Virginia plans to introduce a new electricity tax on data centers, marking a significant change in revenue generation from this rapidly growing industry. Starting July 1, 2026, data center operators will pay $0.011 per kilowatt-hour of electricity used at each facility monthly. This tax will end before July 1, 2028, with collection handled monthly by the State Corporation Commission.
The tax is expected to generate as much as $600 million annually for Virginia’s general fund. Language in the budget specifies that revenue exceeding the annual cap, after administrative costs, will be placed in a special non-reverting fund and refunded to data center operators according to their contribution to the tax payments.
Uncommon Tax Structure
This tax structure is notable among major data center states, as Virginia imposes a levy directly tied to electricity consumption, rather than modifying existing tax breaks. Other states focus on reducing tax exemptions, tightening zoning and permitting, demanding more from data centers for grid upgrades, or adding energy and environmental requirements.
Environmental Concerns
The budget includes provisions regarding environmental measures, especially concerning data center cooling and water use. The Department of Environmental Quality will develop criteria for ‘Cooling Water Scarcity Areas,’ focusing on the Eastern Virginia Groundwater Management Area. In these areas, data centers are expected to utilize air cooling, closed-loop cooling, or more efficient systems to the greatest extent possible.
The department will also devise a plan by October 15 to retrofit existing data centers in the targeted groundwater management area. This retrofitting will involve using air cooling, recycled water, stormwater, or closed-loop systems.
Controversy Over Taxation
This decision follows a debate about Virginia’s data center sales tax exemption. Some lawmakers sought to generate more revenue from the sector. However, Governor Abigail Spanberger and some House Democrats opposed repealing the sales tax exemption, arguing it might undermine existing commitments and impact Virginia’s business environment detrimentally.
Senate Finance Chair L. Louise Lucas and House Appropriations Chair Luke Torian supported the agreement, seeing it as a move to enhance affordability for families.
Industry groups like the Data Center Coalition oppose changes to Virginia’s incentive structure, warning it could stop investment. Spanberger emphasized that while data centers should contribute more, Virginia should honor its existing agreements with businesses.
Virginia’s Joint Legislative Audit and Review Commission notes that Northern Virginia houses 13% of the reported global data center capacity and 25% of capacity in the Americas. More than 200 facilities are located in Northern Virginia, the world’s largest concentration of data centers.
States Considering Similar Measures
Other states are considering similar changes. In Georgia, discussions revolve around ending incentives for new data centers. The Georgia Senate passed SB 410, which phases out tax breaks. Proposed bills in Georgia aim to suspend new exemption certificates or pause construction.
In Ohio, Governor Mike DeWine has temporarily stopped new tax-break offers for data centers; legislators there are considering changes to incentives, water reporting, and creating a utility rate class specifically for data centers.
Illinois also paused the processing of new data center incentive agreements as of July 1. Governor JB Pritzker has urged the state to establish rules regarding electricity rates, water resources, and transparency.