Data centers are proliferating across Michigan and the Midwest at unprecedented speed. The state government sees Michigan as well-positioned for construction due to its water resources, natural advantages and distinguished workforce — despite the concerns raised by local communities.
In 2024, Gov. Gretchen Whitmer signed the Enterprise Data Center Sales & Tax Use Exemptions legislation, which outlines eligibility requirements for participating entities. The act incentivizes development by withdrawing the 6% sales and use tax on data center construction and equipment purchases. This applies to entities that became qualified by meeting requirements.
Since then, Michigan has also expanded exemption eligibility for enterprise data centers, including facilities for private use and Brownfield properties. These include unused historic resources, functionally obsolete or contaminated sites — made eligible for redevelopment under Act 381, which also promises tax breaks after completion. Although most often used by local developers, Brownfields could now be an option for data center building projects.
Besides an initial $250 million investment, these include the adoption of policies that are intended to benefit communities. Under the requirements, a center must create a projected 30 jobs that are compatible with the median wage for an area and refuse electric rates that are passed onto consumers.
Despite these guardrails, certain risks can remain for the environment and communities.
Although the state mandated a quota for job creation, companies like the Nevada-based Switch Inc. had only created 26 jobs by 2022, whereas it had pledged 1,000 back in 2015.
Furthermore, there is a risk that job creation itself, a byproduct of the costs saved by tax breaks, can be passed onto taxpayers. Exemptions could cost taxpayers $42.5 million, an analysis by the Michigan Senate Fiscal Agency finds. This raises a question worth asking: Does a marginal return in job growth outweigh the other burdens associated with data-center development?
Not only do tax incentives catch the eye of developers, but state resources are another factor, and their visibility may be driving company investments in Michigan.
Data centers need large quantities of water to function. Michigan Public estimates that usage can range from 300,000 to between 1 and 5 million gallons per day, depending on the scale of a center. This is equivalent to powering 1,000 homes for a median-sized facility. For a hyperscale, it equates to a small city.
Second to powering a data center is a kind of feedback system. Computer servers within a facility generate heat, and cooling mechanisms are needed to keep temperatures level. One of these methods is air-based cooling, in which water is evaporated to cool the surrounding area yet doesn’t directly return to a watershed. This is an energy-efficient but water-intensive process. Other methods include closed-loop circulation systems, dry air cooling and hybrid methods.
Closed-loop circulation is considered more sustainable in the process of water preservation. It recycles water by allowing cooler currents to lower heat levels in these facilities. The heated, used water then goes through a cooling tower before it can be ready for use again. This recycling procedure reduces freshwater use by up to 70%.
Michigan’s wet, humid continental climate is believed to reduce cooling costs, making it an ideal site for startups.
The Great Lakes region makes it an ideal location for meeting high water demands. However, as critics note, even a grand water supply is far from being inexhaustible. Although the Great Lakes contain 20% of the world’s freshwater, only 1% of that capacity is restored by inflows. In addition, the line that shuttles water to a data center is intertwined with municipal water systems that tap into aquifer beds. This becomes a concern in light of groundwater shortages across every state in the Midwest.
Rural areas in Michigan, in the case of a data center opening, could carry the greatest burden in keeping a facility running.
Michigan Rural Water Assets (MRWA) notes that “the nearly 45,000 water systems in rural America are anchor institutions in their communities.”
Per USDA data, a rural area is defined as one that lies outside census places and includes blocks that have a population density of 1,000 or more people. Some of these are also classified, according to a definition from the Office of Management and Budget (OMB), as areas that are economically integrated with an urban core. Others take the form of outlying tracts with less integration. It is these areas, due to their large land availability, that are often looked to as hosts for potential data centers.
A weak connection to urban areas, which have a greater advantage infrastructurally, makes the most rural counties vulnerable. The water-intensive operations of a data center could potentially lower water tables, deplete wells and increase competition for municipal water supplies—diverting a critical resource away from communities.
Data centers, as a University of Michigan report finds, can become more sustainable—in the context of both the environment and communities hosting them—by being transparent about objectives, scope of need and predicted returns.
This transparency restores agency to local governments and their constituents, offering them tools to negotiate with, or refuse, the terms of a planned facility.
