Kentucky considers billions in tax breaks for AI datacenters, joining regional race for infrastructure capex.
The massive surge in proposed data centers is prompting intense debates about their costs and benefits. A central question emerging across the country is whether states should subsidize data centers with public tax dollars. These concerns are growing as tech companies locate data centers nationwide and as the proliferation of new, artificial intelligence (AI)-driven "hyperscale" centers—many times the size of previous generations—makes the cost of tax subsidies substantially larger.
Kentucky currently has a data center tax break on the books. The state's sales tax exemption applies to equipment purchases and can last up to 50 years, though the state has not yet awarded any exemptions. Given publicly available information about proposed data center sizes in Kentucky and industry data on average costs, the commonwealth could easily forgo over $1 billion in sales tax revenue if this exemption is awarded to just a few large centers. The data center tax break, previously estimated to cost $15 million annually, could quickly become Kentucky's largest tax expenditure. This subsidy would be awarded to the world's most valuable companies even as they eagerly seek localities willing to accept data centers and meet enormous, still-speculative demand for AI processing capacity.
Decision makers should think twice before handing over such a huge amount of state General Fund dollars through this exemption. This money would otherwise fund schools, Medicaid, infrastructure and other services receiving cuts in current and recent state budgets. A growing number of states are engaging in serious debates about data center tax breaks, with proposals to pause, limit or end these subsidies.
Kentucky's 2024 legislation created a sales tax exemption for data center equipment and software, including servers, routers, and systems related to electricity, cooling, water usage and security. Purchases exempt from sales tax total roughly 85%-90% of data center costs, as industry benchmarks show that only 10%-15% of costs stem from land, site work, foundation and shell building.
To qualify, a data center must have a minimum capital investment of $450 million in counties with at least 100,000 people (Jefferson, Fayette, Hardin, Boone, Daviess, Kenton and Warren); $100 million in counties with 50,000-100,000 people (Bullitt, Campbell, Christian, Greenup, Laurel, Madison, McCracken, Nelson, Oldham, Pulaski and Scott); and $25 million in counties with fewer than 50,000 residents. The exemption can last up to 50 years for investments exceeding $450 million and 25 years for smaller centers. Since computer equipment typically requires replacement every 3-5 years, additional tax breaks occur every few years until expiration.
Four major proposed data centers illustrate potential costs. A Powerhouse Data Centers/Poe Companies facility under construction in southwest Jefferson County will use approximately 400 megawatts (MW) of power at an estimated $11 billion lifetime cost. A TeraWulf center in Hawesville at the former Century Aluminum site is planned at 482 MW. Proposed projects include a 1 gigawatt (GW—1,000 MWs) TeraWulf facility in Boyd/Greenup county and a 1.2 GW center in Mason County. These four facilities alone total 3.084 GW, equivalent to providing electricity for approximately 2 million homes.
Based on 2026 prices, standard data centers cost $8-$12 million per MW to build and outfit; AI-optimized facilities range from $15-$25+ million per MW. All four centers are reportedly designed to be AI-optimized. Using conservative estimates of $8-$15 million per MW and assuming 80% of costs are sales-tax-exempt purchases, the initial outfitting of these four facilities could result in the state forgoing $1.2-$2.2 billion in tax revenue, with additional losses as equipment is replaced and upgraded over 50 years. This far exceeds the state's previous $15 million annual cost estimate, calculated before the recent proliferation of AI-based hyperscale centers.
The Kentucky Lantern is currently tracking 16 proposed data centers. A draft analysis of a 1.2 GW proposed center in Barren County reported $10.8 billion in information technology hardware and another $4.6 billion in "interior building systems" separate from real property. If this equipment falls entirely under the sales tax exemption, that represents another $924 million in tax breaks for this center alone. The report notes this is "a deliberately conservative baseline," and that rising hardware costs mean actual IT equipment expenses "is likely materially higher."
As of March 2026, LG&E/KU reported 29 potential data center projects in its pipeline, with 11 projects totaling 3.5 GW having greater than 50% chance of moving forward. The company told investors in May that total prospective electricity demand from potential data centers in its service region could reach 12 GW. East Kentucky Power Cooperative (EKPC) has 11 active data center projects seeking over 10 GW in power. For context, 22 GW of power exceeds the 18.4 GW all Kentucky utilities generated in summer 2024. All proposed data centers are unlikely to be built, but considering known projects, the cost of the sales tax exemption has potential to climb significantly.
For a handful of these data centers, the potential cost could approach or exceed what Kentucky spends on all public universities and community colleges, core K-12 funding (the "SEEK base"), and Medicaid, which provides health insurance for one in three Kentuckians.
More than 40 states provide data center tax breaks, ranging from sales tax exemptions to electricity and property tax abatements and corporate tax credits. However, many were established for previous generations of much smaller data centers. States increasingly face sticker shock as the cost of subsidizing hyperscale-sized centers becomes clearer, with new analyses questioning the cost-benefit of data center tax breaks.