Over environmental concerns, Michigan House passes tax break for data centers

(This story was updated to accurately reflect the most current information.)

Relying on support from Republican state lawmakers, Democrats in the Michigan House of Representatives passed legislation Wednesday to give data centers a tax break, a move environmental advocates fear will threaten the state's new clean energy transition goals.

As digital technologies have moved life online, they've taken up real estate in the physical world where large buildings warehouse computer servers to store and process data. Advancements in artificial intelligence are expected to lead to a surge in new data centers that demand massive amounts of energy and water to operate.

Lawmakers in the state House voted on state Senate Bill 237 to create a use tax exemption for data centers' equipment with the exact votes needed to pass it. Democrats who voted were evenly divided on the legislation while 13 declined to cast a vote. All but two Democrats supported similar legislation in a vote last year that included fewer environmental protections than the legislation they approved Wednesday, marking a major shift in the caucus.

Most Republicans in the state House supported the data centers tax break Wednesday, a fact state GOP state Rep. Bill Schuette, R-Midland was quick to point out.

“Data is going to be a huge basically resource and fueling part of the 21st century economy. So I want those investments to happen in Michigan, and that’s why I’m in favor of also lowering taxes to spur investments. What a concept," he said.

The vote came on the last day of voting expected in the chamber before the Nov. 5 election that will decide whether Democrats keep their House majority. The House Wednesday did not pass a separate bill — HB 4906 — to create a sales tax exemption for data centers also meant to lure technology companies to the state. That bill was up for a vote twice Wednesday, but it did not achieve enough support and was pulled from the voting board.

House lawmakers amended Senate Bill 237 Wednesday to set an expectation that data centers will be connected to municipal water systems with excess capacity and add some protections from rate increases for utility customers.

But state Rep. Jenn Hill, D-Marquette, is still worried customers will end up paying more. Hill previously supported a House version of the bill in a vote last year. She said lawmakers did not have time when the bills initially moved to fully understand what she called the "full consequences" of the proposal. She's not opposed to data centers coming to Michigan. "This is about who is going to pay for this cost," she told reporters.

Senate Bill 237 will now head back to the state Senate where some Democratic lawmakers in the chamber previously opposed it and expressed concerns about the environmental and economic impact of the proposed tax breaks.

Proponents of the data center tax exemptions argue they'll make Michigan a more attractive place for technology companies to warehouse computer servers. "These are good-paying jobs in a highly in-demand field," said state Rep. Joey Andrews, D-St. Joseph, in a statement last year when the state House first voted on his legislation to give data centers a sales tax exemption.

"Not only do data centers serve as the backbone of our increasingly digital world, but they are economic engines that help fuel long-term community growth," said Senate Bill 237 sponsor state Sen. Kevin Hertel, D-St. Clair Shores, in a statement following an earlier Senate vote on his bill. He said Michigan could realize the economic benefits anticipated with data centers coming to Michigan and achieve its clean energy goals at the same time.

But some environmentalists disagree, saying the energy use associated with data centers risks Michigan falling behind on its climate targets. Last year, Gov. Gretchen Whitmer signed into law legislation setting a 100% clean energy standard by 2040. The bills to create tax breaks for data centers would encourage — but not require — them to rely on power from renewable sources if possible. Sierra Club Michigan Chapter Chair Mike Buza predicts the data center legislation could derail Democrats' climate goals. "With the increased demand for electricity, there will most likely be a delay in the closing of fossil fuel plants," he wrote in an August blog post.

In addition to his concerns with the environmental impact of data centers, Clean Water Action's Michigan State Director Sean McBrearty expressed opposition to giving more public funding to large companies. He singled out large technology companies like Google or Microsoft that stand to benefit from the proposed tax breaks. "They don't need a hand," he said.

McBrearty said he was frustrated to see the Democratic-led Legislature prioritize the legislation as other Democratic priorities have stalled. "I am very surprised that they are coming together this week and might be voting through huge tax breaks for out of state corporations instead of focusing on the things that are actually going to help Michiganders right now like water affordability and holding polluting corporations accountable," he said in an interview Tuesday.

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The fiscal impact of the proposed tax exemptions is unclear, according to legislative fiscal reviews. But a Senate Fiscal Agency analysis estimates a reduction in state and local revenues by at least $52.5 million and potentially more than $90 million the fiscal year ending Sept. 30, 2066. Revenue losses would likely reduce revenue for schools, the state's general fund and local governments, the analysis found.

The legislation would require a minimum capital investment of $250 million to qualify for the tax exemptions which would correspond with $15 million in lost sales and use tax revenue, according to legislative fiscal reports. The tax exemptions would expire at the end of 2050 or 2065 if data centers locate in former industrial site or electric power plant. The state's economic development panel would have until the end of 2029 to issue tax exemption certificates.

The move by Michigan lawmakers to subsidize data centers comes as other states have begun to scrutinize their own programs. Virginia is studying how data centers will impact the state's clean energy transition and customers' energy rates. In Georgia, lawmakers tried to halt their state's data center tax breaks, but the governor killed the effort.

Contact Clara Hendrickson at [email protected] or 313-296-5743. Follow her on X, previously called Twitter, @clarajanehen.

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This article originally appeared on Detroit Free Press: Michigan House passes data centers tax break