Kentucky’s AI data center boom could cost taxpayers billions. Is it worth it?
Kentucky could forgo billions of dollars in state sales tax revenue if even a handful of the massive data center projects proposed across the commonwealth qualify for a tax exemption lawmakers expanded statewide last year, according to a new analysis.
The potential cost dwarfs the state’s official estimate that the data center tax break will amount to about $15 million annually — an estimate developed before the recent surge in proposals for artificial intelligence-driven “hyperscale” data centers.
That leaves Kentucky betting billions in potential tax revenue on a data center boom that is far from certain to materialize. The Kentucky Center for Economic Policy estimates the state could miss $1.2 billion to $2.2 billion in sales tax revenue during the 1- to 3-year construction phase at just four proposed hyperscale facilities. Meanwhile, utilities and developers are pitching dozens of other projects whose financing, construction and long-term demand remain uncertain.
“This is the biggest infrastructure project since the interstate highway system,” said Jason Bailey, the progressive think tank’s founder and executive director. “I think data center developers want to show that, but the actual ultimate scale that will be used to measure this growth is really hard to predict.”
Data center tax incentives pale in comparison to the millions of dollars the state offers to pass on taxing other industries every year. In fact, the sales tax incentive on equipment housed inside data centers is the only one the state offers specifically for AI computing hubs in the commonwealth.
In a statement to the Herald-Leader Thursday, Republican House Speaker David Osborne of Prospect said a true analysis of whether an incentive delivers a return for taxpayers requires an “apples to apples” comparison.
“We should always be asking whether an incentive delivers a return for taxpayers, but we also need to make sure we’re comparing apples to apples before drawing false conclusions disguised as economic analysis,” Osborne said. “Instead of looking at this in isolation, Kentucky has to evaluate these programs in the context of the broader economic development landscape.”
What Kentucky could give up
Kentucky’s data center sales tax exemption covers the purchase, use, installation, repair and replacement of equipment used in qualifying data centers. The exemption can last as long as 50 years for projects with at least $450 million in capital investment.
The tax break is what economists call a tax expenditure, which amounts to a government subsidy delivered through the tax code. Rather than writing a check to a company, the state chooses not to collect taxes it otherwise would have collected.
That means the money Kentucky gives up through the exemption cannot be used for other purposes. If billions of dollars in data center equipment are exempted from sales taxes, that is billions of dollars that otherwise could help pay for public schools, Medicaid, roads, water systems and other state priorities, Bailey said.
The tax break, which is specific to data center construction, was created in 2024 and expanded statewide in 2025. It has not yet been awarded to a qualifying project, according to the Cabinet for Economic Development.
The Herald-Leader is tracking nearly 20 proposed or operating hyperscale data centers across the state, including projects in Barren, Boyd, Greenup, Hancock, Jefferson and Mason counties.
Four of the largest projects examined by the Kentucky Center for Economic Policy would have a combined electricity capacity of about 3 gigawatts. That does not include some of the biggest projects announced more recently, including a federal-government-backed AI computing hub in Paducah and a proposed 2-gigawatt data center near Ashland.
A boom with no guarantees
The four projects examined in the analysis include a 400-megawatt data center under construction in southwest Jefferson County, a 482-megawatt TeraWulf project in Hancock County, a proposed 1.2-gigawatt facility in Mason County and a proposed 1-gigawatt TeraWulf facility in Boyd and Greenup counties. TeraWulf has since said the northeastern Kentucky facility could double in size.
But a proposal is not the same thing as a completed data center.
Utilities and developers are promoting dozens of projects across Kentucky, but they are at different stages of development. Some still need financing, customers, power agreements, permits or other approvals.
“People are seeing the large tech companies throw billions of dollars around, and they want a piece of the action,” said Darrell M. West, a professor of political science at Brown University and a senior fellow on technology innovation at the Brookings Institution. “But we know community opposition has grown in many places around the country, and so it’s likely that a number of the proposed data centers will never be built. Their local communities will not approve them.”
