Texas Bills Would Repeal Data Center Tax Exemption

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As Texas lawmakers begin filing legislation for the 90th Legislative Session, a bipartisan effort to end the state's sales tax exemptions for data centers has become one of the first major fiscal debates of the coming session.

On November 9, State Sen. Joan Huffman (R-Houston), current chairman of the Senate Committee on Finance, filed Senate Bill 293 (SB 293), which would repeal the exemptions for qualifying data centers and large data center projects. Twenty-three of the Senate's 31 members, from both parties, have joined as authors. Several House members filed similar bills the same day, though most of them would let facilities that already hold certifications keep their benefits.

The proposals follow Gov. Greg Abbott's (R) June recommendation to eliminate the exemption along with other incentives he called outdated or unnecessary, and a July interim hearing in which Senate Finance members questioned whether the incentive still changes where companies invest.

For Texas Policy Research (TPR), the core question is already settled by principle. The Texas Liberty Compact calls for ending corporate welfare, because government should not pick winners and losers with taxpayer dollars. TPR supports repealing the data center exemptions. The harder question the filed bills now raise is how to end them, and in particular what to do about facilities that already hold certifications.

How the Exemptions Work

Texas created the data center exemption in 2013 through House Bill 1223 (HB 1223), authored by then-State Rep. Harvey Hilderbran (R-Kerrville) during the 83rd Legislature. At the time, lawmakers believed Texas was losing projects to states that offered sales tax incentives. The bill passed with overwhelming bipartisan support, clearing the Senate 23 to 8 and receiving final approval in the House 143 to 1. The exemption now operates through two sections of the Tax Code.

Section 151.359 exempts qualifying data centers from the 6.25 percent state sales and use tax on equipment and services necessary to their operations, including servers, networking equipment, cooling systems, generators, software, and electricity. To qualify, a facility generally must occupy at least 100,000 square feet, invest at least $200 million over five years, and create at least 20 qualifying jobs. Depending on its investment, a certified facility receives the exemption for 10 or 15 years.

Section 151.3595 creates a separate exemption for large data center projects, which must meet substantially higher investment thresholds and can receive the exemption for up to 20 years. The two sections differ in one important respect. The Section 151.359 exemption applies only to state sales tax, while the large-project exemption applies to both state and local sales taxes. Repeal would therefore affect city and county revenue, not only the state's.

The exemption's coverage of electricity deserves emphasis. For facilities whose largest operating cost is power, the electricity exemption is a substantial share of the benefit.

From $14.6 Million to $3.3 Billion

The fiscal note for HB 1223 estimated the exemption would reduce state sales tax revenue by about $14.6 million in the 2014–15 biennium. The Comptroller now projects it will cost approximately $3.3 billion in the 2028–29 biennium, an increase of more than 22,000 percent. That figure covers state sales tax alone.

The growth reflects a market lawmakers did not foresee in 2013. Only ten facilities qualified through fiscal year 2020. Certifications accelerated around 2021 as cloud computing and artificial intelligence drove demand, and by July the Comptroller had certified 59 data centers in fiscal year 2026 alone, with 35 more applications pending. An April 2026 investigation by The Texas Tribune found the state was already forgoing more than $1 billion a year.

Two cautions apply to the headline number. First, forgone revenue is not a direct appropriation, though both affect the state's fiscal position and both warrant scrutiny. Second, $3.3 billion is the value of the exemption, not what repeal would raise. Some projects may locate elsewhere without it. But testimony at the July hearing suggested the effect may be smaller than the industry claims: the Comptroller's chief revenue estimator noted that the Dallas-Fort Worth area became the nation's second-largest multi-tenant data center market without any sales tax exemption.

What SB 293 Would Do

SB 293 would repeal Sections 151.359 and 151.3595 and make conforming changes to the provisions governing sales tax on electricity used by qualifying facilities. It would not simply close the program to new applicants. Existing exemptions would expire on the bill's effective date, and applications pending before the Comptroller would be denied.

