Gov. Abbott Eyes More Guardrails To Check Texas' Data Center Boom

Texas is on pace to become the No. 1 U.S. data center market by 2030, but the prospect of skyrocketing utility bills and nearly $8B in lost sales tax revenue over that time span has Gov. Greg Abbott ready to hit the brakes on the state's development pipeline.

Texas' abundance of land and business-friendly climate have made it a magnet for artificial intelligence data centers and the soaring power demands that come with them.

But Abbott, in a June 10 letter to state regulators, said he wants to see cuts to the ballooning tax breaks given to data center projects and rising utility bills expected by state ratepayers. He also pushed for data centers to give power back to the grid and regularly report on their water and electricity use.

The policy shift could threaten to slow development, although many of the governor’s priorities are policies already adopted by the state’s newer data centers, so they could be met with open arms.

It’s possible to have new regulations and continued development, according to Mark R. McNees, a professor at Florida State University’s Jim Moran College of Entrepreneurship who has been researching AI data center infrastructure and ratepayer protection.

“Done right, it does protect from the backlash that we're seeing in other states,” McNees said of Abbott’s priorities. “The fastest way to turn the public against data centers is to let households, especially senior citizens on a fixed income, watch their bills rise to subsidize them."

The need for greater data center regulation has garnered bipartisan support throughout the state as municipal officials and residents voice concerns about the lack of tools to limit development as well as exorbitant water usage, noise and air pollution. Abbott pledged to work with the state legislature to implement his priorities next year and gave the Public Utility Commission of Texas and the Electric Reliability Council of Texas a July 17 deadline to submit a proposal to implement his objectives. 

Abbott's Priorities

Texas lost more than $1B in state sales tax revenue through an existing exemption for qualified data centers. That figure is expected to increase 33% in the next five years and total close to $8B during that time, according to data from the state comptroller of public accounts.

OpenAI and Oracle's massive $3.5B Stargate AI data center campus in Abilene received an 85% tax break from the local city council last year. And in April, Cloudburst Data Centers received a $500M tax abatement from Guadalupe County for its $14.5B campus in Central Texas.

That’s why repealing large sales tax exemptions and “other outdated or unnecessary incentives for data centers” is one of Abbott’s top priorities for the legislature next year. 

“These big investments don't create the jobs that the incentives were intended for,” said Brian Strawberry, chief economist at consulting and investment banking firm FMI.

Abbott’s other priorities include:

• requiring data centers to pay for their grid infrastructure costs;
• ensuring data centers add to the state’s power generation capacity;
• mandating water-efficient technologies in new data centers;
• directing data centers to report electric and water use to the state annually;
• and establishing standards to reduce impacts on local communities of noise and other concerns. 

The requirement to integrate power generation into the state's grid will increase costs and complexity for data center deals, potentially dissuading development, Strawberry said.

However, the regulations may be welcomed by the industry because, as demand grew, development became a land grab, then a power grab along the lines of the “wild, wild west,” said JD Jones, senior vice president of data center services at Pond Robinson & Associates.

The industry association Data Center Coalition said its members look forward to collaborating with state officials and regulators on developing Abbott’s proposals. 

The organization’s members have already adopted many of the governor’s priorities, including using advanced cooling technologies, working with water providers and paying for their energy infrastructure, Data Center Coalition Vice President of State Policy Dan Diorio said.

"It's important to recognize that data centers are a diverse industry serving a wide range of needs, and there is no one-size-fits-all solution when it comes to facility design, cooling technology, or regulation,” Diorio said in a statement sent to Bisnow. 

Rising Data Center Market

As data center development has grown across Texas over the last half-decade, so have requests to connect to the state's power grid.

The Lone Star State is expected to pass Virginia as the largest domestic data center market by 2030, according to JLL’s North America 2025 Year-End Data Center report.

The state is increasingly enticing data center developers away from Virginia due to abundant energy resources, the huge availability of land and its pro-business environment, the report states.

Texas has 335 existing data centers and another 248 in development, according to The Texas Tribune. Virginia is the only other state with more than 100 active projects under construction. 

Data centers in Texas have faced headwinds due to water availability and grid limitations, a new report from Cushman & Wakefield said.

ERCOT reported that 439 gigawatts of power capacity is being requested by large projects, a total five times larger than the record demand on the state grid. 

That's the equivalent of adding nearly 385 million new homes to the state, as 1 GW of capacity could power more than 800,000 households for one year.

Nearly 90% of those requests are coming from data centers. 

Traditionally, those infrastructure costs have been spread across all ratepayers in most states. But those costs have also traditionally come from big factories that create high-paying jobs and drive economic activity to communities, McNees said.

“The formula is different when it comes to data centers — they have huge amounts of load requirement, but they don't produce a lot of … high-paying jobs," McNees said.

Texas’ business-friendly reputation has made it a victim of its own success, according to Al Bora, a former vice president of data centers for Metro One Security who now serves as a consultant for data center firms. 

“Gov. Abbott's letter is wanting to protect the state's ability to service the citizens without being beholden to hyperscalers or data center companies,” Bora said. “This is him trying to be as proactive as possible.” 

What Could Be Implemented

Abbott's push for new regulations fits a pattern also playing out in states like Florida, Pennsylvania, Oregon, Wisconsin and New Jersey, McNees said.  

Instead of blocking data center development, Strawberry said he likes Abbott’s approach because it is basically negotiating a path with owners to get their projects delivered. Major data center developers with deep pockets and “the right motivations” are likely to be drawn to the proposed regulations for that reason.

“It’s putting guardrails to protect the public on things like power consumption and basically the lack of job creation that these big investments create," Strawberry said. 

While Strawberry said the huge tax breaks aren’t necessary to attract projects anymore, Jones said that option shouldn't be taken out of the hands of individual counties. 

He supports prioritizing the standardization of data centers and regular reporting, calling them “musts” for the industry. Closed-loop cooling processes are already in place in newer data centers, and Abbott’s proposals will help illustrate the progress the industry has already made. 

"It's going to help us show the residents of Texas that we're not using as much water as they think we are," Jones said. 

Many of the larger data center projects have also incorporated behind-the-meter power generation that will help meet the governor’s request that they add to the state’s grid capacity.

State legislators have praised Abbott's letter but indicated they could consider even stricter data center regulations during the 2027 regular session. 

McNees said he believes each of Abbott's priorities will be implemented in some form. 

"Texas, opposed to other states, has a much quicker path to doing this because they control their own destiny,” McNees said. “Politicians like Abbott, they need to protect their voting base, because there's nobody else to blame, so they need to get this right."