Texas Data Center Tax Exemption Faces Serious Legislative Risk Ahead Of 2027 Session

The Texas Senate Finance Committee on July 27, 2026, held a hearing on the fiscal impact of the state's data center sales and use tax exemption. The hearing made clear that the exemption, including its application to existing projects, will be a major target in the 2027 legislative session.

Testimony from the Comptroller's Office underscored how dramatically the revenue impact of the exemption has exceeded original expectations. When the exemption was enacted in 2013 and expanded in 2015, fiscal analyses projected "no significant fiscal impact." Today, foregone state tax revenue associated with the exemption is estimated at approximately $3.3 billion. The Comptroller's Office also testified that Texas is among a minority of states that extends data center tax benefits to purchases of electrical power and that six of 20 recently audited data centers were not in compliance with job creation requirements tied to the exemption.

Bipartisan Skepticism Is Hardening

Committee members from both parties questioned whether the benefits of data center development have been oversold to Texans and whether the state is receiving an adequate return on the incentives provided. Several senators indicated support for repealing the exemption, and the discussion did not appear limited to future projects. Legislators also discussed whether currently authorized exemptions should continue to be honored.

In Texas, economic development incentives have historically been treated as commitments that provide businesses with stability and predictability. Lawmakers contemplating existing data center tax benefits pose a serious policy risk for the industry.

Budget and Constituent Pressure Are Converging

Legislators are preparing for a more constrained budget environment, while local opposition to data center development continues to grow, particularly in rural communities. One key committee member noted that restoring billions of dollars in sales tax revenue to the state would give the Legislature significant flexibility as it considers future spending priorities.

At the same time, legislators are increasingly responsive to concerns from rural voters over electricity demand, water usage, tax treatment, noise, land use and local control. As a result, data center policy is no longer being viewed solely through an economic development lens. It is now an issue in terms of politics, budgets, utility grids and local control.

The Policy Debate Is Already Underway

The 90th Texas Legislature will convene in January 2027, but meaningful policy work is happening now. Interim hearings, agency discussions, stakeholder meetings and public statements from state leaders are already shaping the proposals that will be filed next session.

Based on the direction of recent hearings and comments from state officials, data center operators, developers, investors and customers should expect serious legislative proposals addressing tax incentives, electric reliability, water use, local impacts and large-load development. The sales tax exemption is no longer merely under review – it is at real risk.

For companies developing, financing, owning or operating data centers in Texas, waiting until bills are filed will likely be too late. The most important conversations are taking place now while policy concepts are still being formed and legislative positions developed.

Recognizing the rapidly shifting political and regulatory environment facing the industry, Holland & Knight's Austin-based Texas Government Advocacy Team has established the Texas Data Center Association, a Texas-focused trade association dedicated to effectively representing the industry before Texas policymakers and helping ensure that data center companies have a coordinated voice in the debates already underway.

Clients and attorneys with current or planned Texas data center interests should engage now. For guidance regarding potential legislative, regulatory or public affairs impacts, or to discuss participation in the Texas Data Center Association, please contact the authors.