Data centers: Your questions answered

Data centers are buildings — or spaces within them — that house a company’s computer systems and hardware. They’ve been around a long time.

According to the Data Center Coalition, data centers power anything that takes place “in the cloud” — from storing important documents to photo sharing and online streaming. These used to be spread across different businesses and often owned by third parties.

The coalition’s vice president of state policy, Dan Diorio, said very large data centers — sometimes called hyperscale data centers — started becoming more popular in the 2010s. He said these are generally owned and operated by companies that need more cloud capacity like Amazon, Google, Microsoft and Meta.

“It really is a much more efficient way of utilizing the economies of scale for the amount of storage and processing that we need,” he said.

Diorio said usually the thing that separates a data center from a hyperscale data center is how much energy it uses. He said a data center that uses 50 to 175 megawatts or more could be considered hyperscale.

Many of the data centers getting built today are for generative AI. It uses learning techniques to make new content — images, videos, music and text — based on a user’s request.

Dan Diorio with the Data Center Coalition said different companies have different priorities, but all of them want to locate in places where they can build data centers as quickly as possible.

“We want our data stored [in the U.S.] for our increasingly digital lives — safe and securely, domestically,” he said. “And so we're on that steep curve right now. Data centers are building out as fast as they can to meet that demand curve, and all indications (are) that we're still behind. So overall, time to market is certainly an important consideration — and within that — tax and regulatory climate is definitely key.”

Indiana and 36 other states have tax exemptions for data centers. Diorio said other factors make Indiana competitive — reliable and affordable energy, access to a construction and trades workforce, and available land. Fiber infrastructure also helps bring data centers to market quickly.

Bryce Gustafson is an organizer for Citizens Action Coalition, a consumer and environmental advocacy group. He said every data center project is different, but generally tech companies start conversations with local officials months before a project is announced publicly.

Then, a county or city planning commission will take up the issue — often to decide whether to rezone the land from agricultural to industrial. Gustafson said the land for more urban data center developments might already be zoned industrial or may need a different type of industrial zoning.

If there’s an objection to the zoning department’s decision, the issue may be taken up by a local government’s board of zoning appeals.

After that, the project usually goes before county or city commissioners for a vote. Gustafson said some data center developers have also held community town halls.

Gustafson said he’s seen the whole approval process take as little as a month — so, for community members who object, it’s important to get involved as soon as they hear about a data center project in the works.

“Best advice is to start talking with your neighbors,” he said. “Start showing up to these meetings, start talking with the decision makers and express your feelings on this issue.”

Dan Diorio with the Data Center Coalition said having non-disclosure agreements allows community leaders to get more proprietary information on the project than they would be able to otherwise.

“It's important to remember that this is a very competitive industry and so there are a lot of considerations as far as announcing different developments and ultimately where you decide to site a data center,” he said. “So there's definitely competitive concerns, proprietary concerns, confidentiality concerns, and I think safety and security concerns as well. You know, this is all of our data. You know, this is our banking data, our healthcare data.”

While that may benefit data centers, Bryce Gustafson with Citizens Action Coalition said residents often feel left out of important conversations between tech companies and local officials.

“It's sown distrust in those communities, because people who say, ‘I voted for this person. Why are they doing this without having that community conversation?’” he said.

With data centers in mind, lawmakers created the redevelopment tax credit in 2019. It gives companies that build on “vacant or underutilized land” a tax break on the costs needed to improve the land, purchase certain equipment and set up electricity.

The state has awarded at least $682.6 million in redevelopment tax credits to businesses spread over 53 projects from 2019 to 2024.

Michael Hicks directs the Center for Business and Economic Research at Ball State University. He said whether land is “underutilized” is often open to interpretation.

Hicks said it’s important to note that many data centers go into urban areas or former industrial sites in rural areas to take advantage of the electric and water infrastructure that’s already there.

Indiana is also one of at least 32 states that provide sales tax exemptions specifically for data centers. According to the Indiana Economic Development Corporation, data centers get a sales tax break on things like “IT and electrical equipment, software, electricity, heating and air conditioning equipment, and security equipment.”