SB 293 does not prohibit data centers, impose a moratorium, or create new land-use restrictions. It removes a preferential tax treatment and subjects previously exempt purchases to the same rules every other business follows.

The House Bills Take a Different Approach

Several House members filed repeal bills on the first day of prefiling. House Bill 167 (HB 167) by State Rep. Trey Martinez Fischer (D-San Antonio), House Bill 408 (HB 408) by State Rep. Carrie Isaac (R-Dripping Springs), and House Bill 681 (HB 681) by State Rep. Cody Vasut (R-Angleton) would repeal the exemptions but let previously certified facilities keep their benefits until their existing exemption periods expire. House Bill 851 (HB 851) by State Rep. Vincent Perez (D-El Paso) would also address data centers' access to enterprise-zone incentives.

The difference matters. SB 293 and the grandfathering bills would all close the program to new applicants. Under the House grandfathering approach, however, existing exemptions could run for another decade or more, since certifications last 10 to 20 years. Under SB 293, existing and future facilities would be treated alike from the effective date.

Where Incoming Leaders Stand

The November elections changed who will steer this debate. Democrats won the governor's office, the lieutenant governor's office, and a majority in the Texas House, while Republicans kept control of the Senate. Any repeal will need agreement across that divide.

Governor-elect Gina Hinojosa (D) has promised to end data center tax incentives, and during the campaign she pledged a moratorium on all data center approvals until the Legislature passes new protections. As Rice University economist John Diamond has noted, a governor cannot repeal the sales tax exemption alone. That requires legislation. Her moratorium pledge is a different matter. Halting otherwise lawful development is a far larger step than ending a tax preference, and it raises property rights questions that repeal does not.

Lieutenant Governor-elect Vikki Goodwin (D) has focused less on the exemption than on oversight. She has called for requiring data centers to disclose their water and energy use, giving counties a say in where facilities locate, and making data centers pay for their own infrastructure so those costs do not fall on local communities. That last point aligns with TPR's position that those who create new infrastructure demands should bear the costs. Expanding county authority over siting, by contrast, raises the property rights questions discussed below.

Presumptive Speaker Senfronia Thompson (D-Houston), who announced on November 6 that she has the votes to lead the House, has not publicly staked out a position on the exemption. She has pledged to lead a bipartisan House and appoint Republicans as committee chairs, which will shape how the competing House bills move.

Corporate Welfare and Tax Neutrality

TPR's position begins with the Texas Liberty Compact. One of the Compact's ten legislative reforms calls for ending corporate welfare by eliminating the targeted subsidies and tax preferences that allow government to pick winners and losers. Free enterprise works best when businesses compete on innovation, investment, and consumer demand, not on their ability to secure favorable treatment from government. That principle applies whether the beneficiary is a film studio, a semiconductor manufacturer, a professional sports franchise, or a hyperscale data center.

Economic development incentives exist to change investment decisions. If a company would make the same decision without the incentive, taxpayers are paying for nothing. At the July hearing, State Sen. Pete Flores (R-Pleasanton) asked whether multi-tenant data centers would keep locating in Texas without the exemption. Comptroller officials indicated they likely would. State Sen. Bob Hall (R-Edgewood) pressed the related point that exempting one industry from billions in sales taxes shifts a greater share of the burden onto everyone else.

The strongest case for keeping the exemption is also a tax neutrality argument, and it deserves a direct answer. Sales taxes on business inputs are poor tax policy. They tax the same economic activity more than once as it moves through the supply chain, and Texas already exempts manufacturing equipment for that reason. The industry and some free-market analysts argue the data center exemption simply extends that same treatment to another sector, and that repealing it would single data centers out.

That argument has merit as a description of good tax policy. It does not describe this program. Manufacturers do not have to meet investment, square-footage, and job-creation thresholds set by the state, or obtain certification from the Comptroller, to receive their exemption. The data center exemption is available only to facilities large enough to clear those bars, for a fixed term, as a reward for meeting goals the government chose. That is the defining feature of a targeted incentive.

