A bipartisan proposal intended to draw data centers to Colorado by offering massive 20-year tax breaks has faced a litany of criticisms stemming from the centers’ environmental impact — and questions about whether state incentives are necessary to attract an already-booming industry.
Senate Bill 280 would create a certification system that would grant tax incentives to data center builders if they meet certain benchmarks for investment and water and energy efficiency.
The Data Center Development and Grid Modernization Program would both draw lucrative development to the state and ensure that the additional energy use wouldn’t affect other electric customers, its sponsors said last week during the bill’s first committee hearing. They also noted that it would establish guardrails to minimize environmental impacts.
“Welcome to the future,” sponsor Sen. Paul Lundeen, an El Paso County Republican, said during the Senate Transportation and Energy Committee meeting on Wednesday. “The future that is unfolding all around us — and I mean all around us. It’s happening in pretty much every state except Colorado right now and we’d like to change that.”
Critics worry that if the bill passes, the state will lose out on millions of dollars in tax revenue from an industry that could come to Colorado with or without the new incentives. The large quantities of power and water that data centers require could strain already limited supplies and further derail the state from meeting its clean energy goals, they say. And they view the energy and water efficiency rules in the bill as essentially meaningless.
“As we work to meet our growing energy demand and the federal government continues to roll back climate progress — putting communities in harm’s way while the climate crisis worsens — Colorado must lead the charge to defend our transition to clean energy,” said Paul Sherman, the climate campaign manager for Conservation Colorado. “This legislation threatens to trample our progress toward reaching our ambitious climate goals and lacks sufficient guardrails for communities.”
The bill passed out of the committee on a 6-3 vote and will be heard next by the Senate Appropriations Committee.
Data centers provide the infrastructure needed for the internet, cloud storage, streaming, businesses’ computing needs and the growing use of artificial intelligence. Construction of such centers has boomed across the country, but the facilities use large quantities of power and water, which is needed for cooling.
As an example, one medium-sized center proposed in Denver, at max capacity, could use the same amount of water in a day as 16,100 Denverites and as much power as 82,500 homes.
How the incentive would work
To obtain certification under the bill’s proposed program, a data center operator must commit to spending $250 million in capital investment and creating 25 well-paying, full-time jobs; meet certain energy and water efficiency standards; and consult with the state Department of Natural Resources on wildlife and water impacts.
The data center company must also prove that the addition of the center will not “result in unreasonable cost impacts” to other electric utility users’ rates.
In return, the company would be exempt from sales and use taxes for 20 years. Companies could also apply for a 10-year extension when the first 20 years lapse if they met certain additional requirements.
The Colorado Office of Economic Development and International Trade would oversee the certification system. The state would be required to revoke the center’s certification if it no longer met its obligations under the program, and the company would have to repay the state for the tax benefits it received.
If lawmakers pass the bill, Colorado would join 31 other states that offer tax incentives for data centers, according to the bill’s fiscal note. State lawmakers in 2023 and 2024 considered, but did not pass, bills that would have granted data center companies millions in tax breaks on the purchase of construction materials and equipment.
Data center companies are seeking out the states with competitive tax incentives, company representatives testified last week. The centers create hundreds of construction jobs and fuel local economies, they said.
“Unfortunately, Colorado is missing out on all of that,” said Greg Mikulecky, the vice president of development at Stack Infrastructure. The company is headquartered in Denver and builds data centers across the globe but has no data centers in Colorado.
Lundeen, one of the bill sponsors, said Colorado is receiving only 2% of national data center investments. But that’s proportional, given the 50 states in the nation, pointed out Leslie Hylton-Hinga, the special projects director at the Colorado Office of Economic Development.
A rendering shows the design of a new CoreSite data center proposed for Denver’s Elyria-Swansea neighborhood. (Provided by CoreSite)“Really unique opportunity”
Colorado is home to 56 data centers, including several new facilities under construction like a hyperscale facility being built in Aurora. A Denver company planning to build a new data center in the city last year decided to forgo a city tax break after facing pushback from the City Council based on the facility’s likely energy and water use, but it will continue with construction.
The tax incentives could help lure data center companies to communities looking for economic replacements for coal, oil and gas development, said Sen. Nick Hinrichsen, a Pueblo Democrat and sponsor. Communities like Pueblo need alternative industries for jobs and to support the local tax base, he said.
“We’re heading toward this cliff and we have some significant challenges — but with data centers, we have a really, really unique opportunity,” he said.
Nothing in the bill directs or incentivizes companies to build in rural or transitioning communities, however. All of Colorado’s data centers are in the Front Range — primarily the Denver metro — and the bill won’t shift that trend, said Caroline Nutter of the Colorado Fiscal Institute, which opposes the bill.
“Incentivizing development outside of the Front Range could be an efficient way to spend tax dollars, but this bill, as amended, does not do that,” she said.
It’s difficult to estimate exactly how the program might impact state tax revenues because “there is significant uncertainty regarding the number of data centers that will apply,” according to the fiscal note attached to the bill that was written by nonpartisan legislative staff.
“To the extent that actual investments vary from the assumptions in this analysis, state impacts may increase or decrease proportionally,” the fiscal note states.
Those concerned about the bill — including the head of the state’s utility regulatory body — said it must ensure that meeting the large power needs of new data centers does not increase rates for other customers.
“The stakes of getting this right are enormous, especially for ratepayers,” said Rebecca White, the director of the Colorado Public Utilities Commission, which regulates utilities.
If it passes, the bill mandates a review of the effectiveness of the program in 2031.
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