This story was originally published by The Texas Tribune and supported by the Pulitzer Center.
Texas is set to forfeit $3.2 billion in sales tax revenue over the next two years due to a tax exemption benefiting the rapidly expanding data center industry, as reported by the comptroller’s office.
This figure likely underestimates the impact, given the surge in new facilities, yet it already ranks among the state’s most costly incentive programs and is poised to become the priciest of its type nationwide.
In January, lawmakers are scheduled to convene for the next legislative session, where they will consider proposals to either scale back the tax break or eliminate it entirely.
“These new numbers are extremely concerning, and I will say they’re unsustainable,” said state Senator Joan Huffman, chair of the Senate Committee on Finance, in an interview with The Texas Tribune. “I plan to look at filing legislation to either repeal the exemption or take a very close look at it and see.”
The tax break was approved by lawmakers over a decade ago when data centers were smaller and less resource-intensive. Between 2014 and 2022, the exemption resulted in state revenue losses ranging from $5 million to $30 million annually. By 2023, this loss ballooned to over $150 million, and this year the state is expected to forgo at least $1.3 billion, with projections indicating continued growth.
The funds Texas stands to lose annually from this tax break could entirely fund the new school voucher program or potentially double the size of a state disaster fund to aid communities like Kerr County in flood prevention. Additionally, it is surpassing the costs associated with Texas’ controversial Chapter 313 tax abatement program, which provided tax relief to manufacturing companies but was terminated after reaching over a billion dollars annually.
The rapid expansion of data centers was unanticipated three years ago when the comptroller’s office estimated the tax break’s value at approximately $180 million for the 2027-2028 budget. In 2025, projections were adjusted to exceed $3 billion, driven by the AI boom after 2023, which demands substantial computing power.
Texas currently hosts over 300 operational data centers, with more than 100 additional projects either planned or underway.
At least 142 more facilities are currently being constructed, positioning Texas ahead of Virginia, which has 141 under construction, according to data firm Aterio’s analysis.
The comptroller’s office anticipates the tax break’s annual value will reach nearly $1.8 billion by fiscal year 2030, marking a $500 million increase from the current fiscal year, as stated in the 2025 report.
Industry leaders caution that reducing or removing the tax break could jeopardize Texas’ status as the leading destination for data centers, a designation credited with generating new jobs and billions in local investments.
“I think the hostile message that sends would … give a lot of different companies pause about what the state of being able to invest in Texas for the long term is,” said Dan Diorio, vice president of state policy with the Data Center Coalition, a trade group that represents major tech companies.
Meanwhile, data centers are becoming increasingly unpopular among locals.
Cities such as San Marcos, Amarillo, College Station, Waco, and Harlingen have witnessed grassroots campaigns urging local officials to block data center projects. A recent Quinnipiac poll revealed that 65 percent of Americans oppose having a data center in their community.
Texas is among 37 states offering tax exemptions for data centers, typically tied to local economic growth requirements. States such as Virginia, Illinois, Michigan, Arizona, and Georgia are also contemplating changes to these tax breaks.
The tech industry contends that these tax benefits are essential to sustaining investments that create jobs and boost local tax revenues. Critics argue that Texas is chosen for its affordable land and electricity, rather than the tax break alone.
Dick Lavine, a former fiscal analyst for the policy group Every Texan, noted that while tax incentives are a factor, they are not the primary consideration for companies choosing a location. “Somebody’s giving out money; [the companies] want to be in line. But it’s not really how decisions are made, especially when there’s bedrock things like land and energy that are much more important than their tax rate,” Lavine added.
Currently, 121 data centers benefit from the sales tax exemption, according to a database from the comptroller’s office. A request for individual tax break data was denied by the comptroller’s office, citing state law protecting competitive business information.
Eligible data centers do not pay the state’s 6.25 percent sales tax on purchases related to construction and maintenance, which includes hardware, software, office equipment, cooling systems, emergency generators, and plumbing.
They are also exempt from state sales tax on electricity costs, a significant factor given data centers’ high energy demand. By 2030, 20 percent of data centers are expected to require over 1 gigawatt of power, enough to supply about 700,000 homes for a year.
To qualify for the tax exemption, owners of data centers over 100,000 square feet must pledge to create at least 20 jobs paying 120 percent of the area’s median salary and invest $200 million in the project over five years. A 2015 addition for centers over 250,000 square feet requires creating 40 jobs, investing $500 million, and paying the grid operator to reserve 20 megawatts of transmission capacity. The exemption lasts up to 15 years for smaller centers and up to 20 for larger ones if investment benchmarks are met.
