Caroline MacNeill 

Associate Editor 

Loyola University Chicago School of Law, JD 2028 

 

Data centers have rapidly emerged across the country to support the AI boom. Originally, policymakers were supportive of data center construction in their communities because they promised an influx of construction jobs, tax revenue, and community investment. To compete for data center construction in their communities, policymakers relaxes permitting requirements, offered tax subsidies, and signed non-disclosure agreements to keep development plans hidden. This competitive deregulation began to devolve into a race to the bottom; then, the public realized promises of construction fell short. 

Data centers’ enormous energy consumption has spiked demand, forcing utility companies to build additional infrastructure and drive up rates for everyone on the grid. The rising energy prices—coupled with impacts on water resources, the environment, and community character—have made the public resentful of data centers in their communities. In response to the growing public resentment, elected officials facing reelection in the November midterm races are pivoting away from pro-data center policies toward increased regulation. Those officials should use the political momentum to build coordinated approaches that will prevent competitive deregulation and protect ratepayers long after the midterms. 

Failed policy initiatives used in the race to the bottom  

A race to the bottom develops when local and state governments compete to attract community investment through the relaxation of regulations and tax rates. While deregulation may succeed in creating short-term investment, it often leads to long-term costs. On the front end, data centers create construction jobs, bring an influx of tax revenue, and bolster infrastructure investment. For example, data center revenue in Loudoun County, Virginia, helped reduce the county’s property and vehicle tax rates. But while the construction created thousands of temporary jobs, the finished facilities only supported a few dozen permanent jobs. The centers also come with steep down-the-line costs, including energy rate increases; air, water, and noise pollution; and changes to the community’s character.  

At the beginning of 2026, elected officials were working to lure data center construction to their communities, likely with the belief that the short-term wins of construction would help them in the 2026 midterm elections. In said election, all of the seats in the House of Representatives, 33 seats in the Senate, 36 governorships, and 83% of state legislative seats will be decided. To achieve their goal, regulators relaxed the permitting process and eased government approvals. They offered a buffet of tax incentives, such as sales tax breaks on essential equipment and construction materials, property tax reductions, and tax exemptions on electricity usage. Moreover, many local officials signed non-disclosure agreements to keep the details related to data center construction hidden until the project became official. But when public opposition against data center construction mounted, the political calculus changed and elected officials have scrambled to reverse course.  

Data center backlash can prevent a race to the bottom 

As public backlash of data centers has exploded, data center construction has become politically toxic. Two-thirds of Americans now oppose constructing a data center in their communities. People are joining forces across party lines to organize against data centers and the politicians that support them. In response, elected officials, especially vulnerable incumbents, are quickly tightening regulations to address data centers’ energy use.  

Arizona, where the incumbent Governor Katie Hobbs is up for reelection, and Illinois have each issued moratoriums on sales tax exemptions for data centers. New York’s Governor Kathy Hochul, who is also facing reelection, put a one-year moratorium on all data center construction. Nevada’s Governor Joe Lombardo, another incumbent facing reelection, issued an executive order conditioning data center tax incentives on the payment of their related power costs, protecting existing customers from higher bills, and meeting water use and grid reliability standards. 

State officials have also coordinated efforts to more effectively reduce prices and protect communities. 23 states have signed on to President Trump’s March 2026 Ratepayer Protection Pledge, which commits state and tech company signatories to protect households from rate hikes caused by data centers’ energy use. Although the pledge is voluntary and non-binding, state regulators can adopt the pledge’s commitments as official standards that uniformly regulate data center energy consumption.   

Additionally, local officials are also cooperating to build coordinated approaches to data centers. For example, the Mississippi River Cities and Towns Initiative, an association of mayors from cities and towns along the Mississippi River, adopted recommendations that guide local leaders in their consideration of data center projects. The recommendations, which include requiring a full disclosure of water and electricity use up front, can help officials in the region balance the short term incentives of data centers with their long-term impacts on shared resources.  

The public’s opposition to data center construction has disincentivized elected officials from competing for data center construction. Instead, officials are curbing future construction and working together to address the adverse effects caused by the rapid construction and deregulation of data centers.  

Policymakers can capitalize on the calls for regulation 

State and local officials should continue pursuing coordinated approaches to regulate data center energy consumption. State and local leaders have greatest opportunity to meaningfully work together to regulate how data centers consume energy since most of the country’s utilities operate as regional or  statewide utility monopolies governed by state franchise laws.  

Public opposition to data centers has reversed the short-term political incentives which drove the deregulation and rapid construction of data centers. State and local officials should capitalize on the public’s calls for regulation by building strong cooperative regulatory frameworks. When  neighboring jurisdictions apply the same strong regulations, data center developers can no longer threaten to relocate to a place with looser rules and officials will strengthen their bargaining power. By using public backlash to transform competition into coordination, policymakers can end the data center race to the bottom and shield ratepayers from its long-term costs.