Arizona lawmakers weigh ending tax break for data centers
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A QTS data center under construction in Phoenix in January 2024. Photo: Ash Ponders/Bloomberg via Getty Images
As data centers draw ire from neighborhood groups across the state, the Arizona Legislature may consider nixing a lucrative tax incentive for the tech facilities powering AI.
Why it matters: Arizona has become one of the top markets for data centers in the country, leading a bipartisan group of elected officials to question whether the tax break is still necessary.
Catch up quick: The Legislature first approved the subsidy in 2013 and later extended it to apply to data centers that locate or expand in Arizona through 2033.
How it works: Companies that spend at least $50 million on the construction or expansion of a data center in Maricopa or Pima counties, or $25 million in any other county, qualify for sales and use tax exemptions on the facility's equipment for at least 10 years.
By the numbers: The subsidy cost the state about $38.5 million in tax revenue in fiscal year 2025, according to the Arizona Department of Revenue.
- That's up from $1.4 million in 2020, and local think tank Grand Canyon Institute estimates the impact will surge to at least $60 million by fiscal year 2027.
State of play: Gov. Katie Hobbs in her State of the State address this week called on the Legislature to repeal the tax break, which she supported as a state senator in 2013.
- "More than a decade ago, we made a strategic decision to grow data centers by creating a tax exemption ... I voted for it. Now, Arizona is a national leader in this sector," Hobbs said.
The intrigue: The governor has at least some Republican support, and Rep. Neal Carter (R-San Tan Valley) has sponsored legislation to sunset the exemption at the year's end.
- Rep. Leo Biasiucci (R-Lake Havasu City) told Axios he's okay with using tax incentives to bring businesses like data centers to Arizona, but once they've been in place for a while the benefit should be revisited.
Reality check: Repealing a tax incentive requires a two-thirds supermajority, which Carter acknowledged to Axios will be tough to secure.
- Rep. Michael Carbone (R-Buckeye), the House majority leader, said he's open to conversations about data center policy, but he remains supportive of the subsidies.
- He told Axios the facilities are paying "their fair share" and bring a "big injection of revenue" to Arizona communities.
Zoom out: At least 36 states offer data center tax breaks, according to Good Jobs First, a national policy research center focused on government accountability.
- A handful of states attempted to end the incentive programs in the past few years, but faced well-funded lobbying efforts from data center operators like Amazon and Microsoft.
What they're saying: "These are big giveaways to some of the largest tech companies that have money to pay their share of tax bills," Good Jobs First senior research analyst Kasia Tarczynska told Axios.
The other side: Dan Diorio, vice president of state policy for the Data Center Coalition, told Axios that eliminating the tax incentive would put Arizona at a competitive disadvantage as more cities nationwide look to court data center investment.
- He added data centers generate significant construction and income tax revenue for the state and support a larger technology landscape, which includes the booming semiconductor industry.
- "This industry thrives on predictability and ... this would create significant uncertainty and make Arizona less competitive," he said.
What we're watching: Neighborhood opposition toward individual data centers is growing nationwide and could impact how lawmakers approach this issue during an election year.
- Last month, the Chandler City Council unanimously rejected a rezoning request for a 43,000-square-foot data center after fierce public backlash.
Editor's note: This story has been updated to correct the name of the Data Center Coalition.