Congressional Authority to Regulate Data Centers

Congressional Authority to Regulate Data Centers

September 3, 2026

Data centers are facilities that house computer systems for

managing and transmitting digital information. They are integral

components in the development and use of artificial intelligence

(AI), and large-scale investment in AI has led to rapid buildout

of “hyperscale” data centers that consume large amounts of

electricity and water. Concerns about those resource impacts,

and related financial impacts on ratepayers, have sparked

opposition to data center development and prompted calls for

increased regulation, including state-level moratoriums on new

data centers.

precedent, a court would likely find that data centers are likely

regulable under the Commerce Clause for that reason alone.

Construction and operation of data centers and their associated

infrastructure can trigger requirements under existing federal

environmental laws, such as the Clean Air Act and Clean Water

Act. However, “[r]egulation of land and water use lies at the

core of traditional state authority,” and private development on

nonfederal land is primarily regulated by state and local

governments. Retail water and electricity rates are also

established through state and local proceedings. Thus, at

present, debates about data center development and mitigating

impacts of that development largely implicate nonfederal legal

regimes.

The Taxing Power

If desired, Congress could assert a greater federal role in

regulating data centers’ environmental and economic impacts by

acting pursuant to its constitutional powers under Article I,

Section 8’s Commerce, Taxing, and Spending Clauses. This In

Focus briefly summarizes those powers and illustrates their

application using examples of proposed data-center-related

legislation introduced in the 119th Congress.

The Commerce Power

The Commerce Clause authorizes Congress to “regulate

Commerce with foreign Nations, and among the several States,

and with the Indian Tribes.” According to the Supreme Court,

this grant of authority gives Congress power over (1) “channels

of interstate commerce,” (2) “instrumentalities of interstate

commerce, or persons or things in interstate commerce,” and (3)

activities that “substantially affect interstate commerce.”

While no court has directly addressed the issue, case law

strongly suggests that data centers would fall within all three

categories. Lower courts have widely held that the internet is

both “an instrumentality” and a “channel” of interstate

commerce because it “enables information to be quickly,

conveniently, and inexpensively disseminated to hundreds of

millions of individuals worldwide.” The same is arguably true

of data centers, which perform vital functions in the

“international network of interconnected computers” that

comprise the internet.

Even if data centers are not themselves channels or

instrumentalities of commerce, their construction and operation

are major drivers of national economic growth, and thus

substantially affect interstate commerce. Based on current

Acting under its Commerce power, Congress could directly

regulate data center design, siting, construction, and operation.

Proposed bills in the 119th Congress would do this by, among

other things, barring new construction of AI-related data

centers, requiring data centers to obtain electricity from off-grid

sources, and requiring data centers to obtain water from sources

other than their local utilities.

Commerce Clause aside, Congress could shape data center

development through its authority to “lay and collect . . . Duties,

Imposts and Excises.” This power allows Congress to impose

“indirect taxes” on activities, transactions, and income. Such

taxes must be uniform, but unlike direct taxes on real property,

they need not be apportioned among the states based on

population.

The Supreme Court has declared Congress’s authority to

regulate private conduct through taxation to be “beyond serious

question.” Thus, Congress could impose indirect taxes that

“discourage[], or even definitely deter[]” data center developers

from engaging in certain practices—so long as those taxes

“operate[d] with the same force and effect in every place where

the subject of [the taxes] is found,” and so long they were not, in

effect, penalties on conduct that Congress could not otherwise

regulate under another enumerated power. Conversely,

Congress could create incentives in the form of tax credits or

deductions to encourage data center developers to take certain

actions.

Bills introduced in the 119th Congress employ all these

approaches. For instance, proposed bills would create tax credits

for facilities (including data centers) that invest in water reuse

projects, tax electricity that data centers consume, and eliminate

existing tax benefits for AI data centers that do not meet

specified environmental criteria or do not enter into legally

binding community benefit agreements.

The Spending Power

Congress could also shape data center buildout through its

authority to spend federal funds. For instance, Congress can

subsidize favored forms of regulation or development, as in one

proposed bill in the 119th Congress that would provide grants to

assist state regulators in developing new electric utility rate

structures that allocate certain costs to data centers.

Congress can also encourage or discourage certain actions by

attaching conditions to federal funding that require recipients to

comply with statutory directives. To do so, Congress must

provide “unambiguously” clear notice of any funding

conditions, and those conditions must generally relate to the

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Congressional Authority to Regulate Data Centers

purpose of the relevant spending, must advance the “general

Welfare,” and cannot themselves violate the Constitution or

induce unconstitutional action.

