Data Centers Are Changing the Government Economic Development Bargain

Something unusual happened in New Jersey in late August. On August 27, the End Data Center Tax Credits Act became law as P.L. 2026, c. 77, after passing the Senate 35–4 and the Assembly 74–4 on June 30. The state had previously reserved $500 million in tax credit capacity under the Next New Jersey Program for qualifying AI and data center projects. As of May, $250 million had already been awarded to one project. The act removed the remaining $250 million in uncommitted Next New Jersey credit authority while leaving that prior award untouched, according to the New Jersey Legislature's bill statement.

Anyone familiar with government economic development programs will recognize how unusual this is. Why would a state that wants AI investment voluntarily withdraw an incentive intended to attract it? One answer is that private investment is no longer the only scarce asset in the transaction. Increasingly, the scarce asset is access to infrastructure, development rights, and speed to market. That package of resources and public approval is giving governments and public utilities more leverage than they have traditionally had.

The old bargain: mobile capital, competing jurisdictions

For decades, the government economic development game has rested on the mobility of investment capital. In effect, developers could say: "We can take this project elsewhere, along with the jobs and taxes it will bring to your constituents, so give us the best deal you can." Governments and public utilities responded with lower taxes, subsidized infrastructure, discounted public power, expedited approvals, and favorable development terms. Developers and their capital had more alternatives than the host governments.

As one example, Reinvent Albany estimates that New York taxpayers have committed at least $321 million in sales tax exemptions and low-cost public power subsidies to five data center sites encompassing 11 data centers in Rockland County. Long-duration sales and use tax exemptions can generate substantial savings for developers and substantial foregone revenue for governments. That bargain made sense when many jurisdictions offered roughly equivalent power, land, water, and permitting conditions. Developers could credibly move elsewhere, and governments competed to capture the projects, jobs, and tax base.

What changed: AI-scale demand is making the infrastructure bundle scarce

AI-scale demand is changing the scarcity equation. Data centers have been built for decades, but AI-driven growth in their scale and speed is changing the bargain for large data centers generally. Investment capital matters, but so does access to a bundle of infrastructure, development rights, and speed to market. Governments and public utilities increasingly control what developers most need:

• hundreds or even thousands of megawatts of power
• large contiguous sites
• water or alternative cooling systems
• fiber
• permitting and environmental review capacity
• political acceptance
• perhaps most importantly, speed to market and to available power and water

Getting that entire package in one place, on the timetable a developer needs, can matter more than a large tax exemption. If a site will take several years to assemble and approve before construction can even start, a tax incentive may not make it attractive to a developer that needs the facility operating within three years.

What the new bargain is looking like

Governments and public utilities are starting to test their new leverage in several ways.

Negotiating different terms for individual deals

Governments and public utilities are moving beyond a simple standard that a project with enormous electricity demand should not make existing customers worse off. In some cases, the emerging standard is stronger: the project should contribute enough system value to make existing customers better off. Developers are still getting access to the grid, but on different terms.

On August 21, the Kentucky Public Service Commission approved the Big Rivers / Kenergy / TeraWulf agreement for a planned 482 MW Hawesville data center on the former Century Aluminum smelter site. The agreement includes unusual customer obligations:

• assumption of the market costs and risks associated with serving the load
• payment for reserved transmission capacity
• credit support and prepayment protections
• curtailment before ordinary non-interruptible customers during specified severe system emergencies

Two features stand out. First, the project bears the costs and identified financial risks associated with serving its load rather than shifting them to other customers. Second, its power can be reduced before ordinary non-interruptible customers face reductions during specified severe emergencies.

In Georgia, OpenAI struck an agreement with Georgia Power involving 3,200 MW of new electric demand in Effingham County. OpenAI agreed to pay the full infrastructure costs required to serve the facility and to make up to 1,000 MW of its load flexible. That means its electricity use could be reduced during periods of high system demand.

Georgia Power projects that its broader portfolio of large-load customers, including the OpenAI agreement, will produce approximately $950 million per year in customer savings beginning in 2029—equivalent to at least $15 per month for a typical residential customer using 1,000 kWh per month. Those are projected, not realized, savings. But the claim itself points to a different bargain: the goal is moving from protecting ordinary customers from harm toward making them beneficiaries of the new load.

Creating new rules and categories, not just new terms for specific deals

The more important shift comes when tougher deal terms become standing rules. Data centers have often been treated as ordinary industrial customers. Now some governments and regulators are creating distinct large-load categories with different rates and obligations. We are seeing:

• new tariffs
• statutes
• eligibility conditions
• standard cost-allocation rules
• differentiated levels of electric-service reliability for very large loads

In Delaware, legislation signed on August 26 created a separate rate class for large energy-use facilities and required costs attributable to those facilities to be assigned to them where possible, with other non-directly attributable costs kept within the large-load class rather than shifted to other customer classes. The package also establishes interruptibility requirements. A companion law requires qualifying large energy users to build or procure new generation, with facilities using the 10-year compliance pathway ramping to 100% of annual energy needs within 10 years. The state summarized the package when Governor Matt Meyer signed the legislation.

