The Data Center Tax Break Rollback: What Buyers Need to Model

Run the numbers on a data center site-selection model and the sales-tax exemption is usually a fixed input — a known discount baked into the total cost of ownership for the next 15 to 20 years. That assumption just got a lot shakier. Georgia’s legislative auditors revised their estimate of what the state’s data center tax exemption will cost in forgone revenue for fiscal 2026 to roughly $2.5 billion — 664% above the prior projection of $327 million, according to the state’s own updated figures. Virginia, Ohio, Arizona, Illinois, Michigan and Pennsylvania are all, in different ways, freezing, studying, or actively trying to claw back the same kind of incentive that made their states attractive to build in. If you’re underwriting a multi-decade capacity decision on the assumption that today’s tax terms hold for the life of the asset, it’s time to stress-test that assumption.

The number that triggered the reckoning

Georgia is the clearest case study because the state did the math in public. An audit by the University of Georgia’s Carl Vinson Institute of Government found that in fiscal 2025, data centers generated about $41 million in state tax revenue while receiving roughly $474 million in exemptions — a net loss of $433 million in a single year, enough, the audit noted, to have funded nearly 8,000 public-sector jobs in education, healthcare, or public safety. The same audit concluded that 70% of data center projects would have located in Georgia even without the subsidy. Local sales tax exemptions account for $1.1 billion of the state’s projected $2.5 billion FY2026 loss, and the number is expected to climb toward $3 billion in fiscal 2027.

Virginia tells a similar story at a different scale. The exemption was created in 2008 with an annual cost projection of $1.54 million. It’s now running at roughly $1.6 billion a year — more than 100,000% above that original estimate — across a state that hosts over 600 data center facilities, about 13% of the world’s computing capacity, and a quarter of the country’s data center power draw, according to industry tracking cited in recent legislative debate. Virginia’s Senate pushed a budget that would have ended the exemption on January 1, 2027; the House version kept the current 2035 sunset but added clean-energy conditions. The two chambers were still reconciling the difference as of this spring, which is itself the point: the exemption you’re pricing into a deal today may not be the exemption that exists by the time your facility is operational.

Why state legislatures are turning on their own incentives

This isn’t ideological. The National Conference of State Legislatures counted lawmakers in two dozen of the 38 states that currently offer data center tax incentives proposing to repeal or substantially curtail them, with at least nine states — including Georgia, Michigan, and Pennsylvania — considering full repeal bills this year. The pressure comes from two directions at once. First, budgets: Pew Charitable Trusts found 40 states entering fiscal 2026 underperforming their own 15-year revenue trajectories, which makes a nine-figure exemption line item much harder to defend when the alternative is cutting a state agency’s budget. Second, ratepayers: the same communities absorbing new data center load are increasingly aware that the companies generating that load are also the ones not paying sales tax on the servers producing it, while residential electricity bills climb. Virginia’s State Corporation Commission ruling in January 2026 illustrates the connection directly — it created a dedicated data center rate class and added roughly $16 a month to a typical residential bill, while requiring data centers to pay at least 85% of contracted distribution and transmission demand starting in 2027. Power pricing and tax policy are moving in the same direction for the same political reason, which is a point we’ve covered in more depth in our look at large-load tariffs.

Who’s actually moving, state by state

The legislative picture is messier than “incentives are dying,” and buyers should read it that way rather than panicking into a single narrative. Arizona’s governor and legislature agreed to a budget deal pausing new data center tax exemptions for three years — new deals, not existing ones. Ohio’s governor paused hearing new exemption requests in May while a state commission studies the issue, alongside separate proposals for a permanent repeal, a moratorium on centers without their own power supply, and a new per-facility fee. Illinois suspended new exemption agreements after a repeal bill failed to pass. New York’s legislature passed a one-year moratorium on permits for new large-scale sites. Michigan’s 2024 exemption already carries conditions — higher electric rates than other industrial customers and a requirement to use municipal rather than groundwater — and a bipartisan group is still pushing to scrap it entirely. Pennsylvania and New Jersey are weighing prevailing-wage requirements as a condition of eligibility going forward, which raises the effective cost of qualifying rather than eliminating the break outright. Georgia’s full repeal attempt was rejected by Republican legislators even after the $2.5 billion number became public — the state’s Public Service Commission is instead pushing for contract terms that shield residential ratepayers, which is a materially different outcome than repeal. Across more than 30 states, over 300 bills touching data center tax treatment have been filed, but as of this spring none of the full-repeal efforts had actually passed.

That last point matters for how buyers should calibrate risk. The realistic base case isn’t that your exemption vanishes overnight — it’s a graduated phase-out, a tightened eligibility threshold, or a new conditional requirement (clean energy sourcing, prevailing wages, power self-sufficiency) attached mid-stream. That’s a meaningfully different underwriting problem than binary repeal, and it’s one that shows up in the contract terms you negotiate today, not just the incentive you’re quoted today.

What this means if you’re underwriting a site decision right now

A few concrete adjustments are worth making before the next capacity commitment goes to the investment committee. Don’t treat the headline exemption value as a fixed input — model it as a range that decays or tightens over the lease or ownership term, particularly in any state where a repeal or curtailment bill has already been filed, since that’s now the majority of states offering these breaks. Audit your actual eligibility against current thresholds rather than the thresholds that applied when the deal was pitched; Virginia’s exemption, for instance, requires a minimum $150 million investment and 50 jobs, and several states are actively discussing raising those bars or attaching new conditions like power self-generation or prevailing wages. Push for contract language that specifies who absorbs the cost if the underlying incentive law changes during the term — developer, landlord, or tenant — rather than discovering the answer in year six. And weigh geographic concentration risk: Virginia, Georgia, and Ohio are each now sites of active legislative fights over the exact incentive structure you’d be relying on, which is a different kind of risk than the power and water constraints that usually dominate site-selection conversations, even as those same states remain the deepest markets for power, fiber, and skilled labor.

The incentives aren’t disappearing wholesale, and the states most aggressively courting data center investment five years ago aren’t about to reverse course entirely — Georgia’s legislature just proved that by rejecting repeal even with a $2.5 billion price tag on the table. But the terms are visibly in motion in a way they weren’t two years ago, and a site-selection model that treats 2026’s tax terms as permanent is pricing a risk that state budget offices, auditors, and increasingly ratepayers have already flagged. The buyers who come out ahead will be the ones who priced that volatility into the deal rather than the ones who found out about it from a legislative floor vote.

For a structured way to pressure-test power, cost, and incentive assumptions before you sign, start with the TechInfraHub Data Center Buyer’s Toolkit.

Written by

Raajeev Ratra

Data Center Infrastructure Expert | 15+ Years in DC Design, Operations & Project Management

Raajeev is a seasoned data center professional with hands-on experience in hyperscale facilities, colocation design, power & cooling infrastructure, and global DC operations. He shares practical insights to help engineers and IT leaders build better infrastructure.

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