Less than a year ago, Texas Governor Greg Abbott stood beside Sundar Pichai, the Google CEO, to celebrate the company’s $40 billion investment in the state’s cloud and AI infrastructure. Three new data center campuses would help make Texas, Abbott declared, the “epicenter of AI development.”
On Tuesday, Abbott, a Republican, lost his reelection bid to Gina Hinojosa, a Democrat who campaigned on halting new data center development until state lawmakers pass stronger protections for residents. At a press conference over the summer, Hinojosa accused corporations of taking advantage of Texans and operating with little oversight, blaming Abbott for creating the “Wild West of data centers.”
Her stunning victory makes her the first Democrat elected governor of Texas since Ann Richards in 1990. And given that Texas is home to the country’s second-largest data center market, behind Virginia, the political upheaval could have profound implications for the artificial intelligence boom.
The scale of Texas’s AI bet
Texas’s $2.9 trillion economy is the nation’s second largest; if it were a country, it would rank eighth worldwide. It boasts abundant energy resources, a ton of relatively inexpensive land, and a historically light regulatory touch—all of which have enticed AI companies (and companies in seemingly every other sector, for that matter). Researchers at Rice University’s Baker Institute estimate that annual data center investment in Texas rose from $3.4 billion in 2022 to a projected $66.2 billion in 2026.
And much more is in the pipeline. Texas accounts for roughly 26% of planned American data center capacity—nearly three times the amount planned in Virginia—according to an analysis by the investment bank Jefferies, as reported by The Wall Street Journal. Jefferies estimated that Hinojosa’s proposed moratorium could put 13.3 gigawatts of announced Texas data center projects at risk, potentially delaying construction or forcing developers to abandon their plans. Little wonder that Bank of America called the Texas governor’s race the most consequential contest of the 2026 midterms for utility and power markets.
The stakes extend well beyond Texas. The companies racing to develop AI depend on enormous infrastructure investments that take years to plan and require far more than financing. They need electricity, water, land, permits—and, increasingly, the support of the communities where they hope to build.
Who gets the benefits? And who pays the costs?
Hinojosa has proposed a moratorium until lawmakers enact lasting safeguards. She also wants to prohibit nondisclosure agreements that keep communities in the dark, give residents greater say over new developments, and require companies to prove their projects won’t raise household water or electricity bills. And she wants to eliminate the government subsidies that have helped make Texas so attractive to developers.
One of those subsidies is particularly lucrative. Qualifying data centers can avoid Texas’s 6.25% sales tax on equipment and other purchases for up to 20 years. The state comptroller projected that the exemption would cost $3.2 billion in foregone revenue over two years, potentially an underestimate. The industry argues the incentives attract investment, jobs, and other tax revenue. Critics question the public return when facilities can also place substantial demands on utilities and natural resources.
The advantages didn’t end with tax breaks. A Texas Tribune analysis found that about half of planned data centers are slated for unincorporated areas, where counties generally lack the zoning authority cities use to regulate development. That can leave nearby residents with little say over projects that could transform their communities.
And the scale of Texas’s AI ambitions is putting growing pressure on its resources. University of Texas researchers estimate that data centers currently account for less than 1% of the state’s water use, but could account for as much as 9% by 2040. Meanwhile, proposed facilities are seeking so much power that Texas’s grid operator has had to rethink how it assesses requests to connect new projects.
The backlash was bigger than Abbott
These concerns have fueled a remarkably broad backlash. In a recent University of Houston poll, 79% of respondents supported limits on data center construction, while 76% expected new facilities to drive up electricity bills. Abbott saw such figures and, sure enough, had begun to retreat on the issue. In September, after years of courting developers, he halted new permitting approvals pending audits of projects’ water and electricity demands, and promised to pursue the elimination of tax incentives. But his restrictions were tied to those audits, whereas Hinojosa wants to keep development on hold until lawmakers create more permanent protections.
In any case, Abbott’s reversal on data centers wasn’t enough to save him. But interpreting Hinojosa’s victory as a referendum on data centers alone would be a mistake. Texans were also deeply dissatisfied with the cost of living, political corruption, and a host of other issues. And Republicans were contending with a difficult national political environment under President Donald Trump and his deeply unpopular Iran War.
A broader Democratic breakthrough also delivered a historic victory for James Talarico, who defeated Ken Paxton, the state attorney general and a Republican, to become the first Democrat elected to the U.S. Senate from Texas since 1988. Talarico has also called for tougher data center standards. But Hinojosa will have more immediate influence over the industry’s future in Texas.
Of course, winning the governor’s mansion doesn’t give Hinojosa carte blanche. A governor can set priorities and direct state agencies within existing law, but permanently changing tax exemptions or expanding counties’ zoning powers would require cooperation from the state legislature. And yes, a statewide moratorium could also encounter legal obstacles. Still, developers contemplating billions of dollars in new investments must now reckon with the possibility of tougher rules that could remain in place for years.
Developers can, and in some cases will, look elsewhere. But other states face their own constraints on electricity, water, and land—and their own increasingly skeptical communities. Texas may be an especially consequential example of the political difficulties confronting the industry, but it is hardly an isolated one.