Senators Push To Eliminate Data Centers From Opportunity Zones

When Congress made the opportunity zone tax break permanent last year, supporters were quick to point out how the new benefits for select rural lands would make the sites ideal for data center development.

What a difference a year makes.

Public opinion has greatly diminished regarding data centers and their role in the expansion of artificial intelligence and rising utility costs and power demands.

So, even though data center developers have been planning new projects using incentives – and some rural officials are eager for the tax revenue and jobs these facilities provide – some members of Congress who voted for the program are now seeking to block data centers from qualifying for tax breaks.

The second iteration of the opportunity zone program, known as OZ 2.0, aims to use substantial tax breaks to push development into rural areas in economic decline.

OZ 2.0 includes a tax break known as a step-up in the base, which reduces the gain the investor will owe in taxes after holding the asset for a defined deferral period. The program offers 10% measures for urban parcels, but three times the benefit for rural development.

“They’re not shy about it. They’re very open about the fact that these 30-basis-point measures will be good for data centers,” said Simon Wang, an analyst at the National Community Reinvestment Coalition, an advocacy group that advocates for equitable economic development.

But amid a public chorus over data center development, Republican Sen. Josh Hawley of Missouri introduced legislation this month that would eliminate data center eligibility for the program.

“Big Tech companies are getting unnecessary tax breaks to build data centers that communities don’t want,” Hawley said in a statement.

Hawley voted for the One Big Beautiful Bill last year, which turned the program into a permanent fixture of the tax code while creating a new distinction between rural and urban parcels. OZs were created in 2017 as a one-off, 10-year program that provides tax breaks for economic development in distressed or under-invested areas of the country.

Bill Hawley, referred to the Senate Finance Committee, followed a similar draft proposal from Sen. Ron Wyden, the top Democrat on the committee. Wyden’s proposal, offered as a policy paper framework rather than legislation, would not only eliminate OZ benefits from data center developers but also prevent them from using other tax breaks included in the OBBBA.

Catherine Bazley, a partner in the accounting firm Cherry Bekaert, said that she has been fielding the most calls about the opportunity zone from two groups: small businesses that are looking to influence the program for passion projects like home-based needs and data center construction. He suspects that’s partly because that’s where investment dollars are more commonly directed now.

“The data center, no matter what side you’re on, creates a lot of conversation,” Bazley said. “It’s something that people trying to make easy money can do.”

PTM Partners, an investment company focused on OZ, focused on filling urban development opportunities in the first iteration of the OZ program but plans to push into rural tracts for OZ 2.0 to take advantage of additional tax breaks.

“One of the most generous features of the new program is the rural bonus,” said PTM CEO Michael Tillman.

Critics including data centers in the program question whether incentives are needed for the tech giant, which is spending an estimated $800B this year on data center construction alone. But even critics acknowledge that banning data centers as part of the program could hinder its success.

“I know, people think that these big AI companies have power and power that they can’t do,” said Lance Growth, CEO of the exchange platform 1031 Growth 1031, which is involved in raising the opportunity zone fund. “So there, I was like, ‘Mom, let the capital flow.’

The majority of investment in OZ 1.0 went to multifamily development, in part because the qualifying packages were mostly in urban or suburban areas. Investors looking at OZ 2.0 are particularly interested in rural parcels because of the additional tax benefits.

Some rural areas are in densely populated areas, often surrounding two other large cities, but most of them are far from population centers. With few people nearby, the best use for the site is energy, data center and other infrastructure projects.

Data centers are also a small part of OZ 1.0, according to an analysis by the NCRC that found that 14% of all data centers are located in parcels with the OZ 1.0 designation, while 17.3% of approved, permitted and under-construction data centers are located inside OZ. The analysis does not examine whether the property uses OZ tax breaks.

The national discourse on data center development has been heated in recent months, but the development in the OZ channel is in many ways a good fit for village governments struggling with a declining tax base, Wang said.

“The data center represents a bond that is really difficult for policymakers in rural areas, where they have economic and demographic decline, but then they also have constituencies that do not want a data center,” he said. “He was really forced between a rock and a hard place.”

Hawley’s legislation would prevent that decision-making by adding a clause to existing OZ rules to expressly exclude data centers from qualifying for tax breaks. Sen. Mark Warner, Democrat of Virginia, introduced his own legislation in July that would require data centers to receive LEED Gold or Platinum certification to be eligible for OZ benefits, in an effort to offset the rising environmental footprint.

The push to exclude some types of development from the program is not entirely new, said Blake Christian, CEO of MIT Modular, a manufacturer of accessory housing units. When the OZ program was created in 2017, some lawmakers pushed to exclude self-storage facilities from eligibility, arguing that their construction would not create enough jobs or spur enough economic development.

Those efforts failed, and Christian expects that efforts to exclude the data center from the benefits of 2.0 will also fail. The self-storage ban is “probably a better argument” than the reason for excluding data centers, he said.

“Data centers, on the other hand, are going to create a lot of jobs — certainly a lot of construction jobs,” he said.

In addition, the White House has made aggressive data centers a core component of domestic policy, encouraging large projects on federal land and eliminating public review of the emissions they generate.

The blanket proposal to block data centers from receiving OZ benefits differs from the framework established for the OZ 2.0 nomination process. Many states have some sort of bottom-up comment process, where developers with projects for potential OZ sites make pitches to local officials, which are passed to the district level and finally to the governor.

Each country conducts its own nomination process, and without a national framework, the process varies across countries. In Florida, developers are encouraged to submit proposals to the state commerce department, while officials in California hold local meetings to gather feedback to the state level.

A grassroots approach is the best way for the federal government to bring solutions to the local level, said Steve Glickman, a real estate consultant who helped develop the opportunity zone program framework.

“The more the federal government meddles in being able to determine what asset classes are appropriate and what not, you get to the slippery slope where you start to Pare down the benefit, the impact of this incentive in the tax code, and thus you risk radically decreasing the amount of investment that goes to low-income communities, especially rural communities,” he said.

Local municipalities ultimately have the authority to approve or deny projects, and those decisions should remain at the local level, Glickman said.

The swirling debate about the inclusion of data centers in OZ 2.0 is in some ways an echo of the criticism of the first iteration of the program. OZ 1.0 has looser standards for what properties can qualify and also allows for sites adjacent to eligible parcels.

That dynamic has led to criticism that capital is being directed to areas that are not economically distressed or in need of development incentives. As tech giants pour billions of dollars into data center development, there are questions about whether new incentives are needed to spur construction.

“Data centers create real economic development,” Tillman said. “They’re bringing the tax base, and they’re going to bring construction projects to rural markets, but I think that’s a different policy question than asking whether federal community development capital should pay for it.”

Jarred Schenke contributed reporting.