Texas is giving data centers more than $1B in tax breaks each year

Texas is grappling with the escalating cost of a sales tax exemption for its data center industry, which the comptroller's office projects will amount to $3.2 billion in lost revenue over the next two years. This figure, described as a "vast underestimate," makes the tax break one of the state's most expensive incentive programs and is set to become the costliest of its kind nationwide. The exemption, approved over a decade ago when data centers were less resource-intensive, has seen its value skyrocket from $150 million in 2023 to at least $1.3 billion this year, driven by the artificial intelligence boom. State lawmakers are now considering significant changes, with proposals ranging from limiting the scope of the tax break to an outright repeal. Senator Joan Huffman, chair of the Senate Committee on Finance, called the numbers "extremely concerning and unsustainable" and plans to file legislation. Lieutenant Governor Dan Patrick has also directed the Senate to study the issue, seeking safeguards to ensure Texans benefit. State Representative Trey Martinez Fischer echoed concerns, emphasizing a need for a "two-way relationship" with businesses. The debate is intensifying as Texas now leads the nation in data center construction, with over 140 projects underway. Industry leaders, like Dan Diorio, vice president of state policy with the Data Center Coalition, warn that curtailing the tax break could jeopardize Texas's status as a top destination for data center investment, arguing the industry brings jobs and local investment. However, critics, including former fiscal analyst Dick Lavine, contend that factors like cheap land and electricity are more influential than tax breaks for site selection. Public sentiment is shifting, with cities like San Marcos, Amarillo, College Station, Waco, and Harlingen experiencing grassroots opposition to data center projects. This local pushback, coupled with concerns over data centers' immense electricity and water demands, is fueling the legislative re-evaluation. Similar debates are occurring in other states like Virginia and Illinois, which also offer substantial data center tax exemptions, with Illinois Governor JB Pritzker announcing a two-year suspension of his state's sales tax break.