Lawmakers have proposed a variety of options to change the tax treatment of AI, from new excise taxes to eliminating existing tax incentives. Experts from across the policy spectrum have analyzed the proposals — with tax code neutrality emerging as a common theme.
Taxing data centers
On August 6, Senate Finance Committee Ranking Member Ron Wyden (D-OR) shared a draft proposal on data center taxation. The white paper from the committee’s Democratic staff suggests ending current federal tax incentives available to data centers.
Those incentives include 100% bonus depreciation under IRC § 168(k). Ending that incentive for data centers aligns with a July bill headed up by Senator Mark Warner (D-VA), S. 5054.
The Wyden proposal also targets incentives under the Opportunity Zones program and the Real Estate Investment Trust framework. In addition, it calls for a new excise tax in the form of a gross receipts tax on operators of U.S. data centers.
Comments are requested on the white paper by August 31 — particularly on suggested uses of revenue from the excise tax. Wyden’s view is that “a priority should be to directly aid those adversely affected by the dramatic changes in our economy expected to be wrought by widespread adoption of AI.”
Wyden anticipates releasing a discussion draft this fall.
“These proposals are a first step towards safeguarding taxpayer dollars and ensuring there are resources to support American workers displaced by the coming disruptions to the economy,” Wyden explained.
Days later, Representative Andrea Salinas (D-OR) introduced legislation that would establish another targeted excise tax — on electricity consumed by data centers.
Salinas’ Data Center Community Reinvestment Act, H.R. 10102, calls for a 1-cent-per-kilowatt-hour excise tax on electricity used by data centers with over 1 megawatt of power capacity.
She projects the tax will raise $1.76 billion annually, and could be used to protect public lands, build affordable housing, clean up hazardous waste sites, and support infrastructure projects.
Taxing AI to address labor impacts
Also on August 6, Representative Greg Casar (D-TX) led the introduction of the AI Tax and Work Protection Act, H.R. 10044. The bill would establish a tax on tokens — defined as discrete units of data. The specific tax rate would be linked to the unemployment rate, as published by the Bureau of Labor Statistics.
Casar also calls for the AI tax revenue to be deposited into a trust fund, which would support a new Work Protection Administration within the Labor Department and several job creation programs. Specifically, it would support jobs programs in childcare, education, healthcare, eldercare, housing construction, scientific research, infrastructure construction and maintenance.
“The AI Tax and Work Protection Act will tax certain uses of AI, especially when they lead to job cuts, and it will help create jobs for workers who may be left behind by the AI transition,” explained bill co-sponsor Representative Sara Jacobs (D-CA).
Casar’s proposal to tax AI and use the proceeds to support those impacted by its rapid expansion echoes the approach of Senator Bernie Sanders’ (I-VT) June American A.I. Sovereign Wealth Fund Act, S. 4825. However, Casar proposes a narrower tax and details specific uses of proceeds — whereas Sanders would distribute funds directly to Americans or “in such manner as Congress may provide.”
Experts weigh in
In an August 7 post, Brookings’ Elena Patel and Tracy Gordon raised two threshold questions to ask when considering AI-related tax code changes: “What are lawmakers trying to accomplish? And what can a tax actually do about it?”
“A specific tax on AI would likely do far less than its supporters hope,” Patel and Gordon warned. They explained that such a tax will slow AI adoption but may not raise enough revenue to address the nation’s debt issues.
Instead, the Brookings’ authors suggest lawmakers broadly revise taxation of capital. “AI’s gains are likely to keep flowing disproportionately to capital, income that’s already taxed more lightly than labor,” they noted.
The Institute on Taxation and Economic Policy, likewise, suggests revamping the tax code broadly to tax capital gains. In an August 10 brief, ITEP’s Steve Wamhoff, Joe Hughes, and Erika Frankel called for reforms to “ensure that at least some of the extraordinary wealth created by AI is taxed as it accrues or when it is ultimately passed to heirs, rather than escaping taxation altogether.”
The ITEP authors also recommend reforming corporate income tax to address the use of offshore tax havens and other “tax dodging” practices. And they suggest changes in depreciation rules they say would “put investments in AI and automation on a roughly neutral footing relative to labor.”
Meanwhile, the Tax Foundation’s Andrew Lautz, Richard DiSalvo, and Garrett Watson looked specifically at the Wyden and Warner proposals to end full expensing for data centers. Both would “deny bonus depreciation to businesses that control AI data centers,” they noted in an August 13 blog post.
The Tax Foundation authors advocate for tax-code neutrality in how businesses recoup investment costs. “Taxing resulting profits is better suited to capturing the economic gains from AI without undermining US competitiveness,” they contend.
“Neither the Warner nor Wyden proposals capture non-US investment in data centers, which may have the practical effect of driving data center investment overseas,” said the Tax Foundation authors.
The Cato Institute’s Scott Lincicome raised a similar concern in an August 6 commentary. “Block data centers, and this important commerce stalls in the United States. And it picks up overseas instead, taking the jobs, tax base, and geopolitical influence with it.”
Lincicome examined incentives currently available to the AI industry, including at the state and local level. “Given demand for AI and every other internet-based service in the United States, these data centers will be built without all the subsidies,” he predicted.
“The most obvious place to start is by nixing all the subsidies,” said Lincicome.
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