Texas Senate Lawmakers Reexamine Data Center Tax Breaks

Estimated Time to Read: 10 minutes

The Texas Senate Committee on Finance recently held an interim hearing to examine several interim charges before the 90th Texas Legislature, including one of the state's fastest-growing tax incentives: the sales tax exemption for qualifying data centers.

Originally enacted through House Bill 1223 (HB 1223), authored by former State Rep. Harvey Hilderbran (R-Kerrville) during the 83rd Legislature in 2013, the exemption was intended to help Texas compete for large, capital-intensive technology investments. At the time, lawmakers believed the state was losing projects to competitors offering generous incentive packages. Few could have anticipated the explosion in cloud computing, artificial intelligence (AI), and hyperscale data centers that would fundamentally reshape the industry over the next decade.

That changing landscape framed much of the committee's discussion.

Rather than questioning whether Texas should welcome data centers, lawmakers spent much of the hearing asking whether a tax incentive designed for a different market still serves its intended purpose. The discussion raised broader questions about corporate welfare, taxpayer fairness, infrastructure policy, and whether government should continue providing targeted tax preferences once an industry has already chosen Texas.

Data Center Tax Exemption Costs Soar

Much of the Senate Finance Committee hearing centered on one statistic that illustrates just how dramatically the data center sales tax exemption has evolved since lawmakers created it in 2013.

When HB 1223 was considered during the 83rd Legislature, the accompanying fiscal note estimated the exemption would reduce state sales tax revenue by approximately $14.6 million during the 2014-15 biennium. At the time, lawmakers viewed the proposal as a targeted economic development incentive designed to help Texas compete for a relatively small number of large-scale data center projects.

Today, the picture looks dramatically different.

According to testimony before the Senate Finance Committee, the Comptroller's Office now projects the exemption will cost the state approximately $3.3 billion during the 2028-29 biennium, an increase of more than 22,000 percent over the original estimate.

That extraordinary growth reflects an entirely different market than lawmakers envisioned thirteen years ago.

According to the Comptroller's Office, only ten facilities qualified for the exemption through fiscal year 2020. Since then, applications have accelerated rapidly. Texas has already certified 59 qualifying data centers during the current fiscal year, with another 35 applications pending. Officials testified that certification activity began increasing significantly around 2021 as cloud computing, artificial intelligence, and other compute-intensive technologies fueled unprecedented demand for data center infrastructure.

The hearing made clear that lawmakers are no longer evaluating a relatively modest economic development incentive. They are evaluating one of the state's largest and fastest-growing tax preferences.

Whether the original estimate was simply overtaken by technological change or fundamentally underestimated from the outset, the difference between a projected $14.6 million fiscal impact and a projected $3.3 billion cost has become one of the central reasons lawmakers are reassessing whether the incentive continues to serve its intended purpose.

For Texas Policy Research (TPR), the discussion also highlights a broader policy principle reflected in the Texas Liberty Compact. One of the Compact's ten legislative reforms calls for ending corporate welfare by eliminating targeted subsidies and tax preferences that allow government to pick winners and losers. While the data center industry has become the focus of this debate, the underlying principle extends far beyond any single sector. As tax preferences grow in size and scope, lawmakers should periodically evaluate whether they continue serving a legitimate public purpose or whether broad-based tax relief and a level playing field for all businesses would better promote free enterprise and limited government.

House Bill 1223 Reflected a Different Texas Economy

It is important to understand why HB 1223 passed with overwhelming bipartisan support in 2013.

The legislation ultimately passed the Texas Senate by a vote of 23 to 8 and later received final approval in the Texas House by a vote of 143 to 1. At the time, Texas was competing with numerous other states that were offering incentives to attract major data center investments. The Senate Research Center's bill analysis argued that Texas was losing projects because it lacked comparable sales tax incentives and stated that the legislation sought to "reestablish Texas as the leader in the technology industry."

The final legislation established significant qualification requirements. A qualifying data center had to include at least 100,000 square feet, create at least twenty qualifying jobs paying at least 120 percent of the county average weekly wage, and commit to investing at least $200 million over five years. Depending on investment levels, qualifying facilities could receive the exemption for either ten or fifteen years.

The exemption itself extends well beyond servers, covering electricity, cooling systems, networking equipment, software, generators, mechanical systems, and numerous other components necessary to construct and operate a qualifying facility.

Viewed through the lens of 2013, lawmakers were responding to a competitive marketplace that looked very different from today's.

Lawmakers Question the Tax Exemption

The central question throughout the hearing was not whether data centers benefit Texas. Nearly every witness acknowledged they play an increasingly important role in the state's economy.

Instead, senators repeatedly asked whether Texas still needs to provide billions of dollars in targeted tax preferences to attract investment that may already be coming to the state.

One of the most significant exchanges occurred when State Sen. Pete Flores (R-Pleasanton) asked whether multi-tenant data centers would continue locating in Texas without the sales tax exemption. Comptroller officials indicated those facilities likely would continue investing in Texas even absent the incentive, prompting Flores to observe that he did not believe they were going anywhere.

That exchange cuts directly to the underlying policy debate. Economic development incentives are generally intended to change investment decisions. If companies would make the same decision without the incentive, lawmakers naturally begin asking whether taxpayers are receiving sufficient value in return.

