While a growing number of states have begun pausing or rolling back tax incentives for data centers this year, Kentucky has moved in the opposite direction with sales tax exemptions enacted in 2024 and 2025.
KPMG’s Jeff Cook, speaking on the firm’s June 11 webinar, said that there are “at least 38 states that now offer some type of data center incentive program.” Those programs are intended to attract data center construction, he explained, which lawmakers believe will lead to “investment in the local economy, job creation, increased tax revenues.”
Incentives, said Cook, range from sales and use tax exemptions to property tax relief to utility exemptions to rebates.
Tax attorney Mark Sommer of FBT Gibbons detailed Kentucky’s incentive program and how the state’s tax code structure enables data centers to support local schools.
State lawmakers roll back data center incentives
However, due to concerns over energy grid stability, utility costs, and environmental impacts, many states have considered legislation to pause or repeal existing tax incentives for data centers.
The pushback comes amid a boom in data center construction driven by the growth of artificial intelligence. It also comes “at a time where public opposition to data center development is at a much higher level than what we’ve really ever seen in the past,” said Cook. State legislators are now questioning whether data center incentive programs have increased state tax revenue or are instead costing states revenue.
Actions taken by states to roll back incentives in 2026 include a recently enacted Maine law to remove data centers that begin operations on or after August 1, 2026, from eligibility for certain incentives, including the business equipment tax exemption.
Nebraska repealed its exemption for data center equipment manufactured in the state for use in out-of-state facilities. And Washington state eliminated its sales and use tax exemption for server equipment and power infrastructure for urban data centers that qualify through refurbishment, effective July 1, 2026.
State governors pause data center incentives, construction
State governors have also taken action to pause data center incentives. In a July executive order, Nebraska Governor Jim Pillen ended access to data center tax incentives provided through the ImagiNE Nebraska Act.
Ohio Governor Mike DeWine announced an executive pause on the state’s sales tax exemptions for new data center projects. In addition, Illinois Governor JB Pritzker directed a pause on processing new incentive agreements for the Data Center Investment Program, starting July 1, 2026.
Massachusetts Governor Maura Healey announced the state’s Executive Office of Economic Development will hold off on accepting applications for a data center sales and use tax exemption program and released a framework to protect public health, the environment, and ratepayers.
Recently, New York became the first state to halt construction of large new data centers, imposing a one-year moratorium on facilities that use 50 megawatts or more of power. The executive order, signed July 14, 2026, directs state officials to develop a Generic Environmental Impact Statement to create consistent standards for new projects.
“As data center development threatens to hike up utility bills, deplete our natural resources, and create uncertainty for New Yorkers, it’s my responsibility to take action and lead,” said New York Governor Kathy Hochul. She said she also would pursue separate legislation to repeal sales tax exemptions for large data centers.
Kentucky created favorable tax incentive program in 2024, 2025
In contrast to the national trend, Kentucky established a sales and use tax exemption for data center equipment in 2024 and expanded it in 2025, Sommer told Checkpoint. The Kentucky Qualified Data Center Project Incentive Program provides a sales and use tax exemption on data center equipment for projects meeting certain capital investment thresholds. These thresholds vary based on county population, from a $25 million investment in smaller counties to $450 million in the largest.
“We are seeing just dozens, and I mean dozens, of data centers coming into Kentucky,” said Sommer. He explained that companies are attracted by the state’s competitive advantages, including accessible utilities, a robust power grid, major north-south interstates, and multiple airports.
But Sommer added that Kentucky’s tax code does include a key impediment for data centers — a 6% sales tax on energy plus a 3% additional school utility tax in some counties. “Unlike Ohio, Kentucky wants to tax the energy input into, for example, a data center,” he said. While that tax also applies for, say, auto manufacturers, Sommer explained a mitigating exemption is available for traditional manufacturers and industrial processors.
Incentives support local schools, says expert
A key element often lost in the public debate, according to Sommer, is the financial benefit to local communities from the state’s 3% utility tax on energy sales, which is a local option tax levied by most counties. The revenue from this tax can provide a significant windfall for local school districts, he said.
Sommer explained that a 650-megawatt data center operating at 90% efficiency could generate enough revenue from the 3% utility tax to more than double the per-student funding for one of the state’s smallest school districts.
“In the poorest of counties, that’s life-changing,” Sommer said. “It’s just that simple, and that’s being lost. That’s just getting lost in the noise.”
Despite the state-level incentives, some local pushback has emerged. Officials in Louisville and Lexington — Kentucky’s two largest cities — recently called for a pause on data center development, Sommer said. But he noted that the school districts in those two cities are among the few in the state that do not impose the 3% local option utility tax.
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