Midterm results force data center industry to confront new state regulations

Data center developers and artificial intelligence giants face a tougher regulatory environment after the November midterm elections. Democrats captured control of Congress and flipped at least five governorships, including in Texas, Ohio, Georgia, Nevada, and Iowa. Many of these states are major hubs for server warehouse construction.

Campaigns spent more than $380 million on television ads mentioning data centers, according to AdImpact. Democrats outspent Republicans on the topic by more than three to one. Data Center Watch, a project of 10a Labs, found that 32 of the 34 victorious gubernatorial candidates support stronger regulation or restrictions. Twelve of those candidates support bans or moratoriums.

In Texas, Gina Hinojosa defeated Governor Greg Abbott to become the state's next chief executive. Hinojosa has pledged to block data center permits unless they provide a good deal for Texans and residents have a say in the matter. Clayton Tucker, the first Democrat elected state agriculture commissioner in Texas since 1986, said his promise to fight data center development was critical to his victory. Tucker noted that ranchers feared the facilities would deplete water supplies.

Wisconsin Governor-elect David Crowley shifted his stance during the campaign. He now supports a moratorium and abolishing the state's sales tax exemption for data center operators. Crowley said he is currently discussing proposals that would require developers to disclose water and energy consumption. He also wants to ensure community support before projects begin and insulate taxpayers from energy costs.

The industry responded to the election results with new commitments. OpenAI published a framework on Thursday asking policymakers to write clear rules for industry building. The company stated that lawmakers should establish rules to advance responsible investment and protect residents. Dan Diorio, an official with the Data Center Coalition, said the industry expects new governors to deliver on moratorium promises. He warned that such moves could result in host communities missing out on tax revenue.

Financial markets reacted to the political shift. The Nasdaq sank 11% below its all-time high on Thursday. Morgan Stanley issued an analyst report stating that the election results carry greater expectations for data center restrictions. The firm singled out the elections in Texas and Ohio as creating significant risks for project delays. Morgan Stanley predicted the new state regulations could split the country into areas open to new data centers and those without.

Local voters also voted to restrict data center construction. Redbud Consulting tracked 47 referendums in 44 municipalities across 12 states. Restrictions were approved in 44 of the 45 elections where counting was complete. An AP Voter Poll found that about three-quarters of U.S. voters oppose the construction of a new data center in their community. This opposition held across red and blue states.