Several senators also focused on how the program is administered.

State Sen. Lois Kolkhorst (R-Brenham) questioned the certification and audit process, including how companies initially qualify and how compliance is verified after certification. Comptroller officials explained that applicants certify they will meet statutory requirements and are later subject to audits, as directed by the existing statute. While officials noted that only a small number of audited facilities ultimately failed to qualify, lawmakers appeared interested in whether additional oversight may be appropriate.

State Sen. Bob Hall (R-Edgewood) repeatedly returned to a broader question of tax fairness, asking whether exempting one industry from billions of dollars in state sales taxes ultimately shifts a greater burden onto everyone else.

Data Center Industry Defends the Texas Sales Tax Exemption

Industry representatives argued the exemption remains an important component of Texas's economic competitiveness.

Witnesses emphasized that data centers support much more than AI. They provide the infrastructure powering cloud computing, financial transactions, healthcare systems, communications, and countless digital services Texans rely on every day. They also argued that construction activity associated with data center development has generated substantial economic benefits while supporting long-term infrastructure investment.

Industry representatives further contended that repealing the exemption could send an unfavorable signal to future investors and manufacturers considering Texas for major capital projects.

Several witnesses also addressed concerns surrounding water use, explaining that many newer facilities rely on recycled or brackish water, while others utilize cooling technologies that substantially reduce overall water consumption.

While committee members acknowledged these arguments, much of their questioning suggested they were weighing those benefits against the rapidly increasing fiscal cost of maintaining the incentive.

Corporate Welfare and Tax Policy Become Central Questions

Although the phrase "corporate welfare" was rarely used during the hearing itself, the discussion repeatedly touched on that broader policy question.

Texas Policy Research has consistently argued that broad-based tax relief is preferable to targeted tax incentives that allow government to favor one industry over another. That distinction is particularly important in the context of data centers.

Data centers themselves are not the issue.

Private investment, technological innovation, and expanding computing infrastructure all contribute to Texas's continued economic growth. Earlier this year, TPR argued that Texas should build the infrastructure necessary to support economic growth while protecting private property rights and ensuring those creating new infrastructure demands bear the costs associated with them.

The Senate Finance Committee hearing largely reinforced that perspective.

Rather than debating whether Texas should discourage data center investment, lawmakers focused on whether government should continue providing preferential tax treatment after Texas has already become one of the nation's leading destinations for data center development.

Those are fundamentally different questions.

Supporting free enterprise does not necessarily require supporting targeted tax preferences for particular industries.

Policy Implications for the 90th Texas Legislature

The hearing offered perhaps the clearest indication yet that lawmakers are preparing to revisit Texas's approach to data center incentives during the 90th Legislature. Several policy options appear likely to receive further discussion.

Lawmakers could consider tightening eligibility requirements, strengthening audit procedures, limiting future certifications, modifying the duration or scope of the exemption, or examining whether certain qualifying purchases should remain eligible for preferential tax treatment.

At the same time, lawmakers will have to balance those discussions against Texas's continued desire to remain an attractive destination for private investment.

The broader policy conversation extends beyond data centers themselves.

As AI continues reshaping the economy, Texas will increasingly face decisions about how to encourage private investment without relying on targeted tax preferences that distort markets or create perceptions of government picking winners and losers. That conversation will almost certainly continue into the next legislative session.

Free Enterprise Over Corporate Welfare

The Senate Finance Committee's discussion reflected how much Texas has changed since House Bill 1223 became law in 2013.

At the time, lawmakers believed a targeted sales tax exemption would help Texas compete for an emerging industry. Today, Texas has become one of the nation's premier destinations for data center investment, while the fiscal cost of that incentive has grown from an estimated $14.6 million to a projected $3.3 billion.

That evolution naturally raises an important policy question. If Texas has already become one of the country's most attractive places to build and operate data centers because of its abundant energy resources, skilled workforce, business-friendly climate, and expanding infrastructure, should government continue providing preferential tax treatment to one industry?

For Texas Policy Research, the answer begins with first principles. The Texas Liberty Compact calls for ending corporate welfare because government should not pick winners and losers with taxpayer dollars. Free enterprise works best when businesses compete on the strength of innovation, investment, and consumer demand, not on their ability to secure favorable treatment from government.

That principle applies consistently, whether the beneficiary is a film production company, a semiconductor manufacturer, a professional sports franchise, or a hyperscale data center.

None of this should be interpreted as opposition to data centers themselves. On the contrary, Texas should continue welcoming private investment, expanding energy production, improving infrastructure, and protecting private property rights. Data centers are helping power the digital economy, and Texas is well positioned to remain a national leader in that sector.

The question before lawmakers is not whether Texas should encourage growth. It is how.

As the 90th Texas Legislature approaches, policymakers have an opportunity to reaffirm that Texas competes best not through targeted tax preferences or corporate welfare, but through low taxes, sound fiscal policy, reliable infrastructure, regulatory predictability, and a level playing field for every business. Those advantages have made Texas an economic leader for generations, and they remain a more durable foundation for prosperity than government-selected incentives ever could.

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