The Kentucky Energy Planning and Inventory Commission warned in a June report that uncertainty over which projects ultimately materialize creates a risk of overbuilding the electric system.
Louisville Gas & Electric Co. and Kentucky Utilities reported dozens of potential projects in their pipelines, while East Kentucky Power Cooperative reported active data center projects seeking more than 10 gigawatts of power.
Much of the early activity also has centered on landowners and developers positioning themselves to cash in on the data center boom. But little money has changed hands on many of the projects being discussed.
That makes the potential cost of Kentucky’s tax break especially difficult to predict. If many proposed projects never move beyond the planning stage, the state would forgo little or no tax revenue. But if even a few of the largest projects are built, the cost could reach billions, Bailey said, paid out over the course of the construction period, which usually lasts no more than three years.
“I believe that $1 billion is very conservative, given the size of the centers under consideration and the inflation in equipment value,” he said. “It could be near $1 billion for a single 1-gigawatt data center.”
A tax break built for a different era
Kentucky’s tax exemption covers servers, routers, software and equipment associated with electricity, cooling, water use and security. It does not cover land, basic site development, construction of the shell building, electricity purchases or administrative office equipment.
Projects must meet minimum investment thresholds based on county population. The minimum is $450 million in the largest counties, $100 million in counties with populations between 50,000 and 100,000, and $25 million in smaller counties.
Data center equipment typically must be replaced every few years, potentially allowing companies to claim the exemption repeatedly as they upgrade their facilities over the 50-year lifetime of the broadest exemption.
“Fifty years is way too long,” said West. “The data centers themselves don’t last that long, and they need to have their equipment upgraded every few years because there are big advances in semiconductors and data processing.”
The state’s official tax expenditure report estimates the exemption will cost $5 million in fiscal year 2026 and $15 million annually in fiscal years 2027 and 2028. Those estimates were made before the current wave of hyperscale facilities.
The potential cost depends heavily on how much the facilities ultimately cost to build and equip. Industry estimates cited by the Kentucky Center for Economic Policy put construction and outfitting costs at roughly $8 million to $15 million per megawatt, with AI-optimized facilities potentially costing substantially more.
Using those estimates, the projects analyzed could require nearly $20 billion to $37 billion in equipment and other costs eligible for the exemption. A 6% sales tax applied to 80% of those costs would represent between $1.2 billion and $2.2 billion in forgone revenue within a similar timeframe to the state’s $15 million estimate.
Other states are having second thoughts
Kentucky is not alone in confronting the growing price of data center incentives.
More than 40 states offer some form of tax break for data centers, but several have begun reconsidering those incentives as proposed facilities grow larger and questions mount over whether they create enough long-term jobs and economic activity to justify the public expense.
Ohio Gov. Mike DeWine paused data center tax incentives while lawmakers study the issue. Arizona enacted a three-year pause on its sales tax exemption, while New York imposed a one-year moratorium on new hyperscale data center development.
Illinois has imposed a two-year moratorium on data center incentives, and Nebraska has barred new data centers from receiving tax breaks.
Virginia, which has the nation’s largest concentration of data centers, has faced particular scrutiny. A legislative audit found the state’s data center tax exemptions cost more than $1.6 billion annually and generated an estimated 48 cents in state revenue for every dollar of foregone revenue. Facing scrutiny over the lucrative equipment and use tax break, the state legislature finalized a state budget this year that charges large data centers a new temporary tax on their power usage.
Some local governments in other states have even started to negotiate community benefit agreements that force data center companies to pay them for the right to build a data center in their town or county, said West. Some states with similar tax rebate programs have sought to limit the timeframe by which they can be claimed.
Millions of dollars in local tax revenue could be up for grabs, too, if courts were to conclude that data centers qualify as “manufacturing” or “industrial processing” facilities under a statewide exemption from sales tax on energy costs above a certain cap and a full exemption on local property tax for equipment used in manufacturing or industrial processing operations.