A qualifying company can get the incentive for 25 years or 50 years if the investment is more than $750 million. Data centers must invest a certain amount of money based on the population in the county. Hicks said most AI data centers are likely to receive the 50-year sales tax exemption based on the size of the investment.

Some experts say it’s hard to call the sales tax exemption an “incentive” because of the way Indiana’s corporate tax system works.

Justin Ross is a professor of economics and public finance at Indiana University's School of Public and Environmental Affairs.

“Principle economists would say you're not supposed to put the sales tax on the intermediate purchases made by businesses,” he said. “You're supposed to save that towards the end so you don't get pyramiding and stuff. But states have written their sales tax laws in such a way that they kind of, by default, include them and then have to create a special exemption to carve them out.”

Some data centers have also received state tax credits that aren’t specific to data centers. For example, Amazon received the redevelopment tax credit as well as an additional $58 million in Hoosier business investment credits, EDGE credits for creating jobs and improving the standard of living and Skills and Enhancement Fund workforce training grants.

Ball State University professor Michael Hicks said one of the largest tax breaks available for data centers are actually personal property tax abatements from local governments. He said if the Indiana Economic Development Corporation gives a business something like the redevelopment tax credit, it often expects counties to provide an equal or larger tax abatement.

Hicks said a recent state property tax reform law further complicates matters.

When you pay your property taxes, that money often goes to help run essential local services like schools, fire departments, libraries and parks. So when the state cut property taxes for homeowners, smaller local governments had to find more revenue to keep those services running.

Senate Enrolled Act 1 could cost local governments up to $1.8 billion by the end of 2028.

David Bottorff is the executive director of the Association of Indiana Counties. He said to get new revenue under the law, counties would likely need to add assessed value.

“So developments like data centers can offer a lot of new assessed value, which can be taxed, which would allow the local unit of government to generate more money and reduce the property tax rate, perhaps, so that other taxpayers aren't paying as much property taxes,” he said.

Moreover, data centers allow local governments to get more property tax money without needing to expand basic services on already tight budgets. Bottorff said a housing development might have more assessed value, create jobs and bring more people into a community.

“But, of course, the housing development demands services, right?” he said. “The school may have to expand or create more bus service. It may require more police and fire for housing development versus a data center.”

Ball State University professor Michael Hicks is skeptical data centers will have meaningful benefits to local communities under the new law.

“I'm afraid that that analysis, that these are a big tax boon, just doesn't look realistic to me,” he said. “And that's again, assuming that they're going to be around for a long time, and then this technology is going to be continuing to pay some real property taxes down the road. I'm not sure that's something I'd be comfortable with.”

Indiana’s tax abatements for businesses have always been generous. But Hicks said before SEA 1, local governments got at least 30 percent of the taxable value of the business’s equipment after the 10-year tax abatement was over.

“So if you abate right up front, at the end of that, this business that came in — invested tens of millions or a few billion dollars — is still paying property taxes to the local governments to provide street signage, police, fire, schools, water, sewer, other types of infrastructure,” he said. “Today, under SEA 1, that 30 percent threshold is gone. It's the biggest business tax cut — in anywhere that I know of — in recent decades.”

Of course, local governments don’t have to abate all taxes on a data center’s equipment over those 10 years. Hicks said that could give counties a “windfall” of tax revenue in the first few years.

“They can't bank that. They can't use that to build out water, sewer. They can't make long-term repairs on schools because of the growth cap. It just depresses everybody else's tax for a few years and then the taxes return once they close out,” he said.

Bryce Gustafson with Citizens Action Coalition said SEA 1 has put local governments in a tough spot.

“[Lawmakers] threw this bill out to help fix a problem, but it actually created more problems,” he said. “And these local communities are under pressure. Either they have to raise taxes, cut services, or invite data centers to come into their community — not a great option for them.”

Data centers could provide more benefits to the state, however. Indiana University professor Justin Ross and his team conducted a cost-benefit analysis of putting a data center in Ohio where there wasn’t one before.

