Texas’ multibillion-dollar estimate for what it will lose on sales tax breaks for data centers is growing, but the Comptroller’s Office warned lawmakers on Monday they have little information about whether data centers are meeting their promises to be eligible for the exemption.
Out of 138 qualified data centers under the state sales tax exemption program, only 20 have been audited so far. Of those audits, six data centers were found to be breaching the terms of the tax break. At least four of those failed to create the required jobs, one failed to build to the required square footage and one self-reported that its mandated power agreement had fallen through, according to testimony before the Senate Committee on Finance’s interim hearing on data center tax incentives.
Those data centers found to be out of compliance will have to pay back the money to the state that was previously waived in sales taxes.
The state in 2025 forecast it would lose $3.2 billion in sales tax revenue over the next two years from data centers, a number first reported by The Texas Tribune earlier this year. The Comptroller’s Office acknowledged that total was almost certainly an underestimate due to the growing number of new data centers that are applying for and receiving the tax exemption. Brad Reynolds, chief revenue estimator for the Comptroller’s Office, said 59 additional certifications have been approved this year and an estimated 10 new data centers will be certified to receive the exemption each month moving forward.
“We have vastly, vastly more certifications for exemption that have been granted since that last estimate was done,” Reynolds said. “The next estimate will be significantly higher.”
State law gives the data centers five years to meet both capital investment and job creation requirements — though they are free to immediately reap the benefits of sales tax exemption. Because so many data centers have applied for and received the exemption within the past five years, few data centers have faced compliance checks, said Jenny Burleson, director of the comptroller’s Tax Policy Division.
The Senate Finance Committee listens to invited testimony regarding previously authorized tax breaks for data centers on Monday, July 27, 2026. The lack of compliance information and high rate of noncompliance among data centers that had been audited by the Comptroller added further fuel to an interim committee hearing called to explore a potential repeal of the tax exemption due to its ballooning cost.
In recent months, lawmakers and state officials including Gov. Greg Abbott and Lt. Gov. Dan Patrick have raised concerns about or suggested eliminating the tax break for data centers.
“No tax exemption should operate on autopilot,” said Sen. Joan Huffman, R-Houston and chair of the Senate Finance Committee.
Huffman, along with most members of the Legislature at the time, voted in 2013 to approve the sales tax exemption for data centers and a 2015 expansion of the exemption for larger data centers. Data centers then were smaller, less energy intensive and being built with significantly less frequency, and the exemption only cost the state $5.4 million in 2015. However, as the acceleration of artificial intelligence technology significantly increased the amount of computing power needed by tech companies, both the number and size of data centers has grown rapidly since 2021.
Qualifying data centers are exempted from paying the state’s 6.25% sales taxes on purchases related to building and maintaining the facility — including servers and other data storage hardware, software, office equipment, the cooling system, emergency generators and plumbing.
Data centers are also exempted from paying state sales taxes on the cost of electricity, which is notable given the enormous energy demand of the facilities. By 2030, one in five data centers are expected to exceed 1 gigawatt in maximum energy demand, equivalent to the amount needed to power roughly 700,000 homes for a year.
The data center industry argues the state sales tax exemption is a necessary investment on the part of the state to attract data centers, which make up for the lost tax revenue through job growth, local taxes and other economic development.
Texas is poised to become the No. 1 market in the country for data centers, currently trailing only Virginia. A Texas Tribune analysis found there are 335 data centers operating in the state, with a further 248 planned.
During the hearing, Huffman reiterated an earlier commitment to file legislation to either reform the tax exemption or repeal it altogether during the next legislative session.
Other senators on the committee also voiced skepticism that the tech industry needs the sales tax exemption as it is written, although it was unclear if they would be willing to repeal the tax exemption entirely.
“Services don’t just disappear, so assuming the services we’re providing are legitimate and needed and we’re going to give an exemption to a sector, then somewhere along the line the residents, the citizens, are going to have to make up that deficit,” said state Sen. Phil King, R-Weatherford. “We’re actually shifting that burden of the tax money that’s needed to the citizens by giving these tax exemptions.”
A complete repeal of the sales tax exemption risks ending Texas’ rising status as the top market for data center construction, testified Dan Diorio, vice president of state policy with the Data Center Coalition, a trade group that represents major tech companies.
“By defraying some of the costs of the inputs, it fosters continuous reinvestment in the facilities to generate broader economic activity and taxable outputs,” Diorio said.
The Data Center Coalition commissioned a study by Big Four accounting firm PwC that found data centers had increased the Texas gross domestic product by $65.8 billion in 2024 and directly supported more than 103,000 jobs that year, which Diorio cited.
To qualify for the tax break, owners of data centers larger than 100,000 square feet must agree to create at least 20 jobs paying at least 120% of the area’s median salary and invest $200 million in the project over five years. The 2015 addition to the tax break added a category for owners of data centers larger than 250,000 square feet, who must agree to create 40 of those jobs, invest $500 million and pay the energy grid operator to reserve 20 megawatts of transmission capacity, according to state tax code. The exemption expires after up to 15 years for smaller data centers and up to 20 for larger ones, depending on if the company meets the capital investment benchmarks.
The interim committee hearing is just one of a series of similar hearings on data centers. State Senate and House committees have explored the centers’ impact on the power grid, water use and the ability of local governments to better regulate where the centers are built.
Democratic and Republican legislators have found common ground on the issue. A March Quinnipiac poll found that 65% of Americans oppose the building of an AI data center in their community.
Prior to the committee meeting, a coalition of local groups opposed to data center construction rallied in front of the state Capitol building.
Agriculture Commissioner Sid Miller, a Republican, told rallygoers that Abbott should call a special session immediately so the Legislature can better regulate the industry before more data centers are built.
While generally opposed to Miller’s politics, state Sen. Carol Alvarado, D-Houston, said during the hearing that data centers is one area they have common ground while also arguing Abbott should call for a special session.
“I might be on the same page as Sid Miller,” Alvarado said. “How about that?”
This article first appeared on The Texas Tribune.
