Democratic Senator Proposes New Federal Tax on Data Centers To Offset Power Costs

Congress should consider raising a new excise tax on data center development to offset rising power costs and workforce disruption, one lawmaker says.

Sen. Ron Wyden (D-OR), the top Democrat on the Senate Finance Committee, said a new excise tax should offset data centers' rising rising energy demands. It could also address the broader workforce disruptions created by the artificial intelligence tools the data centers power.

The debate comes as both parties jockey with how to address the fast-growing data center industry nationwide. Thousands of new data center proposals have brought impacts on the housing market and energy prices. They've also emerged as a midterms flashpoint, as the parties try to contend with how to regulate the industry.

"To address the impacts on communities and the country – higher energy prices, drained resources, and workforce upheaval – we will need new streams of revenue," Wyden said in a white paper. "It is only logical that we look to the companies building and benefitting from these projects to contribute."

In addition to the "Data Center Public Investment excise tax," he said the existing tax breaks offered to data centers should be repealed. Many of these originate in state and local governments.

McKinsey estimates the AI industry will pour $7 trillion into infrastructure by 2030, fueling economic growth. President Donald Trump supports data center buildouts to help the U.S. compete with China's technology industry. That's led many Republicans to tout their economic benefits.

But the public, broadly doesn't like them. Separate polls released this summer by Fox News, Gallup, and the Washington Post all found about 70% oppose building data centers to support artificial intelligence near their homes.

Tax tradeoffs

An excise tax—the kind that retailers, manufacturers and other businesses pay on their revenues and business activities—would reverse the flow of tax benefits data centers now enjoy.

A recent analysis from the Center on Budget and Policy Priorities, a left-leaning think tank, found that 40 states provide some sort of subsidies or tax breaks for data centers.

Many of these tax breaks come in the form of sales tax exemptions. That means the data center developers don't have to pay tax on the servers and other equipment they buy.

But data center development has rapidly grown. Data center construction has quadrupled nationwide in four years, and today about $700 billion in data centers are under development, Wyden said.

Some states, such as Ohio, have paused tax incentives for the facilities after realizing they are losing billions in foregone taxes.

Having data centers pay, by comparison, would provide a consistent revenue stream to the communities instead, Wyden said. He said the tax should be in the low single-digits.

“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 said in a statement last month.

The libertarian Cato Institute criticized the idea, arguing it could drive data center tax rates over 100%. Taxing revenue, rather than business activities, could end up penalizing the least profitable data centers, it said.

"Such a tax could end new data center development and risk stripping the US of its status as the global leader in AI and other cloud-based technologies," according to Cato's analysis.