US states reconsider data center tax incentives and regulations

State lawmakers in Illinois and Kentucky are reconsidering tax incentives and regulations for data centers as the industry evolves, driven largely by the massive energy and water demands of artificial intelligence.

In Illinois, Governor JB Pritzker has paused previous tax credits for data centers. The administration aims to introduce new legislation to ensure hyperscale facilities do not increase electric or water rates for residents or cause environmental harm. Public polling indicates broad support for requiring these facilities to provide their own energy and report on environmental impacts.

In Kentucky, Senator Robby Mills suggested the General Assembly might revisit the 50-year sales tax break enacted in 2025. Lawmakers are considering shortening the incentive period, with Mills suggesting a 10-year limit might be more appropriate. An analysis by the Kentucky Center for Economic Policy estimated that just four data center projects could cost the state between $1.1 billion and $2.2 billion in lost sales tax revenue. Additionally, Governor Andy Beshear recently signed an executive order requiring developers to pay a fair share in state and local taxes.