A torrent of states are repealing data center tax exemptions — but it could increase costs by upwards of 7%

• August 3, 2026

• Multiple US states are repealing or enacting moratoriums on sales tax exemptions for data centers
• Estimates on lost tax revenue are far below the billions of dollars some states have missed out on
• Ongoing data center constructions may not be subject, but costs are expected to increase for new or planned projects

In a blow to US firms trying to expand AI compute capacity by building more data centers, multiple states are now repealing tax exemptions for equipment costs.

According to exclusive The Information reporting, the estimated costs could rise by upwards of 7%, as the exemptions previously allowed data centers to be kitted out with equipment without having to pay sales tax.

But as soon as Ohio Governor Mike DeWine revealed that the lost tax revenue amounted to $1.6 billion, instead of the projected $136 million, other states have started following suit.

States repeal data center tax exemptions

Ohio repealed its tax exemptions for data centers in June 2026, and since July, Illinois and Arizona have both paused their own exemptions. Illinois’ program has been paused indefinitely, and Arizona has enacted a 3-year moratorium.

A further nine states are also considering halting their own exemptions, and a further 28 states have introduced bills to limit the effects of their own exemptions.

Per Avalra data, the sales tax in Ohio sits at almost 6%, with Illinois just over the same figure. These sales taxes will immediately increase the costs of new data center projects, but some projects already under way could be subject to indefinite exemptions.

Are data center costs already unsustainable?

The costs of data center construction have already been rising due to the sudden expansion in capacity. Electricity costs have skyrocketed as more data centers join grids without suitable additions in energy sources.

In an attempt to combat this, President Donald Trump has rolled back regulations on fossil-fuel burning power stations, with multiple data centers being built with on-site natural gas turbine electricity generation. This has caused a string of issues with local residents complaining of sickness caused by infra-sound, and deafening noise levels similar to that of an international airport.

Funding and incentives for renewable wind and solar sources have also been scrapped by Trump, which ironically are some of the cheapest energy sources in the US. This has compounded consumer electricity price rises, acting as a catalyst for data center opposition in the US. AI companies have been urged by the UN to disclose the full environmental damage of the technology.

Additionally, a study by Nikkei has found that numerous big tech firms looking to expand data center capacity have almost $1.65 trillion in ‘hidden’ debt, where contracts are signed between subsidiary companies and data center operators. This means the debt does not appear on the company’s balance sheet, and will only show up as annotations in quarterly financial statements.

This hidden debt at big tech companies has exploded eightfold in the last four years, alongside the visible balance sheet debt for big tech companies which stands at $1.35 trillion. Many businesses are still struggling to justify the ROI on adopting AI technologies, especially as token costs increase.

Sales exemptions are an attractive benefit for data center construction projects, and states that keep or enact sales exemptions will likely see an explosion in new project applications.

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Multiple US states are repealing or enacting moratoriums on sales tax exemptions for data centers Estimates on lost tax revenue are far below the billions of dollars some states have missed out on Ongoing data center constructions may not be subject, but costs are expected to increase for new or…