In 2013, when Harvey Hilderbran authored the original bill for the sales tax exemption, data centers were focused on cloud storage and were smaller and less resource-intensive.
Hilderbran joked that the bill has turned out to be his most successful law ever, but he never could have guessed what the industry would have turned into and suggested that the tax break should be reviewed by lawmakers.
“If I was on the committee still, I would certainly be looking at it to get a balanced perspective of what the benefit has been, and how it compares to other costs of the state for other benefits we’ve had,” said Hilderbran, who retired from office in 2015.
States rethink their tax breaks
States routinely hand out sales tax breaks to manufacturing companies to spur further investment that will hopefully create jobs and tax revenue. And data centers should be thought of like any other manufacturer, Diorio said.
“The final product of the data center is the 21st century economy,” Diorio said. “It’s the online purchases, it’s the banking and financial transactions, it’s the telehealth appointments …. I mean, it is basically the entire lifeblood of our daily lives.”
The coalition has been making this case across the country as states consider getting rid of their tax breaks for data centers amid debates over their consumption of electricity, water, and land.
In Virginia, lawmakers have called a special session to weigh whether to phase out the state’s annual $1.6 billion sales tax break for data centers — supporters of repealing it argue the giveaway of tax revenue is unnecessary to keep the industry invested in the state, and the tax revenue is needed to balance the budget.
In Illinois, where the value of the state’s sales tax break for data centers recently reached $1 billion, Governor JB Pritzker in February announced a two-year suspension of the state’s sales tax break amid concerns that data centers are causing energy costs to rise for residents.
Virginia, Illinois, and Texas make up the three most generous states toward the data center industry in terms of the annual value of their tax break. Along with Texas, both states have seen the value of that tax break grow rapidly since the AI boom began.
Diorio argued that repealing a sales tax break isn’t a good way to fill a budget hole because states will lose revenue if the industry invests less in a state. He pointed to a study commissioned by his association that found data centers in 2024 generated $3.2 billion from other local and state taxes, including local sales and property taxes, the state franchise tax, and sales taxes imposed on data centers that have not qualified for the state sales and use tax break. Data centers, however, often engage in local agreements to waive property tax burdens.
“Texas is poised to be the [data center] leader and to be the leader in the country, and most likely to be the leader in the world,” he said. “And …getting rid of the sales tax exemption that would dramatically imperil that.”
Nathan Jensen, a professor at the University of Texas at Austin who studies state and local economic development, said the argument that an industry could pull out of a state is common in debates over economic incentives. He said states should seek the right balance of incentives that attract and grow industries without sacrificing too much in tax collections.
“The whole point is to get some sales tax revenue,” Jensen said. “So even if you lost half the investment, but you taxed it at full value, from a taxpayer perspective, that’s a win, right?”
Texas to hold hearings on data center incentives
The Legislature will begin debating its tax break for data centers in July, when Huffman’s Senate Committee on Finance meets for an interim hearing ahead of the 2027 legislative session.
Huffman said she intends to use the committee hearing to cast a skeptical eye on the industry ahead of possibly filing legislation to repeal the tax break altogether, arguing the broad list of exempt purchases is too generous.
Lieutenant Governor Dan Patrick, a Republican, last week highlighted the ballooning cost of the tax break and directed the Senate to study and make recommendations “providing safeguards to ensure that Texans benefit from data center investment.”
State Representative Trey Martinez Fischer, a Democrat representing San Antonio, and vice chair of the House Ways and Means Committee, said the ballooning forecasts for the value of the tax break had also raised red flags for him.
“We have one of the largest economies in the world,” Martinez Fischer said. “We’re looking for business partners, and that requires a two-way relationship of give and take. If you want the benefits, you’ve got to carry some of the burden.”
Lawmakers could take a range of approaches, including repealing the tax break, reducing it, further limiting the number of years it remains in effect, or tying the tax break to stronger economic development requirements.
Diorio said the industry plans to make its case to lawmakers in the hearings, “to help illustrate the good work that data centers are doing to be good stewards of resources in the state and really put the data out there to show that and demonstrate the broad economic value that we’re bringing to the state of Texas.”
Disclosure: Every Texan and University of Texas at Austin have been financial supporters of The Texas Tribune, a nonprofit, nonpartisan news organization that is funded in part by donations from members, foundations, and corporate sponsors. Financial supporters play no role in the Tribune’s journalism. Find a complete list of them here.
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