A more than decade-long tax break for data centers faces increased scrutiny by Texas lawmakers, skeptical of the benefits compared to the soaring costs.
Originally, those tax exemptions were envisioned as part of an economic development strategy to transform the state into a data center mecca, of sorts. Texas Public Radio reports that the chair of the State Senate Finance Committee, Sen. Joan Huffman, R-Houston, summed up the general consensus among many at Monday’s committee hearing that , “No tax exemption should operate on autopilot.”
Qualifying data centers avoid the state’s 6.25% sales tax on servers, networking equipment, cooling systems, generators, software and other purchases.
Importantly, the tax exemption also avoids electricity usage at its facilities. Lawmakers expected such data center tax breaks to cost roughly $14.6 million, as laid out in the Texas 2014 and 2015 fiscal budgets. But the Senate Finance Committee now projects the cost at $3.3 billion for the 2028–2029 biennium [two-year budget].
That figure [$3.3 billion] covers state sales-tax revenue alone— not local property-tax abatements, or the cost of building electricity and water infrastructure. That's according to the chief revenue estimator at the Texas Comptroller’s Office, Brad Reynolds. He then took his analysis a step further during Monday's hearing, telling lawmakers that the existing projection is already obsolete.
Reynolds elaborated, “We have vastly, vastly more certifications for exemption(s) that have been granted since that last estimate was done. So, other things equal, I would say that suggests that the next estimate will be significantly higher.”
Texas standards to qualify for such tax breaks, as spelled out by the comptroller’s office, include:
* Investment of at least $200 million
* Operate a facility of at least 100,000 square feet
* Create 20 permanent jobs
State Sen. Juan “Chuy” Hinojosa, D-McAllen, asked Reynolds, “How many jobs are created by a data center?” Reynolds replied, “That I don't know. I just know that clearly some of them have difficulty achieving the 20.”
Overall, there are now 582 operating and planned data centers across Texas, 138 of which are in the state’s tax break program. That's according to multiple published reports which includes data from the Texas Comptroller’s Office, U.S. Census Bureau data and also according to data collected in a new report by The Texas Tribune, a nonpartisan, nonprofit media organization.
The comptroller’s office said they accept the data center’s self-certification. But six of the 20 projects that had entered the audit process were found noncompliant or withdrew. Projects that fail are supposed to repay the sales taxes they avoided. Yet, some question the time gap between when companies have begun claiming these tax exemptions versus when the state actually verifies the company’s performance years later.
That’s when State Senator Bob Hall, R-Rockwall, observed that any lack of performance by a company [and lack of reimbursement to the state] means the lost tax revenue translates into taxpayers picking up the financial slack. “If we’re going to give a huge tax exemption we’re going to shift that burden to the people.”
Lawmakers were also told Texas doesn't track the overall economic impact of data centers, leaving more questions about whether the growing tax break is delivering returns. Shannon Halbrook, with Every Texan, a research and advocacy organization, told lawmakers the industry has matured beyond the need for a subsidy.
As Holbrook argued, “The data center industry is viable in our state and no longer needs the subsidy. In 2013, 2014, 2015, it may have been a different story, but they seem to be doing very well here in Texas.”
Options for data center taxes range from cutting the exemption, ending the electricity exemption, imposing stricter job requirements or strengthening compliance audits.
