Research | Policy Briefs
Data Centers: Balancing Economic Benefits and Resource Demands
Across the country, communities are exploring how to attract data centers as part of their economic development strategies. These facilities can generate significant tax revenue, and while they provide a limited number of jobs, those jobs typically offer well-above-average wages.
However, data centers are among the most energy-intensive building types, consuming up to 50 times more energy per square foot than a typical commercial office, according to the U.S. Department of Energy and requiring large volumes of water for cooling. Considering these substantial demands, many communities wonder whether the tax incentives used to attract data centers are worth the cost.
This overview defines the types of data centers, weighs their economic benefits against infrastructure challenges, and examines the policy debate over tax incentives.
Types of Data Centers
Data centers vary in financial, technical, and ownership structure:
Enterprise data centers: Built, owned, and operated by companies to serve their own business needs.
Hyperscale data centers: The largest data centers, generally owned by large tech companies like Amazon, Google, Microsoft, etc. These data centers provide a variety of services, including cloud computing.
Managed services data centers: Operated by third parties (e.g., an IT services provider) on behalf of companies.
Colocation data centers: Companies rent space in a third-party data center which provides the infrastructure (building, cooling, bandwidth, security) while the company manages their own servers.
Cloud data centers: Hosted cloud service providers like Amazon Web Services (AWS) or Microsoft (Azure). Cloud data centers are often among the largest (hyperscale).
Edge data centers: Smaller, decentralized data centers located near end users to reduce latency and support local data transfers and real-time applications.
Rising Energy Demand
Despite their differences, all data centers are heavy energy consumers, a demand that’s only increasing with the rise of AI. According to a Goldman Sachs report, AI growth is expected to increase data center power demand 165% by 2030. According to a 2025 Newmark market report, the immense computational power and density needed for AI requires more power and cooling than existing data centers can handle, driving demand for new facilities.
Many data center owners like Google, Amazon, Microsoft, and Meta are committed to sourcing clean energy to power their data centers. As electricity demand growth—due in large measure to the growth in data centers and AI—increasingly strains the grid, these companies are becoming more creative in their quest for clean energy sources.
What does this mean for communities?
As the demand for data centers grows, developers are seeking new sites with reliable electricity (often renewable or carbon-free), excess water capacity, and access to redundant high-speed internet connections. In return, data centers offer solid capital investment, ample tax revenue, and a small number of high-paying jobs.
Electricity, water, and high-speed connections are primary considerations for developers
Electricity: Data centers consume 10 to 50 times more electricity than a typical commercial building of the same size. They depend on zero unplanned downtime, requiring reliable power from two redundant substations plus onsite backup. The availability of sufficient, reliable power will likely be the developer’s most important siting concern.
Note: For many operators, access to renewable or carbon-free energy is now a requirement, usually specified upfront.
Water: Processing hardware generates substantial heat, requiring an equally substantial cooling system. HVAC and liquid cooling systems can use 500,000 gallons of water a day or more—sometimes much more.
Internet: High-speed internet with redundant connections from multiple ISPs is essential.
Good taxpayers, but not great job creators:
Taxes: Data centers can be large taxpayers, helping offset property taxes or fund schools and infrastructure. Many states offer tax incentives to attract them, though these incentives face growing scrutiny.
Jobs: Despite billions in capital investment, data centers generate relatively few jobs—typically 50-100 for a $1-2 billion facility, compared to 10-20 times more in manufacturing. However, these positions tend to be well paid, averaging around $100,000, versus $50,000-$60,000 in manufacturing.
Growing Controversy
Data centers were once welcomed by states and economic developers with the same tax incentives offered to other large projects, but states are rethinking that approach as they grapple with the industry’s high energy and water use, and as access to those resources—not incentives—proves to be the main driver of site selection. Increasingly, communities are also pushing back on new developments.
Water is a finite resource, and data centers use a lot of it
Unlike electricity, new water resources can’t simply be created. Rivers, reservoirs, and aquifers have fixed capacities and are facing ever-increasing demands. In many areas, there is already limited water to go around. Policymakers are now taking a closer look at economic development projects with high water usage, particularly in regions like the American Southwest, where water resources are especially limited.
Data centers are driving the first net increase in electrical demand in a generation
As noted above, data center power demand is expected to grow by 165% by 2030, contributing to the first significant rise in overall electricity demand in over 40 years. This growth is creating an urgent need for increased power generation capacity across the country. Policymakers rightly wonder whether the electric grid can expand fast enough to keep up with the rapid development of new data centers.
Adding to the challenge, many data center operators and their clients, such as Google, Amazon, and Microsoft, want to source clean energy to meet their climate goals. Some states offering incentives to attract data centers also have their own clean energy goals.
The key question for policymakers is: Can we add enough new clean energy to the grid to meet both our own needs AND the growing demands of power-hungry data centers?
Is Attracting Data Centers Worth It?
Policymakers are actively debating the merits of attracting data centers. Some states are increasingly questioning whether tax incentives to attract data centers are justified given their strain on resources. Others are considering creating or expanding their tax incentives.
This debate is unlikely to end in the near term. Data centers are essential to business and modern life, and provide communities with tax revenue and high-wage jobs, but they also strain local energy and water resources. Policymakers and communities nationwide will be grappling with these tradeoffs for years to come.