A version of the following public comment was submitted to the members of the Texas Senate Committee on Finance on July 26, 2026.
In 2013, Texas enacted House Bill 1223, providing qualifying data centers with sales tax exemptions on a range of materials and equipment (M&E), as well as electricity. This was the same approach taken by 37 other states between 2008 and 2025. Since that time, Texas has led the country in a data center construction boom nationwide, with more than 300 operating data centers — second only to Virginia.
As the number of data centers in Texas skyrocketed, the nominal value of the sales tax exemptions has increased along with it, from $14.6 million in the 2014-15 biennium to projections of over $3 billion in 2028-2029. Now, amid nationwide political backlash against artificial intelligence (AI) and data centers, Texas is rightly taking a close look at the impact of its sales tax exemptions and considering its options going forward.
The data center sales tax exemptions bring them in line with manufacturers
As in other states, proponents of the tax breaks in Texas have framed their benefits mostly in terms of attracting more data centers (and the jobs and revenue they bring) within their borders. But the exemptions passed into law in 2013 by HB 1223 reflect good economic policy for reasons that are separate from how much new development they have created. The best tax policy is broad and consistently applied to all economic activity. The sales tax exemptions passed by Texas perform well against this benchmark because they treat data centers the same as other, similar types of businesses such as traditional manufacturing. Texas has exempted sales tax for manufacturers on both M&E and electricity for decades.
Like traditional factories, data centers are engaged in the production of goods and services that are then sold for final consumption or use. Economists and tax experts widely agree that single-stage sales taxes applied only at the point of final sale for a good or service are a cornerstone of good tax policy. This is because they avoid the problem of “tax pyramiding,” where goods are effectively taxed several times by the time they reach consumers. Most of what we buy in a modern economy goes through many steps in a supply chain. If businesses and manufacturers must pay the sales tax in full at each step in that chain, goods and services that pass through several steps will be taxed several times. Tax pyramiding can distort economies in multiple costly ways. It penalizes manufacturers that produce goods that happen to require many stages of production before their end use, and can therefore disadvantage smaller firms by incentivizing vertical integration. Capital investment is similarly penalized when sales tax falls on B2B transactions. Finally, repeated taxation at each stage of the value chain can obscure the essential signals that market prices send to buyers and sellers, a problem only compounded when goods or services move across the borders of states with different rules.
Exempting B2B transactions from sales taxation is good economic policy
Ideally, states would apply a single-stage sales tax consistently and neutrally across all business types, including manufacturers, service industries, retail, and digital goods and services. Because tax codes in the real world have long institutional histories, rather than developing all at once, it is inevitable that inconsistencies across these types of businesses will develop. States have not been as consistent in making the kind of sales tax exemptions that avoid tax pyramiding available to other kinds of businesses as they have for manufacturers. The exemptions currently available to data centers represent progress in applying good economic policy to another sector of Texas’s economy, whereas singling them out for repeal would be a step in the wrong direction. The economic benefits of taking these steps are real: research shows that removing tax pyramiding by exempting intermediate goods for all types of businesses would result in billions of dollars in increased economic activity.
Advocates of full repeal claim that the tax breaks enacted by HB 1223 now “cost” the state over $3 billion each year, citing the nominal value of the exemptions reported above. However, describing this figure as a cost is misleading on its own, since repeal would now place Texas in the minority of states that don’t offer similar exemptions, likely leading to at least some loss of new activity in the state. Somewhat lost in the current debate, however, is that the cost of repeal would go well beyond losing out on new data centers. The sales tax exemptions currently in place in Texas are good general tax policy, reflecting progress in bringing data centers as a business category in line with the single-stage sales tax principle that is currently applied to manufacturers and that should be applied to other types of firms.
Texans will benefit most from data centers when tax rates are low, regulations are fair and predictable, and businesses are free to compete and innovate while taking into account complex and constantly changing facts on the ground. The exemptions passed in HB 1223 serve that goal by treating data centers consistently with manufacturers and effectively avoiding the costly distortions that come with tax pyramiding.