For most of the 21st century, Texas had a pretty welcoming attitude toward data center construction: Come on down! Like every other type of economic investment, from factory to fab to corporate HQ, if you had just about any need for a facility that would generate money and jobs, officials at all levels of Texas government would bend over backwards to provide you with some mix of incentives, subsidies and tax abatements, along with the state’s famous low tax and low regulation environment, to get you to build in the Lone Star State.
The massive AI data center build-out is changing those sentiments. A whole lot of people are starting to view AI as a job destroyer rather than creator, data centers are seen (rightly or wrongly) as too water- and power-hungry, and too much of a hassle for the relatively small number of local jobs they create.
And Texas politicians seem to be listening to the complaints.
Gov. Greg Abbott is praising new moves by Texas regulators that he says will prevent residential ratepayers from subsidizing the state’s data center boom.
In a filing sent to the governor this week, the Public Utility Commission of Texas (PUCT) and the Electric Reliability Council of Texas (ERCOT) outline steps to make “large computational loads” pay more of their own costs and to tighten reliability rules for massive new projects.
This comes as polling has shown Texans are concerned that the energy-intensive projects will strain the power grid and water supply.
On June 10, Abbott ordered regulators to ensure data centers pay for the transmission and other infrastructure they require instead of shifting those costs onto Texas families. He also directed PUCT and ERCOT to structure interconnections so data center growth helps lower residential electric bills and to develop additional protections for ratepayers.
PUCT Chairman Thomas Gleeson’s July 17 response embraces that framing, saying Texas should welcome economic development “but it must do so in a manner that prioritizes affordability, reliability, and the interests of the residents who depend on the grid.” He stressed that Texans “will not be negatively impacted by the interconnection of these large electric consumers.”
The commission’s filing describes new rules and rulemakings aimed squarely at large loads. A February rule standardizes how utilities report proposed big loads into ERCOT’s forecasting, which regulators say will help avoid overbuilding transmission that would otherwise flow into customer rates.
Another change goes to who pays for new steel in the ground.
After a May review found that rapidly growing demand from large computational loads is driving costly grid upgrades, PUCT opened a rulemaking to require big loads to shoulder those costs. The proposal would make large customers post financial security for interconnection, use any forfeited security to offset transmission rates, and start paying transmission charges as soon as capacity to serve them is available—even if the data center hasn’t energized yet.
Regulators are also trying to keep existing megawatts from quietly disappearing into private deals.
A March rule says generation that was available to Texans before September 1, 2025 must remain available, even if it will primarily serve a new large load going forward. Any such arrangement must be vetted by ERCOT, and PUCT can impose conditions to protect reliability.
Meanwhile, ERCOT is moving to a “Batch Zero” study of all qualifying large loads of 75 megawatts or more, designed to evaluate their combined impact and identify needed upgrades through 2032. Future batch studies and a new interconnection‑screening process are meant to prevent clusters of data centers from overburdening the grid.
Beyond current authority, PUCT and ERCOT are asking lawmakers to give them clearer power over big end‑users.
They want explicit authority to set reliability requirements for large computational loads, the ability for ERCOT to order those loads to curtail directly, mandatory registration of large data centers with both agencies, and an expansion of the Lone Star Infrastructure Protection Act to cover owners of big load facilities, not just generators and transmission owners.
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).
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.
That’s quite a bit of cheddar.
Before.
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.
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.
Colocation (where different companies have their own servers inside a data center side-by-side with those of other companies) looked like it was going to be big for a while, but then hypervisor-based systems like AWS (where massive CPU, RAM, and storage pools are split into dozens or hundreds of virtual machines) came to dominate the remote server service market.
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,”
If you’re gonna take Big Tex’s taxpayer money, you have to abide by Big Tex’s rules.
Lawmakers are questioning whether Texas’ generous tax breaks for data centers are working as intended after state officials confirmed several facilities failed to meet eligibility requirements.
During a Monday meeting of the Texas Senate Committee on Finance, senators discussed the future of section 151.359 of the Texas Tax Code, which allows qualifying data center developments that meet a certain threshold of commerce to be exempt from the state sales tax. In order to qualify, a data center must be a minimum of 100,000 square feet, commit to investing an additional $200 million within five years, and create at least 20 qualifying jobs.
Brad Reynolds, the chief revenue estimator in the comptroller’s office, stated that his audit division has been in the process of doing compliance checks on data centers using the exemption.
“[T]o date we have 20 of such audits that are either in process or already have been completed. One of those six came forward voluntarily [and] asked to have their certification removed [because they] lost their electricity supplier via ERCOT. The other five missed the 100,000 square-foot requirement. The others have missed the job creation requirement, which tells you really how little employment is stemming from this,” said Reynolds.
Reynolds admitted that in 2013 when House Bill 1223 was passed, which exempted data centers from the sales tax, the legislature estimated only one new facility per year.
However, the comptroller’s office saw an additional two to three facilities put up per year initially.
“I would say the early estimates are significantly too low to begin with because, as I say, the first few years we had about twice as many centers come in than we anticipated; and with spending at a higher level than those minimums, so they were too low to begin with, and of course never anticipated the kind of rapid development [in] numbers and scale that we see today,” stated Reynolds when asked about the extra capital investments.
He offered the committee a simplified version of the estimation that the comptroller’s office does. As more hyperscale data centers are developed in Texas, the cost of extra electricity consumption, as well as sales-taxable IT equipment, totals $107 million in forgone taxes and rises to $246 million by the third year of the facility’s operation.
Meta Platforms and the world’s largest asset manager BlackRock on Tuesday announced a venture to develop and operate a data center campus in El Paso, Texas, a project that would cost about $14 billion in development.
The race to build out AI infrastructure has prompted tech giants to turn to debt sales worth tens of billions of dollars and seek external capital from fund managers such as BlackRock due to an unprecedented scale of investment.
Meta said BlackRock-managed funds will take an 80% ownership stake in the venture, with Meta retaining the remaining 20%. A portion of BlackRock’s investment will be financed through $12.5 billion in debt. Meta will also receive a $1 billion distribution to align ownership.
Meta will contribute land and in-progress construction assets worth about $2.3 billion, while BlackRock will make a cash contribution of about $4.9 billion, the company said.
The Facebook-parent will enter into lease agreements with the venture, allowing it to secure computing capacity without directly funding and owning the campus itself, at a time when investors are concerned if data center investments will pay off.
Borrowing by tech companies has hit a fever pitch, with BofA Global Research saying that AI-related bond issuance reached $270 billion by early July this year, nearly doubling what was raised in all of 2025.
“Meta has said it plans to invest $600 billion in AI infrastructure, including data centers and new jobs in the U.S. by 2028, with an aim to fast-track work on personal superintelligence, which could help spin up new cash flows from the Meta AI app, ad tools and smart glasses.” I assume Meta’s AI push will be as laughably unsuccessful as its money losing virtual reality efforts.
Hey, I get to use the after part of the meme as well!
Also, given concerns over excessive water use, El Paso is not the place I would choose for a data center.
America and the world need data centers, but after the initial construction phase, they create a lot less local jobs than a fab or factory. The electricity and water-use concerns are real, but using closed-loop rather than evaporative cooling methods should greatly minimize the latter. A big step should be making sure big data pays market rates for their water and electricity rather than receiving state and local subsidies for them.
I’m pretty sure Texas will still let data centers get built in the state, but the days when Big Tech could expect a free ride to do so are coming to an end.
