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CA — State Policy Updated January 2026

California

Statewide incentives and constraints, plus active legislative and regulatory debate.

California Competes Tax Credit Manufacturing & R&D Equipment Partial Exemption CEQA environmental review Backup generator air quality controls

Overview

California has no enacted statewide data center-specific incentives and stopped two 2025 bills that would have imposed water and energy reporting requirements. A proposed sales tax exemption for data centers (SB 58) was stripped from the bill and replaced with unrelated content.[3] While the California Energy Commission tracks data center load growth,[10] state lawmakers have so far declined to adopt either targeted incentives or mandatory reporting rules.

Incentives

California Competes Tax Credit

The California Competes Tax Credit is a competitive statewide income tax credit available to any business that locates, stays, or expands in California. Awards are tied to job creation and investment commitments.[1] The program is not data center-specific, but data center operators can apply if their project scores well under the program’s criteria.

Manufacturing & R&D Equipment Partial Exemption

California offers a partial sales and use tax exemption for qualified manufacturers, certain R&D businesses, and (since 2018) certain electric power generation or distribution businesses under Revenue and Taxation Code § 6377.1.[2] Data center operators would need to qualify under the statute’s “qualified person” definitions to access this exemption. It is not tailored to data centers and covers only a portion of the state sales and use tax.

Requirements and Conditions

CEQA Environmental Review

Discretionary projects in California are subject to the California Environmental Quality Act (CEQA) review process and its implementing guidelines.[4] For data centers, CEQA typically drives project timelines and mitigation requirements related to land use, traffic, air quality, noise, and water. Operators must work through the local lead agency responsible for CEQA compliance.

Backup Generator Air Quality Controls

California’s Airborne Toxic Control Measure (ATCM) for Stationary Compression-Ignition Engines applies to stationary diesel engines commonly used as backup generators at data centers.[5] Compliance is managed through California Air Resources Board (CARB) standards and local air district permitting. These rules can constrain generator sizing, run-time hours, and emissions controls.

What to Watch

  • AB 222 (held in committee) would require data center owners to submit Power Usage Effectiveness (PUE) data to the California Energy Commission and would require the CPUC to assess whether data center loads cause cost shifts to other utility customers.[8][9] The bill was held in the Senate Appropriations Committee in August 2025 but could return in 2026.
  • AB 93 (vetoed) would have required data centers to provide projected and annual water-use information to their water suppliers as part of local business licensing.[6][7] Governor Newsom vetoed the bill in October 2025, but similar reporting proposals may be reintroduced.
  • The California Energy Commission has already produced a standalone presentation on data center load forecasts (2024–2040),[10] signaling that state planners are tracking data center demand growth even without a statutory reporting mandate. Recent reporting indicates ongoing legislative debate over grid upgrade cost allocation and data center efficiency requirements.[11]

Sources

[1] Governor’s Office of Business and Economic Development (GO-Biz), “California Competes Tax Credit,” September 20, 2019, https://business.ca.gov/california-competes-tax-credit/ (accessed January 8, 2026).

[2] California Department of Tax and Fee Administration, “Tax Guide for Manufacturing, and Research & Development, and Electric Power Equipment & Buildings Exemption,” June 17, 2025, https://cdtfa.ca.gov/industry/manufacturing-and-research-and-development-equipment-exemption/ (accessed January 8, 2026).

[3] California Legislature, “SB 58 (2025–2026) Bill Text (as amended January 5, 2026),” January 5, 2026, https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202520260SB58 (accessed January 8, 2026).

[4] Office of Land Use and Climate Innovation (California), “CEQA Guidelines,” n.d., https://lci.ca.gov/ceqa/guidelines/ (accessed January 8, 2026).

[5] California Air Resources Board, “Stationary Diesel ATCM,” n.d., https://ww2.arb.ca.gov/our-work/programs/stationary-diesel-atcm (accessed January 8, 2026).

[6] California Legislature, “AB 93 (2025–2026) Bill Text (Enrolled),” September 15, 2025, https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202520260AB93 (accessed January 8, 2026).

[7] California Legislature, “AB 93 (2025–2026) Bill History,” October 11, 2025, https://leginfo.legislature.ca.gov/faces/billHistoryClient.xhtml?bill_id=202520260AB93 (accessed January 8, 2026).

[8] California Legislature, “AB 222 (2025–2026) Bill Text (as amended July 7, 2025),” July 7, 2025, https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202520260AB222 (accessed January 8, 2026).

[9] California Legislature, “AB 222 (2025–2026) Bill History,” August 29, 2025, https://leginfo.legislature.ca.gov/faces/billHistoryClient.xhtml?bill_id=202520260AB222 (accessed January 8, 2026).

[10] California Energy Commission, “Data Center Load Forecasts, 2024–2040,” October 21, 2024, https://www.energy.ca.gov/filebrowser/download/6686?fid=6686 (accessed January 8, 2026).

[11] Felicia Mello, “Big Tech blocks California data center rules, leaving only a study requirement,” CalMatters, December 29, 2025, https://calmatters.org/environment/2025/12/data-center-energy-study-california/ (accessed January 8, 2026).