Texas spends billions on tax breaks for data centers. There’s a bipartisan legislative push to repeal them.

Property and equipment used by Texas manufacturers are also exempt from state sales taxes. This cost the state nearly $11.5 billion last year, per the comptroller's office, although legislators have not publicly contested the manufacturing exemption.

While Texas limits the data center exemption to a 10- or 15-year period and has certain eligibility requirements, the tax break for manufacturers is "by right" and has no limitations, according to the National Taxpayers Union, a Washington, D.C.-based group that advocates for limits on taxes and government spending. Manufacturers can claim the exemption for any machinery or equipment that "causes a physical or chemical change in a product in order to make it saleable," rules on the comptroller's website show.

The NTU argued that tax exemptions for data centers are "an extension of a long-standing, economically sound principle."

"Sales taxes should apply to what consumers buy, not to the equipment businesses use to make it," said Jared Walczak, an NTU senior visiting policy fellow, in a July 22 statement. "Treating data centers differently from every other industry doesn't level the playing field, it singles them out for a tax penalty that ultimately shows up in higher costs for everyday goods and services."

What’s happening

The Lone Star State is home to the nation’s fastest-growing data center market, and the Data Center Coalition, which advocates for the industry, has argued that the tax break program is key to maintaining that title.

“Combined with other [policy] issues going on, I do have concerns about long term competitiveness... and what signal it may send,” said Dan Diorio, the coalition’s vice president of state policy.

Senators and members of the public who spoke at the July 27 hearing disagreed.

Sen. Donna Campbell, R-New Braunfels, said that “data centers benefit more from Texas than Texas does from data centers,” while Sen. Carol Alvarado, D-Houston, warned that the data center industry has “failed communities.”

“I have this feeling that if you want to be in Texas because of what we've built here, I think you're going to come without all these incentives, because it's the best decision for your company,” Sen. Lois Kolkhorst, R-Brenham, said.

Amid a bipartisan push for more oversight and regulation of data centers, senators on the finance committee signaled that they intend to add more strings to the sales tax exemption program or eliminate it entirely. The next state legislative session will begin in January, and lawmakers do not have the authority to change laws in the meantime.

Sen. Joan Huffman, a Houston Republican and the Senate’s chief budget writer, said that while data centers are important, Texans are concerned about the industry’s rapid expansion and the multibillion-dollar cost of the tax exemption. That money could otherwise be spent on public education, property tax relief, water infrastructure and other key programs, she said.

“That is why I have publicly committed to filing legislation on this issue during the next legislative session. Texans expect us to protect their hard-earned tax dollars,” Huffman said. “The sales and use tax exemption was enacted in 2013, well before the explosive growth of cloud computing and artificial intelligence, and as a result, its fiscal impact has far exceeded original expectations.”

Some lawmakers, state officials and political candidates from all ends of the political spectrum have pushed for a special legislative session this year to address the tax breaks and consider increased regulations on data centers. Only the governor has the authority to convene a special session.

“I’m not trying to be political about this, but the question is whether or not we need to have a special session where all of us are focusing in on this,” Sen. Royce West, D-Dallas, said July 27.

“We do,” Kolkhorst said.

Ahead of the July 27 hearing, outgoing state Agriculture Commissioner Sid Miller spoke at a rally on the Texas Capitol steps, pointing to the governor’s office behind him.

“He can hear everything we're saying, and I invite him to come down here and join us today,” Miller said. “The governor has authority to bring the legislature back tomorrow, ... so we're calling on him to do just that.”

Gov. Greg Abbott, who in late 2025 called Texas “the epicenter of AI development,” has not publicly commented on requests for a special session. However, he announced last month that, if reelected this November, he would work with the legislature to repeal the tax exemption, require data centers to pay for their own infrastructure needs and establish noise standards for data center facilities.

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Public commenters and legislators criticized the data center industry for a lack of transparency and the negative impacts that data center projects can have on communities, citing concerns about light pollution, water availability and electric grid infrastructure.

“We are experiencing a severe drought in many regions of the state, yet we have data centers located and building in those areas where we don't have enough water supply for farmers, our ranchers [and] families,” said Sen. Juan Hinojosa, D-McAllen. “For example, we have data centers being established in Corpus Christi that's experiencing a significant drought. We have another one down in Raymondville where they have no water.”

Margaret Gannon, an El Paso small business owner, said irrigation allotments for farmers in her area have decreased from 36 inches per acre to five inches per acre in the past few years, expressing concerns that planned data centers would further tighten water availability.

“We have three hyperscale data centers under construction in our region,” she said. “These buildings consume enormous amounts of water and gas to make electricity and to cool the structures.”

Some speakers mentioned that while Texas is a business-friendly state, they have trouble supporting data centers, which may require hundreds of acres of land and thousands of megawatts of electricity.

“As this committee reviews these incentive programs, I respectfully encourage you to consider not only what these projects bring to Texas, but also what Texas is investing to attract them, what role communities contribute to support them, and whether those public investments are producing measurable results for the taxpayers who make them possible,” said Donna Howard, an organizer with the advocacy group Matagorda County Against Data Centers.

Testifiers also pointed to the money that Texas could save by eliminating the data center tax break. Ahead of next year’s legislative session, state leaders have directed all state agencies and public universities to reduce their budget requests for the next biennium by at least 3%. Certain education programs, social services and state pensions are exempt from the required reductions, which Abbott, Lt. Gov. Dan Patrick and House Speaker Dustin Burrows said are needed to promote fiscally conservative policies and further fund priorities like property tax relief.

In recent legislative sessions, Texas had between $24 billion and $33 billion in budget surpluses, although financial experts have warned that similar amounts of excess money will not be available in 2027.

“With that in mind, we should be thinking in terms of, how can we pay for that?” said Shannon Halbrook, a fiscal analyst with the progressive think tank Every Texan. “Ending the exemption seems to be developing into a consensus position.”