# Texas is pulling the $1.3 billion annual tax break that built its AI data center empire > Source: > Published: 2026-07-25 06:59:41+00:00 *Gov. Greg Abbott reversed course in June 2026, backing repeal of the sales tax exemption that drew Google, OpenAI's Stargate, and a sprawling 5,800-acre AI campus near Pantex , and the revolt is bipartisan.* Texas built itself into the world's most attractive state for AI infrastructure by giving it away cheap. Now it's changing its mind. In June 2026, Abbott recommended eliminating the sales tax exemption for data centers and other incentives he called "outdated or unnecessary," citing comptroller figures showing the state will forgo $3.2 billion in sales tax revenue over the next two years. This year alone, Texas is on track to lose at least $1.3 billion , a figure that's climbing fast as the buildout accelerates. State Sen. Joan Huffman, chair of the Senate Finance Committee, called the numbers "extremely concerning and unsustainable" and said she plans to file legislation to repeal the exemption or significantly curtail it when lawmakers convene in January. The reversal is striking because it comes from the same political establishment that spent years marketing Texas as the alternative to California: low taxes, minimal friction, abundant land and power. Google responded with a $40 billion commitment across three Texas campuses. OpenAI and Oracle anchored the Stargate project in Abilene, where Crusoe-built facilities are already partially operational. Then came the Fermi Advanced Energy and Intelligence Campus, a 5,800-acre project near Pantex in the Texas Panhandle, targeting 18 million square feet and enough power to light a medium-sized country. According to JLL's year-end 2025 data center report, Texas was on pace to overtake Northern Virginia , the uncontested global leader for more than 15 years , as the world's largest data center market by 2030, with 6.5 gigawatts under construction. That's what makes the political shift so disruptive. These are not scouting missions or letters of intent. The money is committed, the land is purchased, and the geotechnical work has started. Repealing the sales tax exemption now changes the capex math on projects that were underwritten on the assumption it would remain. A rack of AI servers draws enormous electricity, requires specialized cooling hardware, and relies on continuous water supply , all of it taxable at the point of purchase once the exemption disappears. For a hyperscale campus spending billions on equipment, that's a material cost increase on the back half of a construction schedule the developer can't easily unwind. ## The water and power backlash Abbott didn't act in a vacuum. A University of Texas at Austin poll published July 24 found 56% of Texans opposed to data center development in their communities , including 50% of rural Texans, the exact voters who were supposed to benefit from the economic activity. Mid-sized facilities can consume 300,000 gallons of water a day; AI-grade hyperscale campuses could require up to 32 billion gallons annually by 2028, roughly the indoor water usage of 360,000 households. In drought-prone communities where local aquifers are already stressed, that number reads as an existential threat, not a jobs announcement. Electricity is the other fault line. A single hyperscale facility in Abilene will draw approximately 1.2 gigawatts at full operation. Ratepayers fear they're subsidizing that grid load twice: once through the tax exemption, and again through utility rate increases to pay for transmission upgrades. The math is brutal. Abbott's directive to state regulators was explicit , data centers must pay for their own infrastructure and interconnection costs, not pass them to residential customers. He also called for banning new data center development in rural neighborhoods entirely, a hard line from a governor who spent years treating the sector as a signature economic win. ## The political reckoning Democrats Gina Hinojosa, the gubernatorial nominee, and Senate candidate James Talarico have made the issue a centerpiece of their 2026 campaigns. Hinojosa has called on Abbott to issue an executive order halting new construction until the legislature can establish proper oversight. Talarico wants local communities to have direct veto power over whether data centers can be built, along with an end to all tax subsidies. Their Republican opponents haven't matched that energy , Attorney General Ken Paxton, Talarico's Senate opponent, hasn't put forward a public platform on data centers , which means Democrats are, unusually, outflanking the right on a property-rights and local-control argument. For founders and infrastructure investors treating Texas as a settled location decision, this is the regulatory wildcard that wasn't in the model. The state's appeal was always a bundle: cheap land, cheap power, favorable taxes, and a government that didn't ask many questions. Two of those four are now actively contested. The tax exemption is likely gone by early 2027. The power cost question , who pays for grid upgrades and at what rate , is still being resolved by regulators. 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