It's funny- my initial response was going to be "use the Google DNS servers! 8.8.8.8, 8.8.4.4!", but I suppose they could be logging all sorts of information about me, too...
They store which ISP you were using and your general geolocation. If you're living in the middle of nowhere and your ISP is "Bob's Internet and Shoe Emporium", then I could see it being a bit of a problem.
Geolocation isn't an exact science though, as anyone who has ever seen an ad saying that beautiful people in <reasonably close, yet still hilariously wrong city> want to meet you can attest, and the more disparate the ISP, the more wrong it becomes, since in most cases you only really have "this IP block belongs to this ISP" to go on.
You can get a court order to use this information to force Google to give you information that can be used to identify you with your ISP, but your ISP already has a lot more information on you anyway.
If you're really paranoid that Big Brother Google is keeping an eye on your internet habits, then you should fire up Tor and put the IP address for howtooverthrowtheusgovernment.com in your hosts file.
That geolocation data isn't any more granular than city/region, which they have a valid reason to want to know about (network latencies vary with significant physical distance). We're not talking about your street address here.
If you are concerned about such logging issues, you could use Level 3's servers. They operate 6 DNS servers at 4.2.2.1 through 4.2.2.6. I've heard people claim L3 discourages this, but from my use, that doesn't appear to be the case.
