Data Center Incentives in the Age of AI

The recent growth of artificial intelligence (AI) and edge computing has increased the need for data center development in proximity to cities. Proximity to urban areas results in faster data transmission and improved service performance of low-latency, high-speed data processing that is required by businesses and consumers. As a result, data center development has become a focus of states with large urban centers, who are now competing to lure development that traditionally was a focus of rural communities. 

The Evolution of Data Center Site Selection 

Over the past two decades, data center site selection strategies have focused on rural communities. Businesses have sought to avoid the vulnerabilities of centralized data storage and critical infrastructure in major metropolitan areas, which were viewed as a major risk following the 9/11 attacks. This has led companies to seek safer, more geographically dispersed locations. 

As a result, rural areas began to emerge as attractive alternatives; many states introduced data center incentive programs targeting rural areas to stimulate economic growth, create jobs, and diversify local economies. States like Iowa, Nebraska, and Wyoming capitalized on this trend by offering favorable tax policies to attract data center investment. 

Data Center Incentives Incentive Programs 

More than 30 states offer data center-specific incentives, while several others have tax incentives that, while not exclusively designed for data centers, can significantly benefit their development. New Jersey introduced a brand-new program in late 2024, while Governor Whitmer signed House Bill 4906 into law on January 17 to expand Michigan’s program. 

States like Oregon and Delaware, which do not impose a state-wide sales tax, inherently offer cost advantages to data center operators. Additionally, some states provide general tax exemptions on manufacturing equipment purchases, which data centers can leverage due to the substantial investment in IT and cooling infrastructure. These broad-based incentives can make certain states more attractive for data center projects, even without data center-specific legislation. 

Conversely, states with designated data center incentive programs often require minimum capital investment, minimum job creation, and pre-approval or certification. These programs tend to offer various benefits, including sales tax exemptions, utility rate discounts, and job creation tax credits over defined periods. 

Capital investment requirements vary widely from program to program. For example, Arizona’s Computer Data Center Program requires investment of $25 million in rural counties and $50 million in Maricopa and Pima counties, each within 5 years of program certification. While Arkansas has a minimum investment requirement of $500 million. For states concerned about jobs, several have job creation or minimum payroll requirements. Ohio requires an annual payroll of $1.5 million, and Georgia’s job requirements are dictated by county size. 

New Jersey Data Center Tax Incentives 

Signed into law on July 25, 2024, the Next New Jersey Program – AI (S3432) is intended to attract investment, create high-paying jobs, and cement the state as a leader in the AI industry. The program offers transferable tax credits to businesses investing in large-scale AI data centers and/or businesses involved in AI activities in New Jersey. 

Unlike many previously mentioned programs, the New Jersey program focuses on encouraging the development of data centers intended to support the growth of AI. The potential benefit can be worth up to $250 million. 

Features and Eligibility Requirements of Next New Jersey Program – AI 

• Application accepted through March 1, 2029, on a rolling basis, subject to availability 

• More than 50% of the business (or division) must be engaged in AI-related activities 

• Project must include a demonstration of a collaborative relationship equal in value to at least 10% of the award 

• Tax credits awarded over 5 years of a 10-year commitment to New Jersey, transferable with a 10-year carryforward option 

Eligibility 

• Minimum job creation of 100 full-time employees 

• Businesses must create and maintain jobs in New Jersey for 10 years 

• Employees must be paid at least 120% of the county median salary 

• Employees must be assigned to the qualified business facility and work in the state at least 80% of their work time 

• Minimum capital investment of $100 million at the qualified business facility 

Michigan 

Michigan’s enhancement of its data center tax incentives is designed to attract large-scale data centers. The enhanced program has two key modifications: 

1. Extended Tax Exemptions - These facilities are now exempt from sales and use taxes on equipment purchases through at least 2050, with extensions to 2065 for centers located on brownfield sites or former power plant locations.
2. Investment and Job Creation Requirements - To qualify, data center operators must invest a minimum of $250 million in digital infrastructure and create at least 30 in-state jobs that pay at least 150% of the median wage in the respective prosperity region. 

The Future of Data Center Tax Incentives 

Data center tax incentives have evolved from a tool for rural communities to cautiously develop to a tool for urban communities to win the race to be the epicenter of the AI economy of the future. 

Data center development is now a key piece of many state’s efforts to strengthen their local economies. Incentives are now focused on creating program parameters that require key investment and job creation metrics to be met. With new and expanded programs recently approved, the race to use incentives to encourage site selection decisions could heat up like the industry they are intended to support. 

Ready to take advantage of these incentives? Contact us today to learn how we can help you.