Virginia’s New Electricity Tax on Data Centers

Virginia’s budget deal introduces a new electricity tax targeting data centers. This marks a change in how the state aims to generate revenue from the burgeoning data center industry.

Details of the Tax

The HB30 conference report specifies that data center operators will face a tax of $0.011 per kilowatt-hour of electricity used at each facility. The tax begins July 1, 2026, and ends before July 1, 2028. The State Corporation Commission will oversee monthly tax collection.

The measure expects to raise up to $600 million annually for Virginia’s general fund. Any revenue exceeding this cap, after covering administrative costs, will be placed in a special non-reverting fund. This fund will refund data center operators based on their tax payments.

Implications and Comparisons

Virginia’s approach is unusual among major data center states. Instead of reducing or repealing existing tax breaks, lawmakers agreed to directly connect the new levy to electricity consumption. In other states, discussions typically focus on rescinding tax exemptions, adjusting zoning and permits, increasing contributions to grid upgrades, or imposing energy and environmental stipulations.

Environmental Considerations

The budget includes environmental provisions focusing on cooling and water usage at data centers. The Department of Environmental Quality will establish criteria for “Cooling Water Scarcity Areas,” especially in the Eastern Virginia Groundwater Management Area. Data centers in these areas are expected to use air cooling, closed-loop cooling, or more efficient systems as much as possible.

The department will need to study and outline a plan by October 15 to retrofit existing centers in the groundwater management area to incorporate air cooling, recycled water, stormwater, or closed-loop systems.

Background and Industry Response

This agreement follows a broader dispute about Virginia’s data center sales tax exemption. E&E News reported Senate Democrats aimed to accrue more revenue from the sector, while Governor Abigail Spanberger and House Democrats opposed an earlier Senate proposal to revoke the sales tax exemption. Concerns about breaking commitments to companies and potentially harming the state’s business climate were raised.

Senate Finance Chair L. Louise Lucas and House Appropriations Chair Luke Torian stated the agreement shows a dedication to making Virginia more affordable for families.

Industry Feedback

Industry groups have expressed concerns over altering Virginia’s incentive structures. The Associated Press noted the Data Center Coalition warned the proposed tax could “effectively halt investment.” Spanberger’s office previously stated to Politico that while she believes data centers should contribute fairly, Virginia shouldn’t backtrack on agreements with companies that have spurred business investment and economic growth.

States Considering Similar Moves

Other states are exploring similar measures. In Georgia, the Senate passed SB 410 to phase out tax breaks for new data centers. Other bills sought to suspend new exemption certificates or pause construction.

Ohio is taking steps with Governor Mike DeWine pausing new data center tax breaks, and introducing legislation addressing incentives and water reporting.

In Illinois, Governor JB Pritzker instructed a halt on processing new data center incentive agreements from July 1, while advocating for regulations on electricity rates, water resources, and transparency.