Data Center Sales Tax Break Now Costs Texas Over $1 Billion a Year

Texas gave up an estimated $1.016 billion in sales tax in fiscal 2025 through its exemption for large data centers, according to the comptroller’s latest report on tax exemptions, and the office projects the cost will reach $1.753 billion a year by 2030. The February 2023 edition of the report had put the fiscal 2025 cost at $130 million.

The exemption is Section 151.359 of the Tax Code, added in 2013. A data center of at least 100,000 square feet qualifies if its owner, operator or occupant creates at least 20 jobs in the county and invests at least $200 million over five years. Once the comptroller certifies it, the center buys its servers and its electricity free of state sales tax, along with most other equipment the statute lists, for 10 years, or for 15 years if the investment reaches $250 million.

The January 2025 report projects the exemption at $1.598 billion in fiscal 2027, $1.601 billion in 2028 and $1.693 billion in 2029. That puts the 2028-29 budget at about $3.3 billion. When the Legislature created the break, it expected a cost of about $14.6 million for the 2014-15 budget, members of the Senate Finance Committee noted at a hearing in July, KUT reported. The comptroller’s office has since told lawmakers its newer projections are likely too low as well, CBS Austin reported.

Brad Reynolds, the comptroller’s chief revenue estimator, told the committee that “the early estimates are significantly too low to begin with.” He said nine qualifying projects that were required to invest a combined $2.7 billion invested more than $9.1 billion. Texas has certified 138 data centers, and the comptroller has audited or is auditing about 20 of them. Several were found out of compliance, and one company was ordered to repay nearly $5.6 million. Asked whether more projects are in development than the state knows about, Reynolds said there likely are. “We don’t really know what’s going on,” he said.

The industry counts the return differently. “In 2024 alone, data centers contributed $4.5 billion in state and local tax revenues in Texas,” Dan Diorio of the Data Center Coalition said in a statement to The Texas Newsroom. John Diamond, who directs the Center for Tax and Budget Policy at Rice University’s Baker Institute, told CBS Austin that about 69 percent of what is spent on a data center is exempt, and that some of the investment likely would not happen without the break. “This is the standard treatment for a production facility,” he said.

The City of Starbase notified the public on Monday that SpaceX plans a $24 billion “gas-fired power plant and super-compute facility” on 444.45 acres outside Brownsville, the Texas Tribune reported. Brownsville removed the land from its city limits earlier this year at the company’s request, in exchange for $220 million for water and wastewater projects, and Starbase later annexed it. Brownsville’s 90-day moratorium on data centers took effect last week. Starbase commissioners will hold a public hearing in December on tax breaks for the project, and SpaceX did not respond to the Tribune’s questions.

Gov. Greg Abbott directed grid operators in August to pause new data center connection requests until the centers could be audited, the Tribune reported. A data center with its own power plant could avoid that connection, the Tribune noted. Gov.-elect Gina Hinojosa said in an October 22 video that she would order a moratorium on data center approvals until lawmakers pass laws “to protect Texans,” CBS Austin reported. Diamond told CBS Austin that the governor cannot repeal the sales tax exemption on her own.

The sales tax brought in 58 cents of every state tax dollar in fiscal 2024, the comptroller’s report says. The exemption that now takes more than $1 billion a year out of it is Texas law, written in Austin, and the Texas Legislature needs no one’s permission to narrow the exemption or end it when lawmakers return in January.