Ross said his team “found it really difficult to find a case where it would work out as a net negative for, like, at least the state as a whole, right? So the kind of net-benefit margins for the local government that it's placed in are pretty small. But like, overall, for like the region, the state for the most part, there just aren't very many, let's say, negative externalities.”.

According to the Lawrence Berkeley National Laboratory, data centers make up about 4 percent of all electricity used in the U.S.. By 2028, that’s expected to rise to between 6.7 and 12 percent.

In other words, their electricity use could almost triple. If that electricity comes from coal or natural gas, air pollution and greenhouse gas emissions will also rise.

It’s not always easy, however, to find out how much power a specific data center will use until later in the process. This information is often kept confidential initially because of competition concerns, said Dan Diorio with the Data Center Coalition.

“For our part, as data centers, we are very much leaning in with utilities to help them have the information they need to forecast their demand so that they can see how much infrastructure they need,” he said. “We need to right-size it. We don't want to overbuild. We also don't want to under build. And so it's an important aspect of getting that infrastructure right.”

There has also been confusion over which data centers will actually get built — leading electric utilities to overestimate how much power they will need.

Because there is a huge backlog to connect to the grid, tech companies may be in talks with multiple utilities at the same time in an attempt to gauge who will get power for their data center the fastest.

Diorio said data centers and utilities can work together to find solutions to the issue.

“How does a utility evaluate a project based on certain milestones it hits?” he said. “When it gets local permitting, when it breaks ground or when it reaches halfway through construction? And that should help, I think, weed out some of the, perhaps, speculation within the system.”

The Indiana Energy Association did not provide comment.

This information is also often kept confidential initially.

Hyperscale data centers in the U.S. are expected to consume between 60 and 124 billion liters of water for cooling by 2028. Any coal or natural gas plants used to power them will also need a lot of water for cooling. Indiana’s water use has gone down in recent decades as more coal plants closed.

Dan Diorio with the Data Center Coalition said data centers manage their water use in multiple ways and the industry is seeing a lot of advancements in water efficiency.

“There's advances in waterless cooling systems,” he said. “Many companies are using closed-loop systems in which the system is charged once and then you recycle the water through. There's use of reclaimed water, recycled water, where the infrastructure is available to do that.”

Bryce Gustafson with Citizens Action Coalition said communities have a right to know how much water and electricity a data center will use before it's approved.

“If there's not enough water for that other economic development, that's going to be an issue,” he said. “Or in some instances, like in Chile, they were already having issues with access to clean potable water and here comes a data center saying we're going to take more of it.”

Data centers have increased electric rates in some areas.

According to the Institute for Energy Economics and Financial Analysis, data centers drove up prices on the electric capacity market for PJM — the grid operator that serves northeast Indiana.

As a result, the average bill for residents in Ohio and western Maryland is expected to go up $16 and $18 a month, respectively.

A study by Carnegie Mellon University also estimates that data centers and cryptocurrency mining could increase average U.S. electric bills by 8 percent in 2030.

State and federal policies, however, can have a big impact on whether residents’ rates go up.

Governments can require data centers to pay for their share of the cost to serve them through new power plants and lines. They can also incentivize energy-efficiency and curb their energy use when the overall demand is high — like on a very hot summer day where everyone is using a lot of air conditioning.

Some Indiana utilities — like Indiana Michigan Power and NIPSCO — are exploring ways to protect their customers from rate increases caused by data centers.

“We are fully committed to paying our full cost of service and we want to ensure that the infrastructure that we utilize, we are paying for,” said Dan Diorio with the Data Center Coalition.

Data centers aren’t the only reason rates are going up, of course. Many electric utilities are working to replace aging infrastructure like power lines. More people are driving electric cars and switching to electric appliances and other household equipment. New manufacturing plants also use a lot of power.

There are data centers looking into partially powering their facilities with solar or wind, but it’s unlikely that could cover all of a data center’s needs.

Data centers need a lot of power at all hours of the day. Dan Diorio with the Data Center Coalition said a data center would need a lot of land to generate enough wind, solar and battery storage for such a large energy user.

