularly reported by states and takes the form of negotiated property tax abatements, tax credits, and other firm-specific incentives.
This creates a strange asymmetry in the data center subsidy debate. Policy change is focused on the wrong, but easiest to measure, tax provisions. To help policymakers remedy this distortion, what follows is a brief taxonomy of data center tax policies and what to do about them.
Tax Breaks That Aren’t Subsidies
Many of the policies commonly counted as data center subsidies are either neutral tax treatment or broader tax reforms that should be expanded to other industries. These include sales tax exemptions, personal property tax exemptions, and first-year expensing.
Sales tax exemptions
Sales taxes should fall on the final consumption of all goods and services. To do this, they should exempt business inputs that are upstream of the end consumer. Without these exemptions, the tax becomes an uneven levy on business investment and other inputs rather than only on consumption.
No state sales tax perfectly captures only final consumption, but many move piecemeal in this direction. Most states exempt manufacturing machinery from their sales tax because machinery is used to produce other goods; taxing both the machine and what it produces would add two or more layers of tax on the same end product.
The same principle applies to data centers. Sales taxes should exempt servers and electricity used to produce digital services, which is why all but 11 states provide some form of exemption for data center equipment from their sales tax. However, the National Taxpayers Union shows that data center exemptions are less favorable than what manufacturers receive in 39 states.
For data centers, these sales tax exemptions are particularly important because the industry is extraordinarily capital-intensive. The Tax Foundation’s Jared Walczak estimates that a model $1 billion data center in Santa Clara County, California—where its inputs face sales taxes—would pay $72.7 million in machinery and equipment sales taxes in its first year alone. That multimillion-dollar sales tax bill is then built into the price of the service the data center provides.
The problem is that states often reach the correct tax treatment with unnecessary complexity. Rather than exempting business inputs as a rule, they create industry-specific exemptions tied to investment, employment, square footage, or other requirements.
It is not a subsidy to exempt data center inputs, including servers, machinery, and electricity used in production, from the sales tax base. It is the proper treatment of business inputs. States should drop the conditions and broaden access to all industries.
Personal property taxes
Tangible personal property taxes, when applied to businesses, are annual taxes on the value of a firm’s machinery, equipment, and other capital. The design of these taxes varies by state. But where the taxes exist without exemptions, they tend to fall heavily on capital-intensive industries such as data centers and manufacturing.
Under tangible personal property taxes, a data center owner pays tax on a server rack every year it owns one. The tax adds a burden to relatively mobile business investment that other inputs, such as labor, don’t face. It is also administratively complex, requiring depreciation rules to value assets every year as they lose value quickly. This is why personal property taxes make up a shrinking share of property tax revenue. In 2025, 15 states exempted all or most tangible personal property from tax, and 12 imposed the tax but offered de minimis exemptions. Four states offer a statewide, data center–specific personal property exemption; several more authorize local exemptions.
Exempting personal property doesn’t narrow the ideal tax base. Real property (land and buildings) is what should be included in a property tax. States should expand personal property tax exemptions and ultimately repeal the tax.
100 percent bonus depreciation
Full expensing, also called 100 percent bonus depreciation, has been described as a subsidy to data centers. Sens. Ron Wyden (D‑OR) and Mark Warner (D‑VA) have each proposed denying federal 100 percent bonus depreciation for new data center machinery and equipment. Many states conform to the federal rules.
Full expensing is a widely available feature of the tax code, which was made permanent in 2025 for short-lived assets (tools, machinery, and equipment). Under these equal-treatment rules, businesses can immediately deduct both wages and most investments. A dollar deducted in five years is worth less than a dollar deducted today, so without immediate deductions, the tax code makes investments in new servers more costly. Without immediate write-offs, investments that must be deducted over years incur higher after-tax costs than other business inputs, such as labor.
Expensing is particularly important to data centers because they invest large sums in qualifying equipment. But benefiting more from a neutral rule because a business invests more does not make the rule a subsidy.
The Real Subsidies to Repeal
States and the federal government do provide true subsidies to data centers. These items include real property tax abatements, tax credits, and rebates. These are often harder to catalog because they can be discretionary and firm-specific.
Property tax abatements
The relevant question, as with sales taxes, is what the ideal tax base should include. Historically, property taxes were understood broadly to include real, tangible, and intangible property. The more economically neutral tax base is the narrower definition of real property (land and buildings). Thus, exempting tangible personal property from this base is economically distinct from exempting certain land or buildings from property taxes. Selectively reducing the real property tax owed by a particular firm or industry changes its tax burden relative to competing uses of the same property. If a jurisdiction is going to have a property tax, it should be limited to real property and applied evenly to all taxpayers.
Only three states offer statewide real property tax breaks for data centers. In Connecticut and Montana, it is written for data centers. Oklahoma’s is a general manufacturing exemption, extended by statute to computer services and data processing.
However, local governments all across the country frequently negotiate firm-specific property tax abatements with companies choosing the location for new facilities. These local deals are often opaque and hard to track. Oregon is one notable exception. Analysis by Good Jobs First shows that hundreds of millions of dollars in property tax abatements flow to large technology companies, although the abatement program is not limited to data centers.
Most abatements are not unique to data centers, and it is unclear whether the industry receives more favorable treatment in general than other large capital-intensive projects. But that does not make them good policy. Firm-specific property tax abatements should be eliminated.
Tax credits and rebates
Tax credits and cash rebates are straightforward subsidies. They reduce firms’ tax liability—or provide direct payments—based on where the firm is located, how many workers it hires, or how much it invests.
Illinois, for example, provides qualifying data centers with a tax credit for 20 percent of construction worker wages on projects in underserved areas. The Next New Jersey Program–AI includes $250 million in transferable investment tax credits for qualifying data centers and AI businesses. Data centers have also benefited from more generally available business investment credits, such as Utah’s Economic Development Tax Increment Financing and Nebraska’s ImagiNE Act. These states have all paused or begun reevaluating their programs in 2026.
At the federal level, CHIPS and Science Act subsidies are one step removed but deserve similar scrutiny. The grants, tax credits, and loans go primarily to semiconductor manufacturers rather than data centers themselves. But insofar as the subsidies reduce the costs of chips purchased by data centers, some of the benefit flows downstream to the AI industry. The federal government, for example, committed hundreds of millions of dollars to facilities for advanced memory chips widely used in AI systems. Similarly, data centers likely benefit from the remaining energy-generation tax credits for nuclear, geothermal, and coal to the extent that these credits lower energy prices.
These subsidies, whether they are directly targeted at data centers or more broadly available, should be repealed.
Repeal Subsidies to Treat Data Centers Like Every Other Business
Policy should neither help nor hurt data centers or the rapidly evolving AI industry.
Generally available policies, such as sales tax exemptions for business inputs, are not subsidies; rather, they move the tax code toward a more neutral tax base. If these provisions are targeted only at data centers, policymakers should expand access. Genuine subsidies, such as real property tax abatements and tax credits, should be eliminated.
Policymakers should eliminate genuine tax privileges without falling into the trap of well-intentioned subsidy reform that leads to new, inefficient taxes on investment. Data centers should be subject to the same neutral tax system as every other business.
