NC budget scales back data center tax break

North Carolina’s new state budget has repealed a key sales tax exemption for electricity used by data centers, a significant shift in how the state taxes the industry’s energy consumption.

The provision, included in the final budget agreement, ends the sales-and-use tax exemption for electricity used by data centers. It does not, however, repeal the full suite of data center tax breaks.

Instead, lawmakers targeted the electricity exemption, while leaving other incentives tied to support equipment, software, and certain business property intact.

“The legislature agreed to remove the data center’s sales tax exemption for electricity, so you and I will no longer be subsidizing their energy consumption,” Gov. Josh Stein said during the bill signing press conference.

The change would subject that electricity to the state’s combined general sales tax rate, generating an estimated $21.4 million in additional General Fund revenue in the 2026-27 fiscal year, according to the legislature’s fiscal analysis. By 2030-31, the estimate rises to $28.6 million.

The budget provision marks a partial victory for critics of North Carolina’s data center incentive structure, but it stops short of broader legislation filed earlier this year that sought to repeal several sales and use tax exemptions tied to the industry.

House Bill 1213, the Protect Taxpayers and Consumers Act, was filed in April by a bipartisan group of lawmakers and would have eliminated major tax exemptions for data centers amid growing concern over the cost of subsidizing the rapidly expanding artificial intelligence and cloud computing industry.

The bill followed Stein’s request for his Energy Policy Task Force to examine whether North Carolina’s existing data center tax incentives should be repealed or modified. Stein’s administration began reviewing the exemptions earlier this year, citing concerns that rapid data center expansion could increase electricity demand and potentially raise costs for residential and small-business ratepayers.

That proposal drew attention from lawmakers and industry leaders, who questioned the process, the available data, and the level of legislative involvement.

Supporters of maintaining the incentives have argued that the exemptions help North Carolina remain competitive with other states seeking major technology investments.

“North Carolina didn’t become a destination for companies like Apple, Google, and Microsoft by accident,” said Patrick Riley, on behalf of the board of the North Carolina Blockchain + AI Initiative, in April.

NCB+AI is a technology advocacy coalition focused on promoting AI, blockchain, and data center development in the state.

“It took deliberate policy decisions that made this state competitive,” Riley said. “Eliminating the data center tax incentives that attracted that investment sends the wrong signal at exactly the wrong moment. AI infrastructure runs on compute, and compute runs on data centers. If North Carolina wants to be where the next generation of AI is built and deployed, we need to preserve the policy environment that makes that possible.”

According to previous estimates from the Department of Commerce, North Carolina currently provides roughly $50 million in annual sales tax exemptions on electricity and replacement equipment used by data centers.

The department warned that the figure could grow substantially as more data center projects come online, particularly with the rise of artificial intelligence and cloud computing infrastructure.

The budget action also comes after a separate debate over whether large data centers should face additional regulations to protect ratepayers, water resources, and electric-grid reliability.

Earlier this session, House lawmakers advanced the Ratepayer Protection Act, which would impose new limits on large data centers while adding safeguards to shield residents and businesses from higher utility costs. The measure passed the House on a 104-7 vote.

“Data centers bring economic opportunity, but they must not come at the expense of our ratepayers, our water resources, or our energy reliability,” Rep. Matthew Winslow, R-Franklin, said when the proposal was announced.

Winslow added that the measure was intended to prevent the cost of data center expansion from falling on households and small businesses already facing higher utility bills.

“North Carolinians are already feeling the pinch of higher electricity bills, and we cannot allow massive data centers and unrealistic green energy mandates to make it worse,” Winslow said. “The Ratepayer Protection Act puts people over profits by ensuring data centers pay their fair share, protecting our drinking water, safeguarding local communities, and keeping reliable, affordable power flowing to our homes and businesses.”

The issue comes amid growing concern over the energy demands of data centers used for artificial intelligence. Nearly four-fifths of voters, 78.2%, agreed that new data center facilities should have to provide for their own energy generation, according to Carolina Journal polling. Of those surveyed, 59.8% strongly supported the measure, while fewer than 10% opposed requiring data centers to provide their own electricity.

Jon Sanders, director of the John Locke Foundation’s Center for Food, Power, and Life, said the idea is worth considering as lawmakers look for ways to protect ratepayers from costs associated with new data center demand.

“This is an idea worth exploring in order to keep other customers from shouldering the costs of constructing new power plants to meet the new demand, specifically from data centers,” Sanders said. “That said, changing the law to allow data centers voluntarily to supply or contract for their own power independent from the grid would shield other customers from the risks without requiring special contracts and terms with the utility.”

Amid rising debate over their impact, data centers are drawing increased attention from both state leaders and local communities across North Carolina. Dozens of local governments have moved to pause or slow data center development through temporary moratoriums, with residents and local officials raising concerns about electricity demand, water use, noise, land use, and the pressure large projects could place on local infrastructure.

“NC budget scales back data center tax break” was originally published on www.carolinajournal.com.