Arizona Gov. Katie Hobbs is pushing to cut down on lucrative state tax incentives for data centers.

The Arizona Department of Revenue estimated the incentives lose the state $38M a year.

“It’s time we make the booming data center industry work for the people of our state, rather than the other way around,” Hobbs said during her State of the State address on Monday, which opened the state legislature’s 2026 season.

The incentives, along with inexpensive power, have been key to building the region’s status as a booming data center market.

Companies that spend at least $50M on the construction or expansion of a data center in Maricopa or Pima counties, or $25M in another county, qualify for sales and use tax exemptions on the facility's equipment for at least 10 years, according to Axios.

The state has approximately 146 data centers, 136 of them in Phoenix.

And many more are on the way. In Mesa alone, Google has plans for a 750K SF data center, starting with a 289K SF Phase 1 slated for completion this year, and Meta is building a five-building data center campus that will span more than 2.5M SF. Apple already has a 1.3M SF data center in Mesa.

Hobbs, who originally voted in favor of the incentives in 2013, said they allow controversial developments to get exemptions from state and local sales taxes for the equipment they buy.

She is now calling for legislators to drop them and to place a fee on water used by data centers, with money raised put toward funding water conservation efforts.

Some other states, like Oregon, have tried to end similar incentive programs in recent years, but data center operators like Amazon lobbied against them.

Across the country, public concern is growing over data centers due to their harmful environmental impact, particularly their water and power usage. Local protests aren’t uncommon, especially in areas like Arizona that regularly experience drought.

In December, a rezoning proposal and development agreement for the 422K SF Price Road Innovation Campus, an artificial intelligence data center in Chandler, was rejected due to intense resident backlash. Tucson officials rejected a $3B data center plan in August.

State and local legislators in Arizona have also been updating regulations around data centers. The Maricopa County Board of Supervisors voted in December in favor of modernizing county zoning rules to clarify where data centers can be built.

Now, eyes are on the Arizona Legislature to see if the incentives will be dropped statewide. Repealing a tax incentive requires a two-thirds supermajority.

Hobbs is running for a second term this November.