Texas Senators Examine Rising Cost of Data Center Tax Breaks

Texas senators are considering whether the state should place new limits and reporting requirements on a sales tax exemption for data centers as its projected missed revenue grows into the billions of dollars.

The Senate Finance Committee heard calls to repeal, pause or restructure the incentive during a July 27 hearing focused on data center investment and its effect on state finances. Witnesses also urged lawmakers to require more information about electricity use, water consumption and the economic benefits associated with projects receiving the exemption.

The state created the incentive through House Bill 1223 in 2013. It exempts certain equipment and other tangible personal property used by qualifying data centers from state sales and use taxes.

The projected missed revenue from the incentive has grown from about $14.5 million per biennium to $3.3 billion, according to figures discussed during the hearing. The committee did not vote on a recommendation, and Senate Finance Committee Chair Joan Huffman said the subject would continue to be considered by other committees and as lawmakers prepare for the next legislative session.

A recurring concern was the state’s ability to measure what it receives in return for the lost sales tax revenue.

Henry Lee Butler, a Parker County resident with a background in data engineering and higher education assessment, proposed making disclosure a condition of receiving the exemption. His proposal would require participating facilities to authorize the release of utility billing information, submit annual reports detailing their electricity and water use and provide information about cooling systems and water sources.

Butler also called for the Texas comptroller to compare each project’s verified benefits with the revenue forgone by the state.

“No data, no exemption,” Butler told the committee.

Butler said a mandatory Texas Water Development Board survey of data centers received responses from 17 percent of the facilities contacted. He argued that much of the missing information already exists through utility meters and billing records, although facilities using private generation or groundwater would require additional reporting.

Senator Phil King agreed that the state needs better information and said mandatory reporting should be considered. King said state agencies could protect proprietary information while still collecting data needed to evaluate the industry.

King said lawmakers are trying to balance business development with concerns involving neighboring properties, water supplies and electricity demand. He also said he expected the Legislature to consider additional action on local issues, water and electricity during its next session.

Local control was another theme throughout the hearing.

Shane Shepard, the city of Lancaster’s director of economic development, asked lawmakers to make the local portion of the sales tax exemption optional. Under his proposal, communities that want to offer the benefit could do so through individual development agreements, while other cities could retain the revenue.

Shepard also recommended sourcing local sales taxes on qualifying equipment to the community where the data center is located. He said local sales tax revenue in Lancaster supports parks and reduces residents’ property tax burden.

Witnesses from rural communities asked lawmakers to give counties more authority to address land use, infrastructure and environmental effects. Testimony included concerns about noise, nighttime lighting, groundwater use, fire protection and the capacity of local roads and emergency services.

Several witnesses argued that Texas does not need the exemption to attract the industry because companies are also drawn to the state’s land, energy market, infrastructure and permitting environment.

Dr. Sam Law, a University of Texas at Austin-affiliated researcher studying the effects of artificial intelligence development on rural livelihoods, told senators that research on business incentives has generally found limited effects on company location decisions. Law said Texas’ energy infrastructure, available land and regulatory environment are among the factors bringing data center projects to the state.

Other testimony focused on the possibility that specialized AI facilities could become obsolete as computing and cooling technology changes.

Dr. Tom Keller, a retired IBM specialist in data center computer systems, power and cooling, warned that some hyperscale AI facilities may not be upgraded after one or two generations of equipment. He said highly specialized cooling infrastructure could lose value as newer computer systems require different operating conditions.

A committee member responded that lawmakers could consider reclamation bonds or another financial mechanism to address facilities that are abandoned.

Fire protection officials also raised questions about the demands data centers could place on local emergency services.

Gary Oldham, a former fire service chief officer, described the personnel, equipment and water needed to respond to fires involving battery systems and data center infrastructure. He said rural volunteer departments may not have the resources to handle a large incident, particularly in areas without hydrants or reliable water supplies.

Some witnesses proposed ending the exemption entirely, while others offered narrower changes.

In addition to mandatory reporting and local control, proposals included limiting access to property tax abatements, requiring project-level benefit assessments and giving host communities a greater role in decisions involving infrastructure and emergency response.

The hearing also included testimony from representatives of communities where data centers have been proposed or are under construction. They described concerns about tax revenue, water availability, transparency and the number of permanent jobs projects would create after construction.

Huffman closed the data center portion of the hearing without announcing a specific legislative proposal. She said the testimony had produced a useful discussion and indicated that lawmakers would continue examining the issue before the Legislature reconvenes.