Texas lawmakers spent more than a decade encouraging data centers to set up shop in the Lone Star State with generous tax incentives. Now, as those incentives are projected to cost billions of dollars and the industry's demands on the state's power grid continue to grow, the Legislature appears ready to rethink the deal.
The Texas Senate Finance Committee, chaired by state Sen. Joan Huffman, R-Houston, is scheduled to meet Monday, July 27, to examine several interim charges, including the state's 2013 tax exemption for qualified data centers. The hearing comes just days after Gov. Greg Abbott signaled he wants lawmakers to consider new regulations for the rapidly expanding industry during the 90th Legislative Session, which begins in January.
When House Bill 1223 became law in 2013, it had broad bipartisan support. The measure passed the Texas House unanimously before clearing the Senate by a 23-8 vote. Three Democrats joined the Republican majority in favor of the bill, while all eight votes against it came from Democrats.
The law exempts certain tangible personal property from state sales taxes when it's purchased for use in a qualified data center. At the time, lawmakers viewed the incentive as a way to attract investment and strengthen Texas' position in the growing technology sector.
The incentive has certainly attracted business. It has also become far more expensive than it was when lawmakers first approved it.
According to the Senate Finance Committee's hearing notice, Texas exempted about $14.6 million in tax revenue during the 2014-15 biennium after the law took effect. For the next biennium, the state is expected to forgo an estimated $3.3 billion as data center construction continues across Texas.
The state's growth has been impossible to ignore. A May report from commercial real estate firm Cushman & Wakefield ranked Dallas as the world's leading metropolitan market for data center development. While Virginia remains the nation's largest overall data center market, Texas now accounts for several of the world's fastest-growing markets, according to the report.
That rapid expansion is also raising new questions about electricity demand, water use and infrastructure.
On Friday, Abbott highlighted a letter from the Public Utility Commission of Texas and the Electric Reliability Council of Texas outlining new standards the agencies are implementing or developing to "protect residents by prioritizing affordability, reliability, and the interests of Texas communities."
Abbott also announced three recommendations the agencies want lawmakers to consider next session. They include expanding the Lone Star Infrastructure Protection Act — legislation originally passed in 2021 to prevent a Chinese company from accessing the Texas electric grid — to include large data centers, clarifying state authority to establish new reliability standards for those facilities, and requiring data centers to register with both agencies so Texas has more complete information about their electricity and water consumption.
Earlier this month, Abbott also said at an event in Bullard that he supports ending data center construction in rural neighborhoods.
Monday's hearing is expected to give lawmakers an opportunity to examine whether the tax incentives that helped fuel the industry's growth still make sense as Texas weighs the economic benefits against the increasing demands large data centers place on the state's resources.
