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Senate Finance Committee ranking member Ron Wyden, D-Ore., released a discussion draft of legislation that would impose a new federal excise tax on data center services and restrict several existing tax benefits for data centers. The Oct. 23 draft builds on a white paper Wyden released in August and provides significantly more detail on how the proposed tax and incentive limitations would operate.
The proposal would impose an excise tax on gross receipts attributable to data center services provided from facilities in the U.S. Covered services would include cloud computing, artificial intelligence (AI) training and inference, data storage, high-volume data processing and similar activities. Services provided by data centers larger than 25 megawatts generally would also be covered. The draft includes exceptions intended to protect small operators, traditional corporate IT departments and internet infrastructure.
The excise tax rate remains unspecified in the draft and would be determined after revenue estimates become available. Wyden’s August white paper contemplated a rate in the “low single digits.”
The draft also would establish an alternative tax calculation for arrangements involving the largest developers and users of data centers, including vertically integrated operations that may not generate conventional third-party gross receipts. Under this approach, imputed gross receipts generally would be calculated using the cost of deploying and operating the data center, together with an assumed profit margin.
In addition to the excise tax, the discussion draft would limit several tax benefits for data center investments. It would:
- Eliminate 100% bonus depreciation for data center assets placed in service after enactment.
- Prevent data center businesses and newly acquired data center property from qualifying for Opportunity Zone tax benefits.
- Prevent certain privately held real estate investment trusts from treating rent from newly acquired data centers as qualifying income.
- Clarify that data center equipment and buildout costs do not qualify as research expenses for purposes of the research credit.
Wyden presented the tax package alongside separate legislation intended to assist workers displaced by AI. That proposal would expand unemployment support, provide income assistance while affected workers retrain and establish a pilot program for job training tuition assistance. Wyden has described the two proposals as an initial effort to ensure that businesses benefiting from the AI expansion help address its potential effects on workers and communities.
Broader scrutiny of data center incentives
Public backlash against the rapid expansion of AI and the data centers needed to support it has mounted in recent months, and lawmakers in both parties are grappling with how to respond but have yet to develop a uniform position within either party. The proposals introduced to date take substantially different approaches, ranging from limiting generally available business tax incentives to imposing new federal taxes or recapturing state and local subsidies.
In July, Sen. Mark Warner, D-Va., introduced the Data Center Tax Accountability and Disclosure Act of 2026 (S.5054), which would generally deny 100% bonus depreciation for property used in AI data centers and impose reporting requirements related to energy and water use. Wyden’s proposal would go significantly further by imposing a new gross-receipts excise tax and restricting access to several federal tax benefits.
Some Republicans also have begun looking to address concerns surrounding data centers. Sen. Josh Hawley, R-Mo., introduced the No Tax Breaks for Data Centers Act (S.5418), which would exclude data centers from qualifying for Opportunity Zone tax benefits. Sen. Bernie Moreno, R-Ohio, has proposed a broader approach through the Recapturing Excessive Corporate Largesse through Accountability and Incentive Measures (RECLAIM) Act (S.5689). That bill would prohibit certain large, AI-focused data centers from receiving federal financial assistance or tax incentives and impose a federal excise tax equal to 100% of state and local incentives received by covered facilities.
Other Republicans remain wary of policies that could slow data center development or weaken the U.S. position in AI. House Ways and Means Committee Chair Jason Smith, R-Mo., has sought an investigation into the origins of campaigns opposing data centers, alleging potential links to the Chinese government.
Grant Thornton Insight:
These divisions make agreement on the Wyden approach unlikely in the near term, but they do not preclude narrower bipartisan action targeting particular subsidies or industry practices.
The federal debate also mirrors increased scrutiny at the state level. North Carolina recently repealed a sales and use tax exemption for electricity consumed by qualifying data centers, while Virginia preserved its broader sales tax incentives but imposed a temporary tax based on data center electricity consumption. These differing approaches illustrate how policymakers are weighing the economic-development benefits of data centers against their fiscal, energy and infrastructure costs.
Grant Thornton Insight:
The Wyden discussion draft is not expected to advance before the current Congress adjourns, but it represents a more developed policy marker than the August white paper. The inclusion of statutory language, an alternative tax calculation aimed at vertically integrated arrangements and specific restrictions on widely used business tax incentives provides a framework that Democratic taxwriters could revisit in the 120th Congress or as part of a future tax package.
Although the proposals introduced to date take different approaches and face uncertain legislative prospects, the involvement of both Democratic and Republican senators suggests that scrutiny of federal, state and local tax subsidies for large AI data centers is likely to be a prominent tax policy issue in the next Congress. The debate may also become part of lawmakers’ broader focus on affordability as communities weigh data centers’ effects on electricity prices, infrastructure and public resources.
Companies developing, operating, financing or using data centers should monitor proposals at both the federal and state levels, particularly those affecting depreciation, research credits, Opportunity Zones, REIT qualification and taxes tied to gross receipts, government incentives or electricity consumption. Even if the Wyden proposal does not advance in its current form, companies should consider modeling how the loss of generally available tax benefits or the imposition of a new excise tax could affect project economics, financing structures and planned investments.
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