Data Centers in the U.S.: What are State Governments Doing?
The emergence of artificial intelligence (AI) and advanced computing has opened the floodgates to an abundance of data that touches all areas of everyday life. The United States' economy is reflecting this surge in AI: all labor sectors related to AI are booming.
The increased usage of AI has sparked conversations surrounding how this tool is powered. Federal, state, and local leaders are debating how best to regulate and incentivize data centers used to securely store the massive amounts of consumers’ data.
The conversations around AI are changing as new information becomes available. Because of this, federal and state leaders must work with municipal leaders to ensure that any potential legislation fits within the government’s long-term development strategies, including land use, workforce impacts, and energy capacity planning.
The U.S. Government: A Policy Shift Toward Data Centers
The federal government has taken an expansive approach to policy due to the growth of the technological sector. The Trump Administration signed three executive orders (EO) in 2025, which signaled a more aggressive policy focus on strengthening American manufacturing and technological leadership globally.1 The intent of the EOs was to:
- Implement comprehensive industrial strategies designed to advance the United States’ position in key emerging technologies, particularly AI data centers and supporting infrastructure.;
- Define the scope of “data center projects” as facilities requiring more than 100 megawatts of new electrical load, specifically for AI inference, training, simulation, or synthetic data generation.;
- Remove regulatory barriers, such as reforms of relevant environmental and permitting reviews.;
- Create additional financing avenues, through the U.S. Commerce Department, such as a program to offer financial support, including loans, loan guarantees, grants, tax incentives, and off-take agreements.;
- Streamline, and in some instances expedite, the review, approval, and construction of qualified projects through the Federal Permitting Improvement Steering Council; and
- Leverage federally owned land and resources to support the swift and structured development of data centers.
The administration’s EOs and the federal action plan, titled “Winning the Race AMERICA’S AI ACTION PLAN,”2 signal an increased federal focus on the expansion of nationwide interest in developing and regulating AI and data centers. Congress has also pushed the passage of the Standardizing Permitting and Expediting Economic Development Act, or the SPEED Act, that would reform the process for obtaining federal permits for AI–driven projects.3 Due to the actions taken by the federal government, states have responded by crafting legislation to incentivize the construction of data centers.
Data Centers: The State Response
States across the country are assessing their economic competitiveness in attracting data center investments. According to a 50-state survey, 36 states have some form of tax incentive legislation pertaining to data centers.4 The types of incentives include property tax, sales/use tax, franchise abatements and exemptions, tax credits, and tax exemptions for goods or services utilized by data centers (i.e. equipment, electricity, etc.).
Kentucky’s neighboring states are utilizing these incentives to attract data centers. Ohio’s tax credit authority may completely or partially exempt qualified data centers from taxes levied on the sale, storage, use, or other consumption of computer data center equipment if certain capital investment and job creation requirements are met. Indiana exempts the sale of qualified data center equipment from the state’s gross retail tax if the equipment is sold to a data center and if the equipment is located within the data center. Minimum qualified investments must be made for at least five years. Tennessee has a reduced tax rate on electricity of 1.5%, whereas the general business electricity tax is a 7% state sales tax. The state will also not impose a tax on the cooling equipment or backup power infrastructure sold to a qualified data center if a required investment period is met during a three-year period.
Data Centers in the Commonwealth
Kentucky currently provides tax credits up to 100% of the Kentucky income tax and limited liability entity tax imposed on income, gross profits, or gross receipts. The state also permits approved companies to impose a wage assessment against the gross wages of each new employee subject to Kentucky income taxes. To qualify, the business must:
- Incur eligible costs of at least $100,000.;
- Create at least 10 new full-time jobs and maintain an annual average number of at least 10 new full-time jobs.;
- Pay at least 90% of all new full-time employees a minimum wage of at least 150% of the federal minimum wage; and
- Provide employee benefits for all new full-time jobs equal to at least 15% of the minimum wage requirement.
Looking Ahead for Kentucky Cities
As policies surrounding AI and data center development continue to evolve, Kentucky cities will play a key role in how these projects are planned and implemented. Issues such as land use, infrastructure capacity, workforce needs, and service demands are managed at the local level, making coordination among federal, state, and municipal leaders essential. Aligning data center investment with local planning efforts and long-term development goals will remain an important consideration for communities across the commonwealth.
