Sorry, but data centers don’t need those tax breaks

Let them pay their taxes.

Texas will lose out on at least $3.1 billion in sales tax revenue over the next two years thanks to an exemption for the state’s booming data center industry, according to the comptroller’s office.

That figure is likely a vast underestimate given the explosion of new facilities being built, but already makes the tax break one of the state’s costliest incentive programs and soon to be the most expensive of its kind in the nation.

Lawmakers, who will meet in January for the next legislative session, say they are considering proposals to either limit the scope of the tax break or get rid of it altogether.

“These new numbers are extremely concerning and I will say they’re unsustainable” said state Sen. Joan Huffman, chair of the Senate Committee on Finance in an interview with The Texas Tribune. “I plan to look at filing legislation to either repeal the exemption or take a very close look at it and see.”

Lawmakers approved the tax break more than a decade ago, when data centers were smaller and required fewer resources. From 2014 to 2022, the exemption amounted to between $5 million and $30 million in lost state revenue per year. By 2023, that skyrocketed to more than $150 million, and this year Texas is forgoing at least $1.3 billion — a number that is rapidly increasing every year, based on state projections.

The money Texas is poised to lose from the tax break on a yearly basis could pay for the entirety of the state’s new school voucher program, or it could double the size of a state disaster fund to help local communities like Kerr County prevent flooding. It’s also quickly outpacing the cost of Texas’ highly controversial Chapter 313 tax abatement program, which allowed manufacturing companies to avoid paying local school property taxes, drawing the ire of lawmakers who eventually shut down the program last year at its height of more than a billion dollars a year.

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Data center industry leaders warn that shrinking or ending the tax break could spell an end to Texas’ rising status as the nation’s No. 1 destination for data centers, a status the industry argues comes with new jobs and billions of dollars in local investment.

“I think the hostile message that sends would … give a lot of different companies pause about what the state of being able to invest in Texas for the long term is,” said Dan Diorio, vice president of state policy with the Data Center Coalition, a trade group that represents major tech companies.

Meanwhile, data centers are becoming increasingly unpopular among locals.

Cities like San Marcos, Amarillo, College Station, Waco and Harlingen have seen grassroots movements pressuring local officials to block data center projects. A recent Quinnipiac poll found 65% of Americans oppose the construction of a data center in their community.

Texas is one of 37 states offering tax exemptions for data centers, most of which are sales tax exemptions tied to local economic growth requirements. States like Virginia, Illinois, Michigan, Arizona and Georgia also are debating whether to curtail or significantly alter those tax breaks.

The tech industry argues that tax breaks are crucial to maintain the industry’s investment in the state, which creates jobs and generates local tax revenue. Critics say the industry is choosing Texas for its abundance of cheap land and electricity as much as any tax break.

Dick Lavine, a former fiscal analyst for left-leaning policy group Every Texan, said there are many reasons why a company decides to build in a particular area, “and taxes is far from the most important.”

“Somebody’s giving out money; [the companies] want to be in line. But it’s not really how decisions are made, especially when there’s bedrock things like land and energy that are much more important than their tax rate,” Lavine added.

Yeah, cry me a river, Dan. Giving out these tax breaks is a choice, and considering how few jobs the data centers themselves create, it’s a damn expensive one. It’s also the case that those tax breaks are ultimately going to companies like Microsoft, Amazon, Google, and Meta, all of which can cover their loss.

And while localities can try to stop these things or at least slow them down, since it’s not such a great deal for them and their residents hate them, they may not be able to do so at some point.

Last month, county commissioners in Fayette County, a deeply Republican area between Houston and Austin, approved a resolution opposing the development of data centers after word spread that tech companies were targeting the area.

The push from cities and counties across Texas to slow the flood of data center development comes as Texas Republican leaders are heralding their arrival as another economic boom, putting pressure on Texas Attorney General Ken Paxton to weigh in ahead of his runoff next month with U.S. Sen. John Cornyn.

As the state’s top lawyer, Paxton has been asked to weigh in on whether municipalities have the power to hold up data projects, pitting the Republican between top tech companies and their GOP supporters, including Gov. Greg Abbott and President Donald Trump, and the rural Texans who have long supported him.

In conservative Hood County in North Texas, close to Paxton’s home base, a flood of applications for the construction of data centers has drawn opposition among residents who worry the facilities, which require large volumes of water and electricity and often stretch across thousands of acres, will deplete the region’s water supplies and drive up power prices.

“The concern most people have is this new type of development is going faster than the speed of information coming to the public,” said state Rep. David Cook, a Mansfield Republican. “People are looking for assurances that our water and power supplies are not going to be wiped out here.”

Hood County commissioners narrowly voted down a moratorium on data center construction in February but have, alongside other counties, sought Paxton’s opinion on whether they can take such action. That followed a request from state Sen. Paul Bettencourt, a Houston Republican, for Paxton to uphold state law he says denies municipalities the ability to block data centers.

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At the same time tech executives including Meta’s Mark Zuckerberg, Palantir’s Joe Lonsdale and OpenAI’s Greg Brockman are pumping millions of dollars into political races across Texas and the nation.

The super PAC Leading the Future, which says it has $100 million in commitments since launching last year, spent more than $750,000 helping billionaire Elon Musk’s attorney, Chris Gobert, win the GOP nomination to replace retiring U.S. Rep. Michael McCaul. And they spent another $500,000 supporting former Justice Department official Jessica Steinmann, who won the GOP primary for retiring U.S. Rep. Marcus Luttrell.

Meta’s Forge the Future super Pac, which is backed by a $50 million investment from the tech giant, reported spending more than $1.3 million on Texas races, including Acting Texas Comptroller Kelly Hancock’s unsuccessful bid to win a full term.

And they have found support among politicians like Bettencourt, who led the passage last year of a bill blocking cities from enacting moratoriums on data centers and other large industrial projects.

In an interview, Bettencourt said keeping Texas open to businesses that might prove unpopular with some residents, including multi-family housing and battery factories, was vital to the state’s economic future.

“There is a segment of people that are basically saying they don’t want any more growth,” he said. “What might be very desirable in one county could be perverted into a horrible weapon like we’ve seen other states do, pick California or Illinois or New York.”

So on the one hand you’ve got some crabby voters, and on the other hand you have many millions of dollars in PAC money. Who do you think will win that fight? As the story notes, Paxton can wait on issuing an opinion until after the primary runoff, or after November, whichever he thinks is more politically expedient. I’m not betting against the PACs, are you?

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