Beyond the Moratorium: A Policy Framework for Data Center Development in New York

Artificial intelligence is driving unprecedented demand for data center capacity, prompting states across the country to reconsider how these facilities are taxed, regulated, and integrated into existing infrastructure. As policymakers weigh the economic benefits of AI-driven investment against growing concerns over electricity demand, grid reliability, water consumption, and public costs, the focus is shifting from attracting data centers to determining the conditions under which future development should occur. As discussed in The $1 Trillion Question: New York’s Data Center Moratorium and the Future of AI Infrastructure, the debate extends beyond whether additional data center capacity is needed. It also raises questions about the site-selection factors and policy frameworks that may shape the next generation of data center development.

Data Center State Incentives Need Review

In 2020, Virginia extended its Data Center Retail Sales and Use Tax Exemption (DCRSUT), the state’s largest economic development incentive, through June 30, 20235. Colorado considered a similar incentive to Virginia’s through HB 26-1030 during the 2026 legislative session. The bill would have provided qualifying data centers with a 100% state sales and use tax exemption for at least 20 years while imposing workforce, energy, water, and grid-related requirements. In May, however, the House Energy and Environment Committee postponed the bill indefinitely, and it did not become law. Although the committee did not issue a single formal explanation, the legislative debate reflected concerns regarding electric-rate impacts, water consumption, infrastructure costs and whether a 20-year tax incentive was appropriate given the continuing discussion over data centers’ long-term public benefits. The bill illustrates Colorado’s unresolved effort to balance the economic development opportunities associated with AI infrastructure against concerns regarding resource use and cost allocation.

Infrastructure Factors Shaping Data Center Growth

Emerging data center growth markets are also appearing throughout the Midwest and Mountain West, where large tracts of land, transmission access and comparatively favorable regulatory environments remain available. Mapping tools developed by Pacific Northwest National Laboratory increasingly evaluate prospective locations based on electrical infrastructure, fiber connectivity, water resources and projected growth patterns.

A key observation from these heat maps is that the most desirable locations generally share three characteristics:

Key Policy Considerations During New York’s Moratorium

The recent appointment of new leadership to oversee New York’s energy and grid planning comes at a critical time. AI-driven electricity demand is growing faster than many state forecasting models anticipated, and New York’s temporary moratorium provides an opportunity to evaluate how hyperscale data centers can be integrated into the state’s economy without shifting costs to existing residents and businesses. Rather than focusing solely on whether data centers should be permitted, policymakers can determine the conditions under which future development should occur.

Several policy areas warrant careful review during the moratorium:

Reconsider Data Center Sales Tax Exemptions

Virginia provided approximately $1 billion in sales and use tax relief to data centers in fiscal year 2024. New York could evaluate whether large-scale facilities should continue to receive traditional economic development incentives. Because the availability of power, land and fiber infrastructure may play a greater role in site selection than tax incentives alone, policymakers may determine that certain incentives no longer produce a proportionate public benefit. Reducing or eliminating sales tax exemptions could provide funding for infrastructure upgrades while allowing the public to share in the economic value created by these facilities.

Consider Infrastructure Impact Fees

Infrastructure impact fees have emerged as a potential policy mechanism for large-load customers. Under this approach, developers would contribute to a dedicated fund supporting transmission expansion, substation improvements, grid modernization initiatives and community infrastructure affected by data center growth. Such fees could help advance Governor Hochul’s stated objective of protecting ratepayers from bearing the costs associated with serving rapidly expanding electric demand.

These payments could be structured similarly to transportation impact fees imposed on major commercial developments, with proceeds dedicated to projects that improve electric reliability, transmission capacity and local infrastructure.

Assign Direct Cost Responsibility for Generation and Transmission

Virginia’s experience indicates that even when data centers directly pay for facility-level connections, broader generation and transmission investments may ultimately affect residential customers. During the moratorium, New York regulators could evaluate whether future hyperscale facilities should be required to fund a greater share of the new generation resources, long-distance transmission investments and reliability upgrades needed to accommodate AI-related load growth.

Establish Energy Resource and Sustainability Requirements

Because electricity demand remains the primary policy concern, New York may consider requiring new facilities to procure a specified percentage of power from new renewable resources, energy storage projects, nuclear generation or other dispatchable carbon-free resources. Policymakers may also evaluate whether developers should participate in demand-response programs, install on-site generation or maintain battery storage systems capable of reducing peak grid stress.

Adopt Water Use and Recycling Standards

Water availability and consumption have become increasingly important considerations in modern data center development. Policymakers could review minimum standards for water recycling, closed-loop cooling systems, wastewater reuse and reporting requirements for large facilities. Similar concepts have been proposed or discussed in other states as regulators seek to balance technological growth with long-term resource management. The objective would be to ensure that local communities do not experience disproportionate impacts from industrial-scale cooling operations.

Address Equipment Recycling and End-of-Life Management

An emerging issue that has received comparatively little attention is the disposal of servers, batteries, cooling systems and other technology equipment. New York may examine whether large facilities should participate in mandatory recycling or electronic-waste management programs. Similar concepts have been discussed in other jurisdictions as policymakers consider the long-term environmental effects associated with rapidly evolving computing technologies. Such requirements could mirror producer-responsibility and recycling frameworks already used for other electronic products.

The Broader Policy Question

New York’s moratorium reflects an evolving national conversation about the role of data centers in the modern economy. As states seek to capture the economic opportunities associated with AI and digital infrastructure, policymakers must also address grid reliability, infrastructure investment, environmental impacts and the allocation of costs among developers, utilities, ratepayers and local communities. The regulatory framework that emerges from New York’s review process may influence how other states approach the next generation of large-scale data center development.