“What’s in the water?” state Representative Erin Zwiener asked when talking to the developers of a proposed data center in her district, which covers most of fast-growing Hays County, south of Austin. “There are additives to try to help the water be more efficient with cooling, and I couldn’t get a straight answer. I asked, if this water leaks from the system, what’s in it? Is there anything of concern to the public in it? And I just kept being told it would never leak.” 

In late March, Zwiener announced the formation of the Hays County Data Center Working Group as a response to community frustration and legal helplessness at the county level in the face of a massive data center boom—fueled by the onslaught of artificial intelligence (AI). This comes too as the Texas Legislature sets out to grapple with the consequences of this boom and if and how to regulate in the face of a powerful industry that seeks rapid development and immense resource use. 

“Constituents are really alarmed,” she told the Texas Observer, describing skyrocketing costs of municipal and private water rates—and, in some cases, wells running dry. More than 400 Texas data centers, either operating or under construction, were projected to consume between 29 and 161 billion gallons of water per year by 2030. In that same year, Texas is expected to surpass Northern Virginia as the world’s largest data center market. The Lone Star State has lured developers with tax incentives and a lack of mandatory reporting; despite the state’s drought, data centers are not required to disclose their projected or actual water use.

Large data centers like the Fermi campus and Project Stargate transparently advocate for closed-loop cooling systems, in which water is reused, and losses are minimized compared to traditional evaporative cooling systems—yet it is unclear how much water is actually lost. But Zwiener stresses that household-name developers like Google, Samsung, and OpenAI—which most publicly promote closed-loop cooling systems—do not account for most of these data centers. 

“It gets complicated in that you don’t want everything to be tilted towards the big guys. But they end up with a different level of credibility or firmness in their project. And then, you have a lot of these data centers where someone’s got a big chunk of land, they see this data center boom, and they’re trying to put a deal together,” Zwiener said. “I find it’s more squirrely to work with those developers, not because they’re less honest, but because they’re putting a deal together with a hope and a song and hoping everything falls in line. This causes the most consternation in my district.” 

Zwiener’s goal with her working group is, in part, to strengthen the authority of local government. “Counties use tax breaks to try to get a commitment from the developer that they’ll use a closed-loop cooling system instead of evaporative cooling. I’m glad counties are using the tools they have, but we only have carrots. We only have incentives.” 

Any tax breaks that come at the local level are layered on top of the state’s already generous data center subsidy regime. Texas exempts qualifying data centers from the 6.25 percent state sales tax on major operating and construction costs, including electricity, water, and equipment purchases. The state comptroller’s office says that the exemption—created in 2013, before the AI boom—will cost the state $3.2 billion over just the next two years.

That has made data centers one of the state’s most costly tax exemptions. Meanwhile, counties have little power to regulate the industry directly and are left trying to bargain for concessions like closed-loop cooling in exchange for additional local benefits. Cities reserve the right to impose project moratoriums, but counties don’t have the same authority over unincorporated areas that developers are now targeting for their lack of legal oversight. That regulatory loophole is what state legislative committees are now scrambling to address ahead of the 2027 session. 

In late March, Texas House Speaker Dustin Burrows and Lieutenant Governor Dan Patrick released their 2026 interim charges—the Legislature’s formal study assignments for the period between sessions—and data centers appeared across five separate committees. The House State Affairs Committee was directed to evaluate the regulatory framework and recommend ways to “streamline regulations while enabling communities to plan and manage growth responsibly,” two goals that seem to conflict heavily amid questions about water and energy. The House Natural Resources Committee itself was asked to examine total water usage and promote “water-efficient” development. Three others were directed to study some combination of data center growth, grid reliability, water demand, tax incentives, and the broader economic costs of powering AI infrastructure.

At the first interim hearing on data centers on April 9, House State Affairs Committee Chairman Ken King, a Panhandle Republican, opened the meeting with a casual prophecy: “We’re going to say data center a lot during this interim.” What followed was five hours of testimony from industry representatives and regulators, aimed at establishing what King coined “a baseline of truth, not misinformation.” Yet local officials, groundwater advocates, and county leaders now dealing with the on-the-ground consequences of the boom were missing from the meeting, which featured only invited witnesses. 

The most vital testimony of the day addressed power, water’s inalienable twin. Pablo Vegas, president and CEO of Electric Reliability Council of Texas (ERCOT), testified that “significant problems” are emerging because the existing interconnection process was not built for the volume and scale of new demand now seeking access to the state’s electricity grid. 

“The queue is over 410,000 megawatts. That’s a huge, huge change since the last time we talked about the growth of data centers,” Vegas stated. “In the last month and a half, we saw a big, big chunk of new projects come into this queue, jumping it [by] over 130,000 megawatts.” Vegas said that 87 percent of those new projects are data centers. To put that number in context: The entire ERCOT queue stood at roughly 57,000 megawatts in 2024. The data center boom almost tripled that number in six weeks. Vegas stressed that the next two to three years are an essential window during which new power infrastructure must be built, as Texas’ power grid lacks the generation and transmission capacity to absorb that demand. 

“Costs have gone up a lot in this state since Winter Storm Uri,” Public Utilities Commission (PUC) Chairman Thomas Gleeson testified. “The costs are really on the system because of these ultra-large loads and the amount of energy and transmission they need.” 

Grid overload was at the forefront of questioning from Representative Chris Turner, an Arlington Democrat. “In Texas, what I’ve observed is that we don’t want data centers because of … construction, activity, noise, water, and then obviously electricity,” Turner said. “Winter Storm Uri is still fresh on all of our constituents’ minds—and our minds—and people naturally have a fear that this could trigger another disaster as we had in Winter Storm Uri if we have too much demand.” In addition to reliability concerns, Turner also pressed Gleeson to confirm that PUC would prioritize maintaining stable energy costs for constituents. 

“We’re working to establish a framework that adheres to cost causation principles,” Gleeson responded. “Those who cause the costs should pay the costs.” Gleeson also noted that the PUC has been adjusting their pricing structures and “looking to companies to bring in their own generation.” 

What the PUC frames as a solution, Zwiener sees as a half-measure: “There’s been a big push for many of these facilities to be ‘bring-your-own’ generation [by developing their own] on-site electric generation. But even that is almost always reliant on commodities that affect prices for everybody. If you install natural gas generation at your facility, you’re still using the same natural gas that’s being sold across Texas. You’re still affecting that demand matrix,” she said.  

Hundreds of public comments submitted to the committee ahead of the hearing told a different story than the one industry presented. Texans wrote about water, about electricity bills, about the limited number of long-term jobs data centers really spawn, as opposed to the numbers in shiny marketing materials. Anthony Elmo, public education defender at Good Jobs First, which advocates against government subsidies for corporations, summed up the common Texan’s regulatory concerns: 

“The Legislature … should also ask whether state tax policy is encouraging growth faster than communities and infrastructure can absorb it. Texas should not repeat the mistakes seen elsewhere,” Elmo wrote. “In Virginia, generous data center tax breaks grew into nearly $2 billion a year in combined state and local revenue losses. Texas still has time to avoid that outcome, but only if it acts now.” 

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