If lawmakers conclude that business inputs should not be taxed, the principled response is a broad exemption for business inputs across all industries, not a conditional preference for one. Repealing the data center exemption does not make Texas' overall tax system less burdensome. It removes one form of preferential treatment, and it frees the Legislature to pursue broad-based relief that benefits every taxpayer.

Immediate Repeal or Grandfathering

The real choice before lawmakers is not whether to end the exemption but what to do about the facilities that already hold it. Both sides of that question can claim a principle.

The case for grandfathering rests on predictability. Data centers require enormous upfront capital, and certified facilities made investment decisions expecting 10 to 20 years of exemption. Changing tax treatment midstream alters the economics of projects already built, and a state known for honoring its commitments to investors gains something real from that reputation.

The case for immediate repeal rests on equal treatment. Grandfathering would keep a preferential benefit in place for years, and it would give established facilities a tax advantage over every new competitor in the same market. A tax exemption is also a policy choice, not a contract. The Legislature retains authority to amend or repeal tax law.

That authority has limits. The Texas Constitution prohibits retroactive laws (Article I, Section 16), and terminating an exemption the Comptroller has already certified is where that question would arise. Whether SB 293's approach would survive a retroactivity challenge is an open legal question, and lawmakers should resolve it before choosing between the bills rather than leave it to litigation.

TPR's view is that the principle points toward ending unequal treatment as soon as the law allows. At a minimum, the program should close to new certifications and pending applications immediately, and any grandfathering should be limited to the remaining term of existing certifications, with no renewals or extensions.

A Separate Question From Grid and Water Policy

The exemption debate is unfolding alongside broader scrutiny of data centers' demands on electricity, transmission, and water. Those questions are related but distinct, and repealing a sales tax exemption resolves none of them. TPR has argued that Texas should build supply rather than subsidize demand, and that those who create new infrastructure demands should bear the costs while private property rights are protected.

The distinction runs in both directions. Requiring large loads to pay for their own grid connections is a matter of cost allocation. Granting local governments new power to prohibit data centers raises separate questions of property rights. Lawmakers should keep each debate on its own terms. TPR's coverage of the House State Affairs hearing and ERCOT's large-load process addresses the infrastructure side in more detail.

Policy Implications for the 90th Legislature

The 90th Legislature should repeal both Sections 151.359 and 151.3595 and close the program to new certifications and pending applications without delay. Before choosing between SB 293 and the House approach, however, lawmakers should establish whether terminating existing certifications is consistent with the Texas Constitution's ban on retroactive laws. If some grandfathering proves necessary, it should extend no further than the remaining term of each existing certification, with no renewals or extensions.

The case against the data center exemption does not stop with data centers. The same reasoning applies to every tax preference conditioned on investment or employment targets chosen by government, whether the beneficiary is a film studio, a semiconductor plant, or a sports franchise. Lawmakers who repeal this exemption on principle should be prepared to review the others by the same standard. And if the underlying concern is that business inputs should not be taxed at all, the remedy is a general exemption available to every business, not a conditional preference for a favored few.

Repeal also raises the question of what happens to the revenue. Recovered state revenue should go toward broad-based tax relief rather than new spending. Because the large-project exemption covers local sales taxes as well, cities and counties would see new revenue too, and lawmakers should ensure it reaches taxpayers through property tax relief rather than expanded local budgets.

Finally, the debate exposes how little the public can see of what these incentives cost and deliver. Senators at the July hearing questioned how certified facilities are audited after certification. Every tax preference the state offers should be reported with its actual cost, its measured results, and the audit record behind it, so Texans can judge whether it works.

The Bottom Line

What began in 2013 as a $14.6 million incentive has become a projected $3.3 billion preference for one industry, in a state that has already become one of the nation's leading data center markets. With bipartisan bills in both chambers and support from both the outgoing governor and the governor-elect, repeal now looks likely. The remaining question is how quickly, and how existing certifications are treated.

Texas competes best through low taxes, reliable infrastructure, regulatory predictability, and a level playing field for every business, not through government-selected incentives. Repealing the data center exemptions is a step toward that standard. Applying the same principle to every other targeted preference would be the larger one.

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