In Michigan, the Michigan Public Service Commission approved amendments to Indiana Michigan Power Company's large-load tariff for customers drawing 50 MW or more. Requirements include:

• 15-year contracts
• a maximum five-year ramp-up period
• stronger collateral for new facilities
• early-termination protections
• four years' notice for certain major load reductions
• a 90% monthly minimum billing demand
• a 65% monthly minimum energy requirement
• customer-specific Commission filings before service begins

The Commission also directed Indiana Michigan Power to propose a standalone large-load rate in its next general rate case. In a separate action the same day, the Commission approved DTE Electric emergency procedures under which specified very large loads can be shed before other customers when doing so would prevent broader firm-load shedding.

The important development is not merely that governments are negotiating harder. Some are beginning to convert the terms they can demand into rules that apply prospectively to an entire class of projects.

Making broader public permission part of the bargain

Electric power is not the only thing developers need that they cannot simply buy on the open market. They also need permission to build. That gives governments another source of leverage and can make approval more discretionary, negotiated, public, and contestable.

On August 5, Tucson adopted new regulations for large-scale data centers. The city now requires a public review process including:

1. neighborhood coordination and review of the development plan
2. a public hearing
3. zoning examiner review
4. final mayor and council consideration

Each project must address:

• water adequacy
• power adequacy
• environmental impacts
• noise
• setbacks
• mitigation requirements

The process forces a broader question: Does this project fit the community's scarce resources and public interest requirements well enough to receive development rights? Tucson has made approval of large data center projects more project-specific, public, and contestable.

In Frederick County, Maryland, County Executive Jessica Fitzwater announced a proposed agreement with Catellus, master developer of the Frederick Digital Campus, that would provide about $110 million in developer-funded community benefits. Catellus’s application for a Development Rights and Responsibilities Agreement is now moving through a public review process. The county announcement identifies benefits including:

• $30 million for school renovation
• $40 million for a community center and recreational space
• $14.5 million for workforce development and career and technical education, plus additional investments

Frederick County shows land-use and development authority being used to negotiate a broader public return rather than simply processing a conventional development application.

Making subsidies more conditional, measurable, and contestable

For years, governments and public utilities have offered economic development subsidies with relatively few strings attached. But the examples above show developers paying more of their infrastructure costs, accepting curtailment, providing financial guarantees, facing special regulatory treatment, and negotiating for development rights.

That makes the old assumption that governments must also subsidize them increasingly questionable. Where subsidies remain available for large data centers, they increasingly appear to be taking on features such as:

• shorter duration
• higher qualification thresholds
• auditable performance
• disclosure of resource use
• local fiscal participation

Storey County, Nevada, has submitted a legislative proposal for consideration in the 2027 session that would substantially revise the state's data center tax abatement program. According to The Nevada Independent's review of the proposal, it would:

• shorten current 10- or 20-year abatements to 5 or 10 years
• double investment requirements and slightly increase permanent-job requirements
• require audits at the five- and 10-year marks
• disclose projected and actual electricity and water use
• disclose local government revenue forgone because of the incentives
• bar tax breaks for projects located on federal land

The scale matters. Nevada has approved about $461 million in expected data center tax breaks, with roughly three-quarters tied to developments in Storey County.

New Jersey goes further. Storey County is proposing tighter conditions and accountability for abatements; New Jersey has actually withdrawn part of an available incentive. In effect, New Jersey is no longer simply asking, "What do we need to give away to get this project here?"

Nor is New Jersey alone in asking the question. Kentucky Governor Andy Beshear said on August 27 that data centers do not need incentives and that he would support rolling back the state's sales and use tax exemptions, according to Kentucky Public Radio reporting. In Ohio, HB 999 has been introduced to prohibit property-tax exemptions for data centers. Neither change has been enacted, but together with New Jersey's action they suggest that the subsidy side of the bargain is also being reconsidered.

How far can we take the argument?

I do not want to overstate the case. These examples are recent, not yet widespread, and the pattern is still emerging.

• The shift will not be universal. Some jurisdictions will still have abundant infrastructure and a strong political desire to attract projects. Developers still retain siting options.
• Scarcity can change. Major investments in electricity supply, including wind and solar generation, could expand the number of viable sites.
• Governments can still bargain badly. They can underestimate infrastructure and service costs, accept opaque agreements, or grant long-term incentives before actual costs are known.

The trend is worth watching

The momentum behind mega-data-center development is shifting leverage between developers and governments and public utilities. Demand is enormous, but these projects depend on infrastructure and public authority that are neither abundant nor quickly substitutable. That scarcity is changing the development bargain.

Across the cases above, the emerging bargain can be summarized this way:

• Bring, build, procure, or finance the capacity you require.
• Pay the infrastructure and system costs your project creates.
• Accept different reliability when the system is stressed.
• Show that the project fits local resource and community constraints.
• Protect the public against stranded costs and changing plans.
• Make the public return measurable and enforceable.
• And if you still want a subsidy, explain why the public needs to pay for an investment already competing for scarce infrastructure and development rights.

The pattern is becoming clear enough to watch closely. The question is whether governments and public utilities can convert this moment of leverage into durable, transparent, and contestable rules and public benefits before scarcity eases or the AI boom ends.