Texas Senate Mulls End to 13-Year-Old Tax Break for Data Centers

The data center development industry found aggressive critics in both Republicans and Democrats at a hearing of the Senate Finance Committee.

• Isaiah Mitchell

• Jul 28, 2026

Texas legislators are rethinking a tax break for data center equipment that sailed easily through the Capitol 13 years ago.

The Finance Committee of the Texas Senate convened on Monday morning to hear testimony on House Bill (HB) 1223, a state law passed during the 83rd Legislature in 2013 that created a sales tax exemption for tangible personal property purchased for essential use in qualifying data centers. 

Analysts from the Texas Comptroller of Public Accounts, an industry spokesman, and a local activist all testified before a committee that was largely critical of the law, revealing a growing distaste in both parties for data center development — and highlighting the obstacles to repealing a law that was just as bipartisan.

“What we thought we were voting for back in 2013, it’s a much different animal these days,” said Finance Committee Chair Joan Huffman (R-Houston).

‘The Hockey Stick’

HB 1223 passed the House unanimously and the Senate by a vote of 23 to eight. 

In the first biennium after it passed, Texas ceded $14.6 million in sales tax revenue due to the exemption, according to the committee meeting notice. 

The amount of forgone revenue has since ballooned to $3.3 billion for the upcoming biennium, said Brad Reynolds, an analyst from the comptroller’s office.

Much of the growth took place recently, Reynolds told the committee. From 2014 through 2020, just 10 facilities successfully sought the exemption. In this fiscal year alone, the state has already certified 59 new data centers and is considering five more.

When asked by state Sen. Paul Bettencourt (R-Houston) when the “hockey stick hit,” Reynolds said applications for certification shot up starting in 2021 as remote work trends took hold and the demand for remote data storage grew.

“It had a lot to do with the increasing digitization of the economy,” Reynolds said.

Data centers devoted to artificial intelligence account for about a quarter of the industry today, according to Dan Diorio, executive vice president of state policy and government affairs for Data Center Coalition, who also testified.

“Cloud [computing] and the basic digital infrastructure that we all depend on continues to be the dominant reason for data center development,” Diorio said.

The Tax Break Question

Members often revisited the question of whether data centers would have clustered in Texas without the tax break.

Thirty-five other states offer a sales tax exemption for data centers in some form, Reynolds told Bettencourt, who called the exemption “one of the drivers of where they bring their location, their equipment.”

HB 1223 only applies to single-user data centers. Multi-tenant data centers cannot make use of the benefit, according to the statute.

“Do you think these data centers would stop coming to Texas or proliferate regardless of whether they’re exempt or not?” state Sen. Pete Flores (R-Llano) asked Reynolds.

Reynolds said that “Texas is the second-largest colocation, multitenant data center market in the country.” 

“That all happened without any sales tax exemption,” Reynolds said.

State Sen. Lois Kolkhorst (R-Brenham) pursued a similar line of questioning with Diorio.

“I do have concerns about [Texas’] long-term competitiveness,” Diorio said of a repeal, claiming that other industries would join data center developers in disfavoring Texas without a sales tax exemption.

Kolkhorst said that she has “this feeling that if you want to be in Texas because of what we’ve built here, you’re going to come without all these incentives.”

Due to the fact that so many companies have already taken advantage of the exemption, a full repeal of the statute would be “exceptionally controversial,” Reynolds told state Sen. Charles Schwertner (R-Georgetown).

In addition, even if the Legislature does decide to repeal the law, it would take years for a positive fiscal revenue effect to take shape, Reynolds added.

‘Really Shocking’: Costs and Benefits

Democrats and Republicans alike took turns at the microscope, scrutinizing data centers’ purported benefits to the state.

Bettencourt pointed to the “national security imperative” of having a well-supplied set of American-developed data centers.

State Sen. Juan “Chuy” Hinojosa (D-McAllen) and Carol Alvarado (D-Houston) both questioned how many permanent jobs the industry creates.

“Data centers, from May 2023 to May 2024, were responsible for a 69 percent year-over-year increase in construction activity. That far outpaces any other sector,” Diorio responded to Hinojosa, adding that even temporary jobs such as construction tend to stretch out over several projects in a full pipeline of development.

Members frequently referred to the results of a comptroller’s audit of 20 of the 138 data centers currently benefiting from the exemption in the state. According to the audit, six of the 20 facilities failed to meet the law’s qualification requirements.

“It’s really shocking to me that you would say, in your 20 audits of 138 — again, everybody can do the percentages there — that six of the 20 you audited don’t meet the certification,” Kolkhorst said. “I can read the statute, but what happens inside the operation of the comptroller’s office? Is it just check, check, check?”

“I believe we accept the attestation of the company developing the data center,” Reynolds said. “I think that’s because of the way the statute was written. It explicitly instructs us to do post-audit.”

Huffman pledged to file a bill addressing the tax break in the next legislative session, which starts in January. Kolkhorst said she would support it.

Disclosure: Unlike almost every other media outlet, The Texan is not beholden to any special interests, does not apply for any type of state or federal funding, and relies on its readers for financial support.