There are more data centers in the Valley than just about anywhere else in the country. But that is not without its controversies — and questions.
The Show is trying to answer some of those questions.
Today, it’s about dollars and cents. And, to be clear, when it comes to data centers, it’s a lot of dollars and cents.
In her State of the State speech this past January, Gov. Katie Hobbs made a pitch to lawmakers to do away with a sales tax incentive the state had implemented several years earlier, under then-Gov. Doug Ducey.
“It’s time we make the booming data center industry work for the people of our state, rather than the other way around,” Hobbs announced. “More than a decade ago, we made a strategic decision to grow data centers by creating a tax exemption for them. I voted for it. Now, Arizona is a national leader in this sector. We must ask ourselves, should taxpayers continue subsidizing the data center industry?”
The governor’s question came up often as budget talks ramped up this spring. And while lawmakers didn’t agree to end the tax break, they did agree to pause it for three years.
Basically, the argument Hobbs was making was — we wanted to attract data centers, so we gave them a tax break. It worked — there are a bunch of data centers here now. So it's time to stop giving them the tax break.
Mark Stapp agrees. He’s Fred E. Taylor Professor of Real Estate at Arizona State University's W.P. Carey School of Business.
“The decision-making that’s going into locating a data center really is not driven by tax incentives, right? It’s driven by availability of land, access to power and access to data transmission lines.”
Stapp says he finds it hard to believe that data center operators would choose locations other than Arizona just because the tax incentive isn’t available. But maybe they would?
Dan Diorio, vice president of state policy for the Data Center Coalition, acknowledges there are a lot of factors that go into where data centers want to set up shop — things like how fast they can get built and online; access to energy and water; available workforce to build and maintain the facility; land.
But also on that list, he says? A tax climate that is both favorable and predictable — two things Diorio says do not really apply to Arizona at the moment.
“We have a lot of uncertainty and a lot of unpredictability in the marketplace right now, and especially in Arizona,” he said.
Diorio adds, “It is not going to be necessarily a favorable environment right now, or it’s an uncertain environment because of the three-year moratorium. You know, we know you’re not gonna be able to get a sales tax exemption certificate, and quite frankly, we don’t know what the environment’s going to be if that moratorium really and truly is lifted in 2029.”
He says that uncertainty may well give companies that are looking to build data centers pause when they’re thinking about potentially investing billions of dollars. In addition to the buildings themselves, which can be hundreds of thousands of square feet, he says capital purchases are also massive. Consider the servers: Diorio says on average, they need to be replaced every three to five years.
“You want to get the most up-to-date and energy efficient equipment into your facility,” Diorio said. “So, these are ongoing capital purchases. And these programs — by defraying the sales tax on those rolling capital expenditures — they foster continuous reinvestment into that facility, but also continuous economic activity as a result of that facility.”
Diorio says the pause in the tax incentive will lead to a slowdown in investment in Arizona, and predicts that’ll cause ripple effects throughout other aspects of the state’s economy. But not everyone is convinced the impacts will extend beyond the data centers. Consider potential employees and the money they spend during the work day.
That’s what Micah Miranda (and others) call “the sandwich tax.”
Miranda is economic development director for Chandler, which has a number of data centers, but is not currently looking to add any more.
“It’s the sales tax from going out and getting lunch, or you’re running to Target and you have to get errands. That type of consumer spending is where a lot of cities generate tax revenue to provide the services,” Miranda said. “The challenge with data centers is they don’t have a lot of those employees. They do have a lot of sales tax generated through their utilities, though, so there’s a trade-off.”
Data centers typically do not have as many people working in them as other facilities of their size — so to Miranda’s point, there are fewer people going out to lunch generating less sales tax revenue. True, says Diorio, but he also points out some communities’ infrastructure couldn’t handle that many people, so a data center may be a better fit than some other kinds of projects.
“There are communities throughout the state that would like to have a data center, that view data centers as really filling or fulfilling their economic development goals,” he said. “And now the state has essentially put in a one-size-fits-all policy. It’s told those communities, `We’re gonna have a dramatic impact on your ability to attract a data center from a state level.’”
One of the Valley cities that may be concerned about that is Buckeye. Officials are trying to bring data center development to an area just west of the city’s airport. And Mayor Eric Orsborn doesn’t love the idea of doing that without the state sales tax incentive.
“In our case, it seems a little unfair that they’ve put in this tax incentive to build these out here, and when some of the municipalities fill up with those data centers… now that we’re about to take advantage of those opportunities — partially because of these tax incentives and the success of them in our state — that now we want to take away that incentive which is one of the tools in our toolbox to attract development to our community,” he said.
It's not just Arizona that’s reconsidering the economic development tools they make available to bring in data centers. The National Conference of State Legislatures reports as of this spring, 38 states offered some kind of tax incentive for data centers.
But as of April, eight states besides Arizona had considered bills to completely repeal their incentives; 19 other states had bills that would amend their tax breaks. In addition to Arizona, states like Washington and Alabama this year have rolled back their incentives.
So, what does that mean for data centers?
“Broadly speaking as a trend in the industry, what we see now is significant development of new markets throughout the country,” Diorio said.
He adds that while Arizona has historically been a top five market for data centers, the industry is seeing new states jump into the mix — he says that’ll be a factor in how competitive Arizona is long-term. But there are those in the industry who argue there are some limits on where data centers can locate.
Jason Pfaff, general manager for Iron Mountain North America, which operates data centers here, says it comes down to demand.
“I mean, it’s the sixth largest city now, demand is here. So, that’s where you come. You don’t put a data center in some little town in Idaho, where there’s no people, right?”
But that may not be the case forever. Diorio says as technology continues to evolve, it’ll likely make it more possible for data centers to move away from population centers.
Mark Bauer agrees there’s an evolution in all of this. He’s vice chairman at the commercial real estate firm JLL in their data center solutions group. He says over the past couple of decades, Phoenix had been a backup data center facility; primary centers were in places like California or Seattle. But, he says, that started to change around 2005.
“So, we’ve been a really good recipient of customers that had their primary data centers in California and had backup here, now they’ve converted,” Bauer said. “They actually now have their primary data centers here and might have a backup data center in another area of Phoenix or Vegas or Texas.”
Bauer adds that Arizona’s lack of natural disasters makes it an attractive place to locate data centers, as does the growing semiconductor industry. Going forward, he can envision smaller data centers spread throughout communities, rather than the massive facilities we see now.
And Mark Stapp with ASU’s W.P. Carey School of Business believes communities should think about data centers a little differently than they do other kinds of developments.
“This is necessary infrastructure,” he said, “and it’s necessary infrastructure not just for the local community, but on a national and global level. And that changes the calculus on how you evaluate their benefits versus the public cost of including them in your community.”
Stapp says data centers need to go somewhere — so that somewhere may as well be in this country, rather than in one that maybe isn’t so friendly. But he also gets why residents don’t necessarily want those somewheres to be close to them — not only because of concerns about power, water and land — but because of what happens inside data centers. And that’s especially true when states are offering tax breaks to bring them in.
“They don’t see the public benefits equaling the public incentive, meaning the public has agreed to forgo revenue in order to generate something that it believes is going to produce more revenue than we’re giving up. And the question is, is that actually happening?” Stapp asked.
Data center supporters say it is. And, they argue, operators understand the objections people have to the facilities and are working to mitigate them. But in Arizona and elsewhere, that work may have to happen without economic help from the state.
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