Tim Steller's column: Arizona Legislature should end data center incentives

This should be one of the easier things the Legislature does all session.

Not because there’s no money involved, but, in a way, because there’s so much money involved.

Arizona is one of 36 states with tax incentives for companies wanting to build data centers.

Our incentive program offers a complete waiver of sales taxes on data center equipment purchases for 10 years for any qualifying data center in Arizona. To qualify, the center must make a capital investment of at least $50 million, if in Maricopa or Pima County, or $25 million elsewhere.

Qualifying means no state, county, or local sales tax on their data center equipment purchases in Arizona.

The incentive program, which began in 2013, has helped the Phoenix area become one of the biggest areas of data center development in the country. In 2021, the Legislature passed, and then-Gov. Doug Ducey signed, a 10-year extension of the law, meaning the incentives are now set to expire in 2033.

That was then, before the artificial-intelligence-driven boom in data centers grew so big that it provoked public opposition around the world, including in Arizona cities like Tucson and Chandler. 

Now, Michigan's Legislature is considering repealing its data center tax incentive, and other states are considering modifying theirs.

State Sen. Priya Sundareshan, a Tucson Democrat, said she's heard some legislators talk about changing or eliminating Arizona's incentive, though no bill has been filed yet. 

"I’m hearing a lot of interest around it," she said. "I personally have a lot of interest in it."

Gov. Katie Hobbs has also signaled an interest in revisiting the incentives to find "the right balance," KNXV TV Channel 15 in Phoenix reported. 

“We should look at the incentives to make sure they're doing the right thing, and that we have a better strategy around it,” Hobbs said.

No need for incentive

There is obviously no need for this incentive on the part of data center developers and users, some of the wealthiest companies in the world.

Investor money has been pouring into data centers to such an extent that the big five tech companies involved in data center hyperscaling are expected to make around $600 billion in capital expenditures in 2026.

Outside investment firms like Blue Owl Capital, the one backing the Project Blue data center in Tucson, also are pouring investor money into building them. 

And the companies supplying the equipment, including massive companies like Nvidia, are some of the best-funded on the planet. The industry is so big that our economy, at this stage, is dependent on its success.

Back to homepage

Subscriber Login

Keep reading with a digital access subscription.

Subscribe now

But the builders of data centers, the Big Tech companies using them, and the companies selling the equipment for them all have enough money to pay our sales tax on the equipment required. They don't need a break from us.

It's unclear exactly how much sales tax has been forgiven over the life of the incentives. In the fiscal year that ended June 30, the Arizona Commerce Authority approved nine data center projects for the incentive. The year before, the authority approved 17.  

Of course, the argument is not so much about what the data center companies need, but about what we can get from the data centers. The eternal argument for such incentives, no matter the industry, is that they give us "jobs and investment."

Indeed, the investment is tremendous. The projected investment to build Project Blue, a complex of up to 10 data centers just southeast of Tucson, is $3.6 billion. Of that, about $1.2 billion is the projected cost of construction.

That means lots and lots of construction jobs that would buoy the local job market for the years of the project's construction. It's no small benefit.

Few permanent jobs

The drawbacks are plentiful, too, though. While data centers provide many jobs during construction, their permanent jobs are relatively scant. The forecast for Project Blue is 180 permanent jobs at an average of $64,000 per year, but the developers are only required by their deal with Pima County to create 75 permanent jobs.

They also use substantial water, if they're cooled with water, and massive amounts of electricity. Data centers and the grid upgrades they require are one of the factors expected to drive up already soaring electricity costs in coming years. 

The increased electricity usage also means retaining fossil-fuel-burning electric plants and their greenhouse-gas emissions, slowing the transition to cleaner renewables.

Beyond that, people are simply tired of new data centers in their areas. This became clear when the Chandler City Council rejected a proposed new data center on Dec. 11.

Former Sen. Kyrsten Sinema lobbied for the approval of the center, which would have been Chandler's 11th, and even threatened them with resorting to the Trump administration for strongarm assistance. Nevertheless, the council voted unanimously against approving the center.

This shows not just local resistance but also bipartisan skepticism. Chandler has almost 7,000 more Republican than Democratic voters, and a Republican mayor, Kevin Hartke, though the elections are non-partisan.

"Republicans are not immune from this either," Sundareshan said. "I’d love to find that common ground."

Tech industry will fight

Of course, any move to repeal a tax incentive meets with opposition from the industry it benefits. You can bet the tech industry will fight any effort at repeal.

As wealthy as they are, they have the money to boost a legislator's campaign immeasurably, or to boost an opponent to anyone who goes for a repeal.

A more likely outcome than full repeal is some middle-ground reform of the program. That would be a step in the right direction, of course. 

But we should always be asking why we are incentivizing this wealthy and well-established industry at all.