Kavanagh Defends Data Center Tax-Break Freeze in Budget Deal

PHOENIX — Senate Majority Leader John Kavanagh is defending a post-session budget compromise, temporarily freezing new data center tax breaks while preserving incentives already promised to companies operating in Arizona. The three-year moratorium was integral in the $18.3 billion bipartisan budget package signed by Gov. Katie Hobbs after lawmakers adjourned Sine Die on June 13, 2026. The agreement pauses new sales tax exemptions for data centers, but does not cancel tax incentives already granted under Arizona’s existing data center program.

For Kavanagh (R-3), that distinction was critical to the bipartisan budget deal. Hobbs had pushed to eliminate the incentive more broadly, arguing that the tax break had become a costly subsidy for a rapidly expanding industry. But Kavanagh said revoking benefits already promised to companies would have exposed the state to legal risk.

“We had a problem with that because we’ve already given them the incentives, which last for five to 10 years, to a lot of data centers. So had we canceled them, we’d be in court,” Kavanagh said.

The compromise reflects one of the central tensions in Arizona’s post-session budget politics: how to respond to growing public concern over data centers’ electricity and water demands without undermining the state’s economic development commitments.

Arizona first approved data center tax relief in 2013. Under current law, qualifying facilities may receive sales tax relief after meeting investment thresholds, including $50 million in counties with more than 800,000 residents or $25 million in smaller counties.

Critics argue the incentive is no longer needed and costs the state tens of millions of dollars annually. Bloomberg Tax reported that the pause is among the more restrictive state-level responses to backlash over data centers’ energy and water use.

Kavanagh, however, said data centers remain important to Arizona’s economy and broader infrastructure needs.

“They are great for economic development and national security,” Kavanagh said. “Data centers are part of the new world, and we just have to have them develop responsibly.”

The moratorium gives lawmakers three years to revisit the issue, leaving Kavanagh and other Republicans to defend a middle ground: pause new subsidies, protect existing agreements, and keep Arizona open to future data center investment.