Arizona Sen. Gallego supports nixing tax breaks for data centers

It is all the rage to hate data centers. Democrats and even many Republicans are skeptical of them due to their high energy and water demands, meager job creation and general ugliness when placed in communities. Others argue they are crucial investments in the country’s technological supremacy.

Arizona Sen. Ruben Gallego is trying to strike a middle ground.

The Democrat has called data centers a “necessary evil” that the country will need in order to keep up with the AI arms race against China and other countries. However, he said Thursday that he’s less than willing to roll out the red carpet for data centers in Arizona, arguing that they shouldn’t receive tax breaks they’ve long enjoyed in the state.

Gallego discussed his views with reporters Thursday morning after an event at the southeast Phoenix Veterans of Foreign Wars Post 720 to promote his support of the Richard Star Act, which would extend full benefits to all medically retired combat veterans. Afterward, Phoenix New Times asked Gallego about his previous comments on data centers and how he balances them with the loud grassroots backlash against such projects. 

“Your local resident should be held harmless. We shouldn’t be paying more in electricity bills because data centers are here,” Gallego said, adding that he agreed with what residents are feeling and that “we can find a compromise.”

That compromise? Having wealthy tech companies and data center developers actually pay their fair share. The “data center and the hyperscalers have to actually want to be a part of that,” Gallego added.

In 2013, Arizona lawmakers passed a statewide tax exemption intended to attract data centers to the state. The exemption provides tax breaks for equipment purchasers and operations that meet a minimum capital investment threshold within five years of applying for the program. To qualify, facility owners must invest at least $50 million in projects in Maricopa and Pima counties, or at least $25 million in the state’s 13 other counties. The exemption lasts up to a decade for most projects.

The program worked, but perhaps a bit too well.

The tax break, which is set to last through 2033, has cost the city of Phoenix more than $12 million in revenue a year, a city-sanctioned audit showed. Now, officials, including Gallego, are calling for that exemption to be rolled back. 

While Gallego has said he believes the future of the economy will be driven by AI, that doesn’t mean handing out a blank check to the companies that open these facilities. Some data centers, Gallego said, “end up paying, on average, less than some of the homeowners who are right next to them.”

“That’s not a good deal,” he added. “There can be a good deal when it comes to residents and data centers. That’s not what we’re seeing right now.”

Support for nixing tax breaks

Both Phoenix Mayor Kate Gallego (the senator’s ex-wife) and Arizona Gov. Katie Hobbs have also both supported a rollback, with Hobbs demanding a repeal of the exemption in state budget talks.

“The amount (of data centers) that are coming in is a problem to me,” Gallego added. “I fear that we may not have enough water and we may not have enough power generation to be able to hold harmless everyone else.” 

Gallego also called some data centers in the Valley “abusive” for using state tax benefits to build eyesores in “very dense or very valuable areas” without long-term, thoughtful use of their impact on water and other resources. “That’s not fair to our communities,” he said. Instead of benefitting from state tax benefits, data centers “should be bringing their own energy or compensating the individual rate payer for that,” Gallego argued. He also believes state and local governments should have more control over where these facilities are placed.

The rapid growth of data centers in the Phoenix area has become a flashpoint for many community members who don’t want massive, windowless warehouses that bring few jobs but suck up high amounts of energy and water. According to the Data Center Map, there are 176 data centers in the Phoenix area, with large concentrations in southeast Mesa, south Chandler, Goodyear and north of Luke Air Force Base in Surprise.

Additionally, nearly 20 more facilities are expected to open in the coming years. The region now has the country’s highest concentration of data centers outside of Northern Virginia.

Community-led high-profile local fights have broken out against Project Blue in Tucson, against a Kyrsten Sinema-supported data center in Surprise and against facility in Ahwatukee. Those efforts have had limited success — of those three, only the Chandler project was scuttled due to community pushback. 

More recently, community members rallied against Project Baccara, which would be built in an unincorporated area of Maricopa County south of Surprise. The 160-acre site, which will have two data centers and a gas power plant, is just north of Luke Air Force Base. On Wednesday, despite loud pushback from residents, the Maricopa County Board of Supervisors approved a military compatibility permit for that project by a 4-1 vote, as required by state law for development near military bases.