Site Selection and Incentives for Data Centers — Navigating New Opposition and Legislative Challenges

At a Glance

• Despite clear economic benefits, opposition to data center incentives is mounting. Organized anti-data center groups, as well as legislators on all parts of the political spectrum, are questioning the value and long-term sustainability of these programs. Concerns often center on resource consumption, especially energy and water usage.
• Responding to and following up on concerns around issues such as noise pollution and water usage from community organizations has been shown to lead to successful, less bumpy project timelines. Coalition building — uniting mayors, business groups and laborers — is often decisive in securing bipartisan support and overcoming opposition.

Site selection and incentive programs have long been key drivers of data center development, shaping where and how facilities are built across the country. States compete to attract these transformative projects, offering sales and use tax exemptions, property tax rebates, and streamlined permitting. However, the landscape is shifting: anti-data center groups and both progressive and conservative legislators are increasingly calling for the repeal or reform of these incentives, raising new challenges for developers and communities.

Industry Evolution and the Role of Incentives

Over the past decade, data centers have evolved from a novel concept to vital infrastructure, powering societal connectivity, business digitization and the growth of artificial intelligence. Incentive programs, such as the Illinois Data Center Tax Incentive, have catalyzed billions in investment and substantial job creation. For example, in Illinois, the incentive requires a $250 million minimum capital investment, at least 20 permanent jobs, adherence to carbon-neutral standards, and project labor agreements for the construction of the data center. Since its launch in 2020, Illinois has seen over $15 billion in data center investment tied to the incentive program, transforming local economies and doubling property tax valuations in some towns. Notably, these incentives focus on sales and use tax relief, ensuring that local property tax revenues continue to grow with each new project.

Emerging Opposition and Calls for Repeal

Despite the clear economic benefits, opposition to data center incentives is mounting. Organized anti-data center groups, as well as legislators on all parts of the political spectrum, are questioning the value and long-term sustainability of these programs. Concerns often center on resource consumption, especially energy and water usage. In several states, advocates are pushing for repeal or significant reform of incentive programs, citing environmental impacts and community concerns.

This opposition has led to heightened scrutiny in legislative sessions, with proposals to curtail or sunset existing incentives. The debate sometimes conflates misconceptions about resource usage — for example, some studies show most data centers use equal or less water than average commercial buildings — and can overlook the tangible benefits of increased employment, higher property tax revenues, and partnerships with local labor organizations. Successful data center development now requires not only compliance with incentive program requirements but also robust advocacy and community engagement to counter misinformation and build consensus.

Site Selection in a Shifting Landscape

As incentives come under review, site selection decisions are increasingly shaped by access to reliable land, power, water, and fiber infrastructure, as well as local political dynamics. For example, Data Center Watch recently released a report claiming that $64 billion worth of data centers in the United States have been “threatened” because of grassroots opposition, with $18 billion worth of data center development being outright blocked, while $46 billion has been delayed. Developers must assess not only the availability of incentives but also the potential for future legislative or regulatory changes.

Early engagement with local officials, community groups and organized labor is crucial to addressing concerns and ensuring project viability. Also, responding to and following up on concerns around issues such as noise pollution and water usage from community organizations has been shown to lead to successful, less bumpy project timelines. Coalition building — uniting mayors, business groups, and laborers — is often decisive in securing bipartisan support and overcoming opposition.

As the debate over data center incentives intensifies, legal and advocacy can be essential to secure project success.

For More Information

This client alert is the result of an interview conducted by Matt Olsen (a construction and real estate litigation partner in Faegre Drinker’s Indianapolis office) of Brad Tietz (a director in the firm’s Illinois government and regulatory affairs team). You may contact them for further information.