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Texas has become one of the nation's largest hubs for data centers. The state has offered major sales-tax exemptions for the massive server farms for more than a decade. State leaders were hoping to attract technology investment and high-paying jobs.
But data centers are no longer an emerging industry. Driven by cloud computing, crypto mining and artificial intelligence, they are spreading rapidly across Texas, and the projected cost of the tax break has climbed into the billions.
During a Texas Senate Finance Committee hearing Monday, lawmakers questioned whether the state is sacrificing revenue for projects that companies might build in Texas without an incentive.
"No tax exemption should operate on autopilot," said Republican state Sen. Joan Huffman, the committee's chair.
Huffman said the industry has changed dramatically since lawmakers approved the exemption in 2013.
"It's a much different animal these days," she said. "So it's time—and it's appropriate and necessary, actually—for the Legislature to re-examine whether this exemption still delivers a return that justifies its rapidly mounting foregone tax revenue."
Qualifying data centers can avoid Texas' 6.25% state sales tax on servers, networking equipment, cooling systems, generators, software and other purchases. The exemption also covers electricity used to operate the facilities.
A data center generally must invest at least $200 million, occupy at least 100,000 square feet and create 20 permanent jobs to qualify.
Republican state Sen. Lois Kolkhorst questioned whether the Texas Comptroller's Office is adequately verifying that companies meet those requirements.
"Is it just check, check, check? We trust them? Check, check, check, go down the list, check, check, check, check, check, and here you go?" Kolkhorst asked. "Here's your certification for millions of dollars from the state of Texas?"
Comptroller officials said data centers initially self-certify their eligibility. However, of the 20 projects that had entered the audit process, six were found to be noncompliant or withdrew.
Projects that fail to meet the requirements are supposed to repay the sales taxes they avoided. But the findings raised concerns about allowing companies to claim exemptions for years before the state verifies their performance.
When lawmakers created the program, the state estimated it would cost approximately $14.6 million during the 2014–15 budget cycle.
The Senate Finance Committee now projects the exemption will cost Texas approximately $3.3 billion during the 2028–29 biennium. That estimate covers state sales-tax revenue alone. It does not include local property-tax abatements or the public cost of expanding electricity and water infrastructure.
Brad Reynolds, chief revenue estimator for the Texas Comptroller's Office, warned that the projection is already outdated.
"We have vastly, vastly more certifications for exemption that have been granted since that last estimate was done," Reynolds said. "So, other things equal, I would say that suggests that the next estimate will be significantly higher."
Lawmakers also questioned whether the program is producing the promised permanent jobs.
"How many jobs are created by a data center?" Democratic state Sen. Chuy Hinojosa asked.
"That, I don't know," Reynolds replied. "I just know that clearly some of them have difficulty achieving the 20."
Republican state Sen. Bob Hall argued that exempting the companies ultimately shifts costs to other taxpayers.
"If we're going to give a huge tax exemption, we're going to shift that burden to the people," Hall said.
The data center industry maintains that focusing only on forgone tax revenue overlooks the construction, investment and other economic activity generated by the facilities.
Dan Diorio of the Data Center Coalition, whose members include some of the world's largest technology companies, compared the exemption to Texas' tax treatment of manufacturing equipment.
"By defraying some of the cost of the inputs, it fosters continuous reinvestment in the facility to generate broader economic activity and taxable outputs," Diorio said.
But the industry's overall economic impact does not resolve the central question facing lawmakers: How much of that investment would have occurred without the exemption?
Texas already offers companies available land, relatively inexpensive electricity, extensive fiber-optic networks and a comparatively light regulatory environment.
Shannon Halbrook of Every Texan, a research and advocacy organization, said those advantages have allowed the industry to mature beyond the need for state subsidies.
"The data center industry is viable in our state and no longer needs the subsidy," Halbrook said. "In 2013, 2014, 2015, it may have been a different story, but they seem to be doing very well here in Texas."
Lawmakers could consider eliminating or limiting the sales-tax exemption, removing electricity from the program, strengthening job requirements or requiring more rigorous compliance audits. That will be decided in the next legislative session.
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