Powering Digital Growth

How State and Local Incentives Attract Data Center Investment

The new darling of the commercial real estate sector is data centers. Estimates indicate the U.S. has more than 4,100 data centers, making it the largest consumer of capacity and positioned well to be a global leader in artificial intelligence (“AI”).¹ According to a Goldman Sachs report, the worldwide demand for power supplied by data centers will rise 50% by 2027, and that increase could be as high as 165% by 2030.² Driving this growth is AI, which requires enormous computing and electrical power and cooling and networking infrastructure. This need for compute power is propelling development by hyperscale cloud providers, neoclouds, data center operators, asset managers and global institutional investors.

What often goes unnoticed by developers and investors is the decisive role tax incentives can play in bringing large-scale digital infrastructure to life –– long before shovels hit the ground or power contracts are signed.

Tax Incentives Can Power Data Center Construction

Data centers can cost billions of dollars to construct and equip. Investors are wise to approach the financing for these projects as similar to large merger and acquisition transactions, and accordingly, secure available tax incentives as an alternative to raising enormous amounts of money from capital markets. Incentives also help balance the drive toward speed to market with a smart, longer-term approach to capitalization.

Incentives can be a significant value driver for site selection given the capital-intensive nature of these projects. Thirty-six states have statutory data center programs that offer incentive packages based on certain requirements, typically the level of investment, job creation and wages.³ Although benefits under statutory state programs are generally not negotiable, most localities allow expansive negotiation of benefits that are non-statutory.

Developers and investors should look at state and local governments that offer competitive tax and economic incentives to build data centers in their locations. These incentives vary from jurisdiction to jurisdiction (often differing from county to county within the same state) and their value may be billions of dollars, so the cost-benefit considerations in pursuing these incentives should make for a straightforward decision for stakeholders.

These competitive inducements can include:

Sales and use tax exemptions
Property tax abatements
PILOT programs
Payroll tax deductions
State income tax credits
Utility incentives
Public grants
Partnerships with local colleges –– access to an employee pipeline

Other incentives may include power and ease of entitlements, as well as tax credits or cash payments for job creation, energy efficiency and sustainability from the municipality and favorable financing arrangements from the lender.

The Value of Proactive Incentive Negotiations

It is important to understand that failure to negotiate and secure a valuable incentive package PRIOR to closing on the purchase of land or signing a long-term power purchase agreement will likely result in a significantly diminished package with long-term impact on the data center’s bottom line. That’s because these programs offer substantial cash savings that can apply to several cost streams. When jurisdictions are not approached to negotiate incentives prior to a project being announced, they will perceive the construction as a project that will happen anyway, without the need to give away anything. Therefore, companies keen to participate in the data center sector are strongly advised to explore available incentive programs well in advance of purchasing property or announcing a project.

Real Estate Is Local. So Is the Power To Greenlight a Data Center.

The power to say “yes” to a data center project lies with municipalities and community sentiment that could ultimately determine the project’s fate. Courting a municipality and establishing a mutually beneficial partnership with it must be part of the transaction.

Although it is difficult to forecast the economic impact a data center will have on a community, data centers pay significant taxes over time, with or without incentives. Many of these tax dollars go to fund local public schools, for example, so data centers can provide vital funding to the heart of many communities. Data center owners also provide non-monetary benefits to the communities in which they invest, including support for educational programs necessary to win the AI race within the U.S.

States and municipalities that want to be part of the digital economy and known as a computing hub are open to data center business. Developers and operators that put the data center construction cart before the tax incentives horse forego valuable strategic partnerships and generous packages that can ultimately save stakeholders enormous sums of money. The winners are those who treat this process as a large-scale capital transaction, with an approach that can be replicated across projects and jurisdictions.

Footnotes:

1: “USA Data Centers,” Data Center Map (n.d.).

2: “AI to drive 165% increase in data center power demand by 2030,” Goldman Sachs (February 4, 2025).

3: Remington, Jake, et al., “An Overview of State Data Center-Related Tax Incentives,” NAIOP (Winter 2024-2025).

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Published

December 01, 2025

Key Contacts

McRae Thompson

Senior Managing Director, Leader of Real Estate Tax Advisory