Subject to constitutional constraints discussed below, Congress

can, and frequently does, use funding conditions to induce state

and local governments that receive federal funds to behave in

certain ways. For instance, Congress has made certain federal

highway funds contingent on states’ adoption of a 21-year

minimum drinking age and has barred federal funding recipients

from (among other things) adopting land-use regulations that

“substantially burden” religious exercise. In a similar vein, one

proposed bill in the 119th Congress would require state

regulators to certify, as a condition for receiving certain

Department of Energy grant funds, that their electricity rates for

residential and small business customers do not reflect costs of

meeting data centers’ electricity demand.

Considerations for Congress

The Anti-Coercion and Anti-Commandeering Doctrines

While Congress can use federal funding conditions to influence

state and local government behavior, the Supreme Court has

held that those conditions cannot be unduly “coercive” and must

leave states with a legitimate option of forgoing funding rather

than acceding to funding conditions.

The Court has justified this “anti-coercion” doctrine as a

necessary tool to safeguard the constitutional system of dual

federal-state sovereignty, which generally withholds from

Congress the power to directly regulate states and reserves to

states certain powers not specifically granted to Congress.

Similar concerns about the federal-state balance of power

animate the Court’s “anti-commandeering” doctrine, which

forbids Congress from ordering state legislators or executive

branch officials to act or refrain from acting in certain ways.

That said, under the Court’s precedents, Congress can require

state and local governments to “consider” within a given

time frame whether to adopt specified policies in order to

continue regulating in an area. Several proposed bills in the

119th Congress would use this approach to direct state regulators

to consider revising rate structures to ensure that large electricity

consumers, such as data centers, bear the costs of meeting their

electricity demand.

Preemption and Cooperative Federalism

Because the Constitution makes federal law supreme, federal

law can override (i.e., “preempt”) state laws. While courts

generally presume that federal statutes coexist with, rather than

preempt, overlapping state and local laws, Congress can rebut

that presumption through statute. Thus, Congress can not only

decide what role the federal government will play in data center

regulation, but also what role, if any, state and local authorities

can play.

Congress has exercised its preemptive power in various ways.

For instance, Congress sometimes broadly preempts state

regulatory action that is “related to” a given subject, as in the

Airline Deregulation Act, which the Supreme Court described as

“confer[ring] on private entities (i.e., covered carriers) a federal

right to engage in certain conduct subject only to certain

(federal) constraints” on “rates, routes, or services.” Congress

could employ a similarly broad preemption clause if it wished to

remove state and local constraints on data center build-out and

operations.

In other statutes, Congress has more narrowly preempted state

and local laws, barring them only to the extent that they are “in

addition to, or different than” federal statutes. As interpreted by

the Supreme Court, this language permits state and local

requirements that are substantially similar to, but not necessarily

identical to, federal requirements.

Rather than preclude state action, Congress sometimes promotes

joint federal-state implementation of national policies. The

Clean Air Act and Clean Water Act exemplify this “cooperative

federalism” approach. Those laws authorize states to implement

federal policies through federally approved state air and water

programs. They also set minimum federal requirements but

expressly preserve states’ authority to adopt air and water

regulations that go beyond the federal requirements.

Takings Clause Implications

The Fifth Amendment’s Takings Clause requires the federal

government to provide “just compensation” if it takes “private

property for public use.” Regulation of data center development

may implicate the Takings Clause, depending on the nature and

extent of federal intervention.

According to the Supreme Court, a taking occurs when the

government physically appropriates property “for itself or

someone else,” such as when it acquires land through its power

of eminent domain. The Court has also held that a taking occurs

even absent physical appropriation if a government restriction

on property use “goes too far.”

How far is too far? The Court has given two answers. First,

when a regulation deprives “an owner of ‘all economically

beneficial us[e]’ of her property,” the Court has held that the

“eliminat[ion] of value” effects a “per se” taking. Second, when

a regulation diminishes, but does not eliminate, a property’s

economic value, the Court has looked to the “the economic

impact of the regulation, its interference with reasonable

investment-backed expectations, and the character of the

government action” to determine whether a diminution of value

effects a taking. This fact-bound inquiry entails “careful

examination and weighing of all the relevant circumstances.”

Diminution-in-value takings cases are, in the words of one

jurist, “among the most litigated . . . in current law,” and strict

federal restrictions on data center development—particularly

construction moratoriums—would likely lead to takings suits.

Success in those suits would entitle litigants to payment but

would not invalidate the restrictions giving rise to the claims. As

the Supreme Court has explained, the Takings Clause “does not

prohibit the taking of private property, but instead places a

condition on the exercise of that power.” Thus, the ordinary

remedy for a Takings Clause violation is compensation, not an

injunction.

Andrew S. Coghlan, Legislative Attorney

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Congressional Authority to Regulate Data Centers

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