Tax Incentives vs. Power Costs: Which Matters More for a Data Center Site?

Site selection teams often end up comparing a state with generous tax treatment and average power prices against a state with cheaper power and weaker incentives. Both affect the same lifetime cost model, but they behave differently: power is a recurring operating cost that scales with load and runs for decades, while most incentives reduce taxes on capital purchases or property and are set by statute or local agreement.

Incentives are common and large. The National Conference of State Legislatures counts 38 states with dedicated data center tax incentives, and Good Jobs First reported in 2026 that Georgia, Virginia and Texas each lose $1 billion or more a year to them.⁸ Virginia’s Joint Legislative Audit and Review Commission found that the state’s sales and use tax exemption saved the industry about $928.6 million in fiscal 2023, by far the state’s largest economic development incentive.⁷

This guide sets out the arithmetic for comparing the two. For what incentives exist and how they qualify, see data center tax incentives and the state-by-state sales tax exemption comparison. For how power bills are built, see electricity rates and power costs.

Start with energy use. A campus’s draw is its IT load times its average utilization times its PUE, the ratio of total facility energy to IT energy. Uptime Institute’s 2025 survey found that the industry’s weighted average PUE has hovered just above 1.5, with little change for six consecutive years,⁹ while new hyperscale and AI designs usually target lower figures.

For an illustrative 100 MW IT campus running at 80% of capacity with a PUE of 1.3, average draw is about 104 MW, or roughly 911,000 MWh a year. At that volume, every 1 cent per kWh is about $9.1 million a year, and about $137 million over 15 years before discounting. A high load factor is what makes the price per kWh so important: there are few idle hours in which a lower rate goes unused.

Price differences of that size are normal between states. In 2024, the average industrial price was about 5.61 cents per kWh in Louisiana and 7.21 cents in Georgia, according to EIA.⁶ State averages blend many customer types, so a transmission-served campus will pay its own tariff rate, but the gap shows the scale.

The direction of travel matters as well. EIA’s January 2026 outlook projected U.S. electricity use to grow 1% in 2026 and 3% in 2027, the first four-year run of growth since 2007, driven by large computing centers.¹ EIA’s outlooks through mid-2026 expected residential prices to rise nearly 5% in 2026, with the largest increases in the Mid-Atlantic, East North Central and South Atlantic regions, where utilities cite fuel and transmission costs.² A site whose rates are set by a utility adding large amounts of new generation and transmission may see its advantage shrink.

The most valuable incentive for most large campuses is a sales tax exemption on equipment, because servers, networking gear and electrical and mechanical systems are bought in large volumes and replaced on short cycles. Its value depends on three things: how much taxable equipment the project buys, the combined state and local rate, and how many times the equipment is refreshed over the period being modeled.

Hardware intensity varies by orders of magnitude. Epoch AI estimates a typical frontier AI campus costs about $44 billion per gigawatt of server power, of which about $30 billion is IT hardware and $14 billion is everything else.³ Spread over asset lives, it estimates servers account for about 60% of annual total cost of ownership, and that shortening the IT lifespan to three years raises the annual cost of a 1 GW facility from $8.5 billion to $12 billion.¹⁰ A colocation landlord or powered-shell developer, by contrast, may not buy servers at all; the tenant does, and the exemption mostly benefits whoever owns the IT.

Property tax treatment is the second lever. Abatements, PILOT agreements and reduced assessment ratios for business personal property can be large where local rates are high, but they are usually negotiated locally and time-limited. Our guide to property taxes on data center projects covers the mechanics.

States do not recover the full cost. JLARC estimated that Virginia recovered about 48 cents in other tax revenue for each $1 of exemption,⁷ which helps explain why legislatures keep revisiting these programs.

The comparison below uses one hypothetical campus and two hypothetical sites. Site A has an equipment sales tax exemption; Site B has none but cheaper power. All numbers are illustrative assumptions, not quotes or forecasts.

For a conventional cloud or enterprise deployment, a one-cent power advantage and the exemption are roughly equal, and a two-cent advantage wins clearly. For an AI campus whose owner buys $3 billion of hardware per refresh, the exemption is worth about $180 million each time and outweighs even a two-cent power gap. Discounting does not change the order: at 8%, the one-cent power stream is worth about $78 million today and the AI exemption about $386 million, because hardware purchases are front-loaded.

Incentives can change after a site is chosen. S&P Global counted eight states that moved to pause or repeal data center sales tax exemptions between May and August 2026: Arizona, Illinois, Massachusetts, New Jersey and Ohio paused exemptions or programs, while Maine, Minnesota and Nebraska repealed them.⁴ Whether a pause or repeal protects projects already certified depends on the statute, so certification timing can matter as much as the incentive itself. Track state data center legislation and confirm grandfathering with tax counsel.

Power prices can change too, and new tariffs shift risk to the customer. In July 2025 the Public Utilities Commission of Ohio approved an AEP Ohio tariff under which new data centers over 25 MW must pay for at least 85% of their subscribed capacity for up to 12 years, including a four-year ramp, and pay an exit fee if a project is canceled.⁵ Under terms like these, a low energy rate is worth less if the campus ramps slowly, because the customer pays for capacity it is not using. See large-load tariffs and electric service agreements.

Market structure adds another layer. In competitive markets, energy prices move with wholesale conditions unless hedged; in regulated states, rates move with the utility’s rate cases and resource plans. Our guide to regulated vs. competitive market sites explains how each affects price risk.

• Power cost usually matters more for powered land, colocation shells and conventional cloud capacity, where the developer does not buy most of the IT and loads run at high utilization for decades.
• Incentives can matter more for an owner-operator buying GPU servers on short refresh cycles, where equipment is the largest share of lifetime cost.¹⁰
• Property tax treatment matters most in high-rate jurisdictions and for projects with large, long-lived electrical and mechanical plant.
• Power availability matters more than either. A cheaper rate or a richer exemption has no value if energization slips by years; see power timelines and interconnection queues.

The two are also linked. Expected data center load growth is the reason utilities such as AEP Ohio have sought minimum bills and large-load rate classes, so a power advantage can narrow as a region attracts more campuses.⁵ Choosing between rural and suburban sites within a state can change both line items at once, because local property taxes and the serving utility vary by county.

1. 01Ask the utility for the applicable large-load tariff, contract demand terms and any minimum-bill or collateral requirements.
2. 02Build a year-by-year load ramp rather than using nameplate capacity from day one.
3. 03Identify who will own the IT equipment, since that determines who captures an equipment exemption.
4. 04Confirm qualification thresholds, certification timing and grandfathering with tax counsel.
5. 05Run a case with the exemption removed for new phases, and one with power prices rising faster than inflation.

Our tools can help frame early screening, and BlackForge can get a site reviewed for power availability and utility fit before detailed tax modeling.