One Governor Targets Data Centers, While Another Kills Proposal

Arizona Gov. Katie Hobbs announced that she wants to remove tax incentives for data center operators in the state, which have been in place for more than a decade.

Simultaneously, New Jersey assemblymembers were advancing legislation that would have raised electricity costs for certain data center operators, which former Gov. Phil Murphy pocket vetoed as one of his final actions in office on Jan. 20.

The moves represent the divergent paths states are taking toward data center regulation, as politicians seek to balance constituent pushback toward the sector with potential economic benefits.

“More than a decade ago, we made a strategic decision to grow data centers by creating a tax exemption for them. I voted for it,” Hobbs said in her annual State of the State address. “Now, Arizona is a national leader in this sector. We must ask ourselves: Should taxpayers continue subsidizing the data center industry?”

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The tax incentive, which the governor said costs the state $38 million annually, is partly why Arizona is one of the top data center markets in the country, in addition to the state’s climate and power availability.

To qualify for sales and use tax exemptions, operators must 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, according to Axios. Removing a tax incentive requires a two-thirds supermajority in the statehouse.

David Guarino, head of global data center and tower research at Green Street, told Commercial Property Executive that while the removal of the tax exemptions would make the Arizona data center market slightly less appealing, the region’s other strengths would likely still entice developers.

“Phoenix is still a very pro-business market, not to mention it has some of the cheapest power rates in the country relative to other markets,” Guarino said. “I don’t think it would materially change the outlook for the market.”

Guarino added that the purpose of tax exemptions like Arizona’s is often to attract a particular industry to a market and help that industry become sustainable on its own. Phoenix, he said, has “solidified itself as a primary market and it doesn’t need those incentives to lure in projects anymore.”

A bill that could raise power costs dies in New Jersey

Across the country in New Jersey, Murphy opted not to take action on a bill that would have directed utility companies to charge a tariff for large-load data center operators that use more than 100 megawatts per month. The bill passed both houses of the New Jersey legislature on Jan. 12.

Since Murphy neither signed the bill nor officially vetoed it before the legislative session ended, it must now be reintroduced and voted on in the next session and approved by the new governor, Mikie Sherrill, in order to become law. Murphy did not explain his reasoning for the pocket veto.

In prepared remarks following Murphy’s decision, Ray Cantor, deputy chief government affairs officer at the New Jersey Business & Industry Association, called the bill a “misguided attempt” at protecting average consumers from rate increases and said a better way is to encourage more power generation.

Guarino said the New Jersey legislation was in line with broader national trends, where more and more utility providers are placing a heavier financial burden on large load requests. Because New Jersey is not a primary market for data centers—unlike Arizona—due to its already high power costs, Guarino reasoned that the proposed legislation, if ever enacted, would also not have a particularly large impact on the market.

“The utility providers are getting smarter and saying, ‘We’ve got to figure out what’s real and what’s not, so we don’t get stuck bearing the burden for these multi-year, multibillion-dollar projects,’” Guarino said. “It’s just the cost of doing business in the data center space.”