Texas’ multibillion-dollar sales tax exemption for data centers is growing, while audits lag
Texas is facing a growing multibillion-dollar loss from sales tax exemptions for data centers, with audits revealing significant non-compliance among beneficiaries. State lawmakers are now considering legislative action to either reform or entirely repeal the tax break due to its escalating costs and questions about its necessity. Various state officials and local groups are actively opposing the current exemption policy.
The Texas Comptroller’s Office recently informed lawmakers that the state's multibillion-dollar sales tax exemption for data centers is rapidly expanding, with insufficient oversight. Out of 138 data centers approved for the tax break, only 20 have been audited, revealing six instances of non-compliance, primarily related to job creation and square footage requirements. Those found in breach will owe sales taxes back to the state. The Comptroller's Office projects a $3.2 billion loss in sales tax revenue over the next two years, acknowledging this figure is likely an underestimate given the surge in new data center certifications.
Lawmakers, including Gov. Greg Abbott and Lt. Gov. Dan Patrick, have expressed concerns, with Sen. Joan Huffman (R-Houston), chair of the Senate Finance Committee, vowing to introduce legislation to reform or repeal the exemption. The tax break, originally approved in 2013 and expanded in 2015, was less costly when data centers were smaller and less frequent. However, the rapid growth of the industry, driven by AI, has dramatically increased its financial impact, leading to exemptions on sales taxes for equipment and electricity.
The Data Center Coalition, an industry trade group, argues the exemption is crucial for attracting data centers to Texas, projecting significant economic benefits and job creation. They cited a PwC study indicating data centers contribute $65.8 billion to Texas GDP and support over 103,000 jobs. However, legislators like Sen. Phil King (R-Weatherford) question the necessity of the tax break, suggesting it shifts the tax burden to citizens. The debate also involves broader concerns about data centers' impact on the power grid and water resources. Agriculture Commissioner Sid Miller and Sen. Carol Alvarado (D-Houston) have called for a special legislative session to regulate the industry.