States Reconsider Data Center Incentives and Permitting as Energy, Water, and Fiscal Pressures Mount

What only recently was treated principally as an economic-development story is increasingly viewed as impacting infrastructure, the environment, and affordability. The result is not a uniform anti-data-center movement. Rather, states appear to be moving toward a more conditional model in which tax benefits, permits, and utility treatment are tied more directly to public-resource impacts and demonstrable community benefits.

Just over a month ago, we wrote about how public attention on data centers had increased. Since then, recent executive actions in Illinois, Ohio, and Utah have significantly changed the landscape for development of new data centers. Additionally, newly approved legislation in New York (which has not yet been signed into law) imposes a one-year moratorium on certain environmental permits for large projects while layering in additional labor, energy, and community-benefit requirements. 

Given the shifting trends, developers will need to address power demand, transmission and interconnection costs, water use, air emissions from on-site generation, and the risk that residential and commercial ratepayers may bear infrastructure costs associated with growth as part of the development process.

Governors Are Rewriting the Incentive Conversation

In Illinois, Governor JB Pritzker announced that, effective July 1, the state will pause processing new agreements under the Data Center Investment Program while his administration works with the General Assembly on a broader framework addressing affordability, natural-resource protection, and responsible growth. The governor’s proposal signals that future state support may depend less on capital deployment alone and more on whether developers can internalize the costs they impose on the electric grid and water system.

In Ohio, Governor Mike DeWine directed the Ohio Tax Credit Authority to pause consideration of new data center tax exemption requests while lawmakers study the sector’s impacts. The move followed reporting that the cost of Ohio’s exemption had risen dramatically beyond prior projections. Although pending applications already in the pipeline may continue to move forward, the Ohio action is a reminder that even longstanding incentive frameworks can become politically vulnerable when program utilization accelerates faster than expected.

In Utah, where a proposed data center three times the size of Manhattan has turned into the hot-button issue in the state, Governor Spencer Cox issued an executive order titled “Establishing a Higher Bar for Data Center Development in Utah,” instructing state agencies to weigh water use, air quality, wildlife impacts, ratepayer protections, and public transparency alongside economic growth. Utah’s order is particularly notable because it frames data center development not simply as a land-use or tax issue, but as a statewide resource-allocation question requiring coordinated agency review.

From State Incentives to Permitting and Operating Conditions

The legislative response is similarly becoming consequential. On June 4, New York lawmakers approved a bill that, if signed into law, would impose a one-year moratorium on environmental permits for data centers with peak demand of 20 megawatts or more. The bill goes beyond this one-year temporary pause though; it would also require prevailing wage compliance, energy-efficiency measures, a community-benefit outlay, and utility treatment that places data centers in a separate service class.

Those features matter. A temporary moratorium can delay or kill a project; separate service classes and explicit cost-allocation rules can reshape the economics of the project itself. Once states begin directing utilities and regulators to isolate data center load and assign grid-upgrade costs more directly to those customers, developers and investors may confront a very different underwriting environment from the one that prevailed when many of today’s sites were first pursued.

More broadly, the National Conference of State Legislatures reports that lawmakers in 14 additional states have introduced bills proposing some form of moratorium or restriction on new data center development, although several of those efforts have already failed. Even where those bills do not pass, they are instructive. They show how quickly concerns about affordability, resource consumption, and local opposition are diffusing across states with very different political profiles.

What This Means

For developers, the immediate lesson is that tax incentives can no longer be treated as the most stable component of project economics. While incentives remain important, they may be outweighed by utility, water, and permitting constraints. Developers should therefore revisit site-control and diligence strategies to focus not only on traditional zoning and tax variables, but also on timing of transmission upgrades, water sourcing, and the likelihood of public opposition.

Developers should also expect more emphasis on front-end transparency and discussions of “social license to operate.” Policymakers and their constituents increasingly want disclosure regarding anticipated electricity consumption, water use, on-site generation, emissions, workforce commitments, and community benefits. Projects that arrive with a clear narrative around self-supply, efficiency, ratepayer protection, and local benefits are likely to fare better than projects designed around speed.

In addition, companies pursuing phased campus development should not assume that grandfathering of an original approval (or tax treatment) will automatically extend to later phases. States may honor existing agreements while still treating substantial expansions or new permit applications as opportunities to impose updated standards. Developers factor in risks of a potential change-in-law across each phase of a multi-year buildout.

Looking Ahead

The common thread across these actions is that states are beginning to treat data centers as critical infrastructure with community-wide consequences and not just industries whose development comes at no cost. 

For developers and private equity funds alike, the practical response is early integration of land use, environmental, energy regulatory, incentive, and stakeholder-engagement planning. Projects that can show disciplined resource management and a credible public-benefit story should remain viable. But the era of assuming that scale and capital expenditure alone will carry the permitting and incentive case appears to be ending.

For more insights on these issues, visit our Data Center Legal Solutions webpage.