“It's the interim nature of the energy as well. Data centers are everything we do every day,” he said. “It's the 21 connected devices on average in our homes. We depend on those services to be available 24/7, 365.”

As a result, many data centers in Indiana will likely be powered by natural gas — at least initially. Diorio said tech companies are looking into energy sources like small modular nuclear reactors and geothermal.

This isn’t easy to answer.

David Nelson is a noise control consultant based in Arkansas. His work involves forecasting and managing the noise that comes from machines, buildings and certain consumer products. He said there are a lot of factors that go into how loud an AI data center might be.

“The first factor is how much power it consumes because all of that power eventually turns into heat, and then machinery needs to get rid of that heat and replace it with cool air inside the facility,” he said. “So the bigger the facility, the potentially louder it is.”

Nelson said the method of cooling a data center uses affects noise.

“If they use a lot of outside air, that tends to be noisier than what we call liquid cooling,” Nelson said.

Data centers can also choose quieter equipment and place noise control treatments on or around certain machinery.

Nelson said people also experience sound differently depending on the context.

“Am I experiencing this at work or at home?” he said. “Is it the sound of money being made? Is it the sound of services being provided, technology advanced that might have a positive association. But if it's not my sound and it's coming over the fence, I might not have that positive association.”

A loud sound in a rural area will also have a bigger impact than in an urban one — because that new, loud sound stands out more. Unlike the sound of cars on a highway, data centers have a more continuous sound because they run 24/7.

While tree cover can improve the aesthetics for some neighbors, Nelson said it doesn’t dampen the sound.

Some communities have created ordinances that limit the sound from data centers to a certain A-weighted decibel level — or dBA, which is a relative measurement of how noise is perceived by a human ear. While that can be a helpful starting point, Nelson said it often overlooks low-frequency sounds — the low, rumbly sounds that can get into a home more easily.

Nelson said many communities make the mistake of trying to set their own acceptable sound levels without the help of a noise control engineer or other professional. He used an example of one community he worked with after the town faced litigation over noise levels from data centers.

“They misread a document and misunderstood sound levels that would be acceptable going into an industrial facility for those that would be going that would be acceptable going out. So your backyard as the neighbor would be as loud as what would be acceptable in the industrial facility. And that's clearly not sensible,” Nelson said.

He said an ordinance only solves disputes if it’s enforced. He suggests local governments use standards from the Institute of Noise Control Engineering as a starting point.

“If you're going to have a noise ordinance, it should be grounded in in the engineering standards so that it's reliable and that you can have some confidence that when you're asking a corporation to shell out money to do noise control, that it's technically meaningful, there's a real good reason for it,” Nelson said.

He said tech companies should also design their data centers to noise levels that are more compatible with residential living. Nelson said picking quieter equipment is easier the first time around than adding it later.

“It's always much more expensive and creates problems,” he said. So waiting until the end to do noise control is a poor idea. Sometimes they can site the facility in locations that are already noisy — next to a highway, next to other industrial facilities — and then it's less likely to cause problems for the same noise output.”

When asked about noise concerns with data centers, Dan Diorio with the Data Center Coalition said the facilities are “very much responsive” to community members’ concerns.

Data centers often create a lot of temporary jobs during construction, but fewer full-time jobs compared to other large facilities like manufacturing plants. There is some nuance, however.

Dan Diorio with the Data Center Coalition said construction jobs that may have lasted only two to three years in the past can last for six, seven, or eight years in an area with multiple data centers.

“The crews get experience and they move from data center site to data center site,” he said. “Or, if a data center is building a campus-style development, they'll move from building to building.”

Diorio said data centers also depend on local electricians and plumbers and HVAC technicians for maintenance.

According to the trade publication Data Center Knowledge, colocation data centers — where a third-party owns one building that serves multiple companies — often require technicians from each of those companies to hire their own workers.

Union workers in Michigan City have expressed concerns that the data center known as Project Maize plans to hire out-of-state construction workers.