Midterm shifts threaten data center expansion

The midterm elections delivered a clear signal to the artificial intelligence industry: the era of easy expansion may be over.

Democratic candidates won control of at least five governorships and full state governments in five additional states, including Texas, Ohio, Georgia, Nevada, and Iowa. Many of these regions are primary hubs for server warehouses. According to Data Center Watch, a project by AI security consultancy 10a Labs, 32 of 34 winning gubernatorial candidates support stronger regulation. Twelve of those candidates back full bans or moratoriums.

Campaign spending on the issue was substantial. AdImpact data shows that political campaigns spent more than $380 million on television ads mentioning data centers. Democrats outspent Republicans on the topic by a ratio of more than three to one. Clayton Tucker, the first Democrat elected Texas state agriculture commissioner since 1986, cited the issue as a factor in his victory. He noted that ranchers feared data centers would deplete water supplies. “You know, there’s an old saying around here that ‘whiskey’s for drinking and water’s for fighting,’” Tucker told The Associated Press. “And that’s exactly what happened.”

In Wisconsin, Governor-elect David Crowley shifted his stance under pressure from his opponent. He now supports a moratorium and the abolition of sales tax exemptions for data center operators. Crowley said he is currently discussing proposals that would require developers to disclose water and energy consumption. He also aims to ensure community support before projects proceed and to insulate ratepayers from energy costs.

The industry is responding by seeking clearer guidelines. OpenAI published a framework on Thursday asking policymakers to write clear rules for how the industry builds. The company stated that lawmakers should establish rules to protect residents and share the benefits of AI infrastructure. Dan Diorio of the Data Center Coalition said the industry expects new officials to deliver on their promises. He warned that moratoriums could lead to real world consequences, such as host communities missing out on tax revenue.

Stock markets reacted to the election results. The Nasdaq sank 11% below its all time high on Thursday. Investors worried that data center construction might slow due to higher borrowing costs. Morgan Stanley noted that new state regulations could split the country into areas open to new data centers and those that are not. The firm identified the election of Democrat Gina Hinojosa for Texas governor as the most important result for the sector. Hinojosa said she would block permits if data centers were not a good deal for Texans or if residents did not have a say.

Local voters also rejected nearby development. Redbud Consulting tracked 47 referendums in 44 municipalities across 12 states. Restrictions were approved in 44 of the 45 elections where counting was complete. In Ohio alone, 21 referendums were held. The AP Voter Poll found that about three quarters of U.S. voters oppose building a new data center in their community. However, only about one quarter of voters said data centers were crucial to their vote for Congress.

Texas remains a critical battleground. JLL reports that the state is poised to overtake northern Virginia as the largest global data center market by 2030. Stephen Sanders, a Republican who co-founded a data center protest group in Lubbock, said Texans are attuned to the issue due to drought and electricity concerns. “I would say data centers were on the ballot,” Sanders said.