Senators Are Pushing To Kick Data Centers Out Of Opportunity Zones

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

What a difference a year makes. 

Public opinion has soured dramatically on data centers and their role in both the expansion of artificial intelligence and the surge in utility costs and power demand. 

So even as data center developers are already planning new projects using the incentives — and some rural officials are eager for the tax revenue and jobs the facilities provide — some members of Congress who voted for the program are now looking to block data centers from qualifying for the tax breaks. 

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

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

“They weren’t shy about it. They were very open about the fact that this 30-basis-point step-up would be great for a data center,” said Simon Wang, an analyst at the National Community Reinvestment Coalition, an advocacy group promoting equitable economic development.

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

“Big Tech companies are getting major tax breaks they don’t need to build data centers communities do not want,” Hawley said in a statement. 

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

Hawley’s bill, which was referred to the Senate Finance Committee, follows 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 strip OZ benefits from data center developers but also block them from using other tax breaks included in the OBBBA. 

Catherine Bazley, a partner at accounting firm Cherry Bekaert, said she’s been fielding the most calls about opportunity zones from two groups: small developers that are looking to leverage the program for a passion project like needs-based housing and data center developers. She suspects that’s partly because that’s where investment dollars are being more generally directed today.

“Data centers, no matter what side you’re on, are generating a lot of conversation,” Bazley said. “It’s something that people trying to raise money can easily tap into.”

PTM Partners, an OZ-focused investment firm, concentrated on infill urban development opportunities in the first iteration of the OZ program but is planning to push into rural tracts for OZ 2.0 to take advantage of the additional tax break.

“The single most generous feature of the new program is the rural bonus,” PTM CEO Michael Tillman said.

Critics of including data centers in the program question whether the incentives are needed for the tech behemoths that are spending roughly $800B this year alone on data center construction. But even the critics acknowledge that a ban on data centers as part of the program could hamper its success.

“I get it, people are kind of thinking that these big AI companies have unfettered strength and power,” said Lance Growth, the CEO of 1031 exchange platform Growth 1031, which is involved in raising opportunity zone funds. “Being in it, I’m like, ‘Dude, just let the capital flow.’” 

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

Some rural tracts are in relatively populated areas, often straddling two other larger cities, but the majority are far from population centers. With few people nearby, the best uses for those sites are frequently energy, data center and other infrastructure projects.

Data centers were also a small part of OZ 1.0, according to an analysis from NCRC that found that 14% of all data centers are located on parcels that have OZ 1.0 designations, while 17.3% of approved, permitted and under-construction data centers were inside an OZ. The analysis did not examine whether the properties leveraged the OZ tax breaks.

The national discourse around data center development has become fraught in recent months, but their development on OZ tracts is in many ways a natural fit for rural governments that are grappling with a declining tax base, Wang said. 

“Data centers represent this really tough bind that rural policymakers are in, where they have economic and demographic decline, but then they also have constituencies that don’t want data centers,” he said. “They’re really forced in between a rock and a hard place.” 

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

The push to exclude some types of development from the program is not wholly new, said Blake Christian, the CEO of MIT Modular, an accessory dwelling unit fabricator. When the OZ program was created in 2017, some lawmakers pushed to exclude self-storage facilities from eligibility, arguing that their construction wouldn’t create enough jobs or spur enough economic development. 

Those efforts failed, and Christian expects that efforts to excise data centers from 2.0 benefits will similarly wane. A self-storage ban was “probably a better argument” than the rationale for excluding data centers, he said. 

“A data center, on the other hand, is going to create a lot of jobs — certainly a lot of construction jobs,” he said. 

What’s more, the White House has made the aggressive build-out of data centers a core component of its domestic policy, backing huge projects on federal land and stripping public review of emissions they generate.

The blanket proposal to block data centers from receiving OZ benefits is in contrast to the framework that was established for the OZ 2.0 nomination process. Many states had some sort of bottom-up comment process, where developers with projects for potential OZ sites made their pitches to local officials, who passed them up to the county level and eventually to the governor. 

Each state is running its own nomination process, and with no national framework, the process has varied across the country. In Florida, developers were encouraged to submit proposals to the state’s commerce department, while officials in California held a series of local meetings to gather feedback that made its way to the state level. 

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

“The more the federal government meddles in being able to determine what is an appropriate asset class and what’s not, you get to a 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, particularly rural communities,” he said.

Local municipalities ultimately have the authority to approve or deny a project, and that decision should stay at the local level, Glickman said.

The debate swirling around the inclusion of data centers in OZ 2.0 is in some ways an echo of criticisms of the program’s first iteration. OZ 1.0 had looser standards for what properties could qualify and also allowed sites adjacent to qualifying parcels to qualify. 

That dynamic led to criticisms that capital was being directed to areas that weren’t economically distressed or in need of development incentives. As tech giants pour billions of dollars into data center development, questions are arising about whether the new incentives are needed to spur their construction. 

“Data centers create real economic development,” Tillman said. “They bring a tax base, and they’ll bring construction jobs to a rural market, but I think that that’s a different policy question than asking whether federal community development capital should be paying for them.” 

Jarred Schenke contributed reporting.