Kentucky Attorney General Russell Coleman already issued an opinion in August 2025 that determined that the definition of “industrial building” in local industrial revenue bonds issued by local governments on behalf of data center projects can apply to data centers. The result could mean local governments collect far less than advertised if the additional local tax breaks are given, Bailey said.
Kentucky’s political debate
The issue is already becoming a political and local-government flashpoint in Kentucky.
A number of counties and cities have enacted temporary moratoriums or other restrictions on new data center development as officials grapple with concerns over electricity, water, land use and potential effects on existing residents and businesses.
Speaker Osborne said it is important that Kentucky decision makers account for how other states are competing for the same data center investments and how tax incentives are used across other industries. Failing to do so “may not give a complete picture” of the tax break costs.
Gov. Andy Beshear signed an executive order earlier this month establishing conditions for projects seeking state approval or incentives. Developers must demonstrate they will not shift electricity costs onto existing ratepayers and will protect Kentucky’s water, air and other natural resources. The order also calls for developers to pay applicable taxes and engage with local communities before projects move forward.
Beshear has said the state will follow the tax incentives already approved by the legislature. On Friday, he told MS NOW’s Peter Alexander that data centers must “pay their fair share of taxes” because they’re not creating a “huge number of jobs.”
He left room for the possibility that the benefits may outweigh the consequences of a data center in some Kentucky communities.
“But only if they’re not trying to negotiate their way out of paying their fair share,” he said.
The Cabinet for Economic Development has already established guidelines on the sales tax exemption that requires developers seeking the incentive to submit community engagement plans, obtain endorsements from local officials and provide information about a project’s impact on its utility.
The 2026 General Assembly also considered measures aimed at protecting utility customers from the cost of serving massive data centers but did not enact legislation requiring data centers to bear more of those infrastructure costs.
Instead, lawmakers directed the Cabinet for Economic Development to study data center incentives in Kentucky and other states and issue recommendations by Aug. 1, 2027, after lawmakers are likely to have already begun debating the issue again.
“What we as a commonwealth probably need to do next is claw this back a little,” said Bailey. “All of us are just sort of saying, ‘Hey, wait a minute, this is so much bigger than anybody imagined. We need to, you know, really think about it before we commit 50 years of such a massive subsidy.’”
Supporters see a chance for growth
But the Republican-controlled legislature is still taking an all-in approach on its program designed to entice data center development. Senate President Robert Stivers, R-Manchester, has been an outspoken supporter of the incentives.
In an August opinion piece defending Kentucky’s economic development strategy, Stivers argued that the state should compete for emerging industries and the jobs and investments they can bring local communities. Senate GOP leadership declined to comment on the Herald-Leader’s reporting.
Stivers also championed the data center incentive when Kentucky’s first hyperscale project was announced in Louisville in January 2025, calling the legislation “groundbreaking” and saying it would “spark job creation and expand the tax base, which creates more revenue.” He described the Louisville project as “a game-changer” that would drive long-term economic growth and strengthen Kentucky as a regional business hub.
Stivers has continued to argue that data centers represent a significant economic opportunity for Kentucky, pointing to the state’s central location and relatively inexpensive electricity. But he was also an early supporter of the GOP bill to force data centers to “pay their own way” and criticized land speculators that are promising major investments in communities without solid backing from the tech industry. He called them “cowyboy speculators” in a February interview with Louisville Public Media.
The argument from Stivers and other supporters is that the tax incentives should be viewed as an investment in economic growth, rather than simply as money Kentucky is giving away.
But the scale of that investment is becoming harder to predict as proposed data centers grow larger and the artificial intelligence boom fuels a rush for new computing capacity.
For Kentucky, the question is increasingly not whether the state can attract data centers. It is whether the jobs, investment and tax revenue they bring will be enough to justify the billions of dollars in tax revenue the state could choose not to collect.