Texas, other Southwest states rethink data center boom

Bloomberg News

Texas Gov. Greg Abbott had a message for data centers last week. 

"Any AI data center even thinking about coming here, they got to bring their own money, bring their own power, reuse their own water, and do it in a way that reduces the cost of electricity for residents across our state," he said at a campaign event in Bullard, Texas.

The Republican governor, who is running for a fourth term, called for prohibiting building data centers in rural neighborhoods and for eliminating their tax breaks, saying companies "must be responsible for funding their own projects here in Texas."

 The Lone Star state is projected to lose more than $1 billion annually in sales tax revenue from exemptions afforded to data centers, according to a 2025 report from the Texas Comptroller's Office.

Texas ranks second — behind Virginia — in the data center stampede, with 229 in operation,152 under construction, and 757 announced, according to data company Aterio. 

Abbott's declaration came just seven months after he hailed Google's $40 billion investment in Texas, which includes increasing the company's data center campuses in the state to five from two.

"This is a Texas-sized investment in the future of our great state," Abbott said at a Nov. 14 event with the company. "Texas is the epicenter of AI development, where companies can pair innovation with expanding energy."

The proliferation of the sprawling projects in triple-A-rated Texas and other states has heightened concerns about potential fallout from their considerable need for power as well as water, which can be scarce in the Southwest region. This demand introduces credit risk for states and local governments, according to a June 24 Moody's Ratings report.

"Rapid growth in hyperscale and AI-driven facilities may require major expansion of power, transmission and water infrastructure, creating costs that may fall on governments or ratepayers if not fully recovered from the new data centers," the report said. "Further, new data center development may fail to deliver material revenue benefits if tax incentives are not well calibrated."

Moody's said some governments are reexamining these developments by considering moratoriums on developments, revising tax incentives, and increasing cost-sharing requirements.

"These policy revisions are positive to the extent they help governments and their utilities more accurately assess data centers' impact on local infrastructure and resources and minimize the risk of data center infrastructure and utility costs being transferred to existing taxpayers," the report said.

In Texas, Abbott directed the state's Public Utility Commission and Electric Reliability Council to "require data centers to fully fund the costs of electric infrastructure needed to serve their operations, preventing those costs from being passed on to residential ratepayers."

He also pledged to work with the legislature next year to codify restrictions on data centers' electricity and water use. The legislature, which meets every other year, has been holding various committee hearings targeting data centers ahead of the 2027 session.

A University of Texas/Texas Politics Project poll out last month revealed strong opposition in the state to data center construction.

San Marcos, which is located between Austin and San Antonio, became the first Texas city to ban data centers, according to local media reports.

In New Mexico, the Santa Fe County Board of Commissioners adopted an 18-month moratorium on data center development last week.

"High-profile projects like Project Jupiter in Doña Ana County, and proposals in Socorro and Raton, have drawn sustained public concern over water consumption, electrical demand, and long-term community impacts," the county said in a statement. "Santa Fe County has no data centers currently proposed, but commissioners said the county needs rules in place before, not after, a project arrives."

Doña Ana County, New Mexico

Project Jupiter, which involves the issuance by Doña Ana County of $165 billion of taxable industrial revenue bonds that serve as a vehicle to obtain tax breaks, continues to be the target of litigation.

The latest lawsuit, filed on June 22 by New Mexico Foundation for Open Government, claims the county denied access to public records concerning the project in violation of state law.

Litigation filed in October by the New Mexico Environmental Law Center, seeking to invalidate bond ordinances on the grounds they were approved by the county board based on insufficient information, survived a dismissal attempt in the Third Judicial District Court in Las Cruces. The group also sued in February claiming open meeting act violations by the county.

Doña Ana County does not comment on pending litigation, according to a spokesperson, who confirmed all of the bonds were privately placed with three entities involved with the project, which is under construction. 

The debt issuance acts as a conduit to provide the project with a variety of tax breaks under a mechanism used by New Mexico to spur economic growth. 

Also in New Mexico, Socorro County last month approved a one-year moratorium on data centers in unincorporated areas, according to local media reports.

Litigation has stalled a massive data center and energy campus in Utah's Box Elder County that was approved by the state's Military Installation Development Authority on April 24 and by the county commission on May 4.

Both are defendants in a lawsuit filed in Salt Lake County District Court in June by non-profit Alliance for a Better Utah and five county residents, challenging the constitutionality of approvals for the Stratos Project.

In the wake of public backlash, Utah Gov. Spencer Cox signed an executive order in late May, which creates a data center framework prioritizing water resources, including the Great Salt Lake, while protecting utility ratepayers and the environment, and promoting transparency.

"This executive order establishes a higher bar for how these projects are evaluated and ensures that economic strength and environmental stewardship go hand in hand," the Republican governor said in a statement.

Elsewhere in the Southwest, Oklahoma City approved a temporary moratorium that will remain in effect until either year-end or earlier, if the city council approves amendments to the zoning code, according to Moody's. The city of Edmond paused the acceptance of data center applications until the end of this year.  A bill to halt data center construction in Oklahoma until November 2029 failed to pass the legislature. 

Arizona enacted a three-year pause on data center tax breaks in June.