Virginia Budget Keeps Data Center Tax Breaks, Adds $600M Energy Levy

After an impasse of data center policies nearly caused a government shutdown, Virginia lawmakers have finally passed a state budget that keeps the critical sales  and use tax exemption for data centers but adds a new levy on the power they consume. 

Virginia lawmakers passed a $250B budget Monday, a bill that comes after weeks of acrimony between Democrats in the commonwealth’s Senate and House of Delegates over how to tax and regulate data centers. The debate holds significant implications for the future of data center development in a state that has the world’s densest concentration of these facilities. 

The final budget includes neither the repeal of Virginia’s data center sales tax exemption passed by the Senate nor the new environmental standards for data centers passed by the House of Delegates. However, the compromise bill creates a new tax on data center energy consumption that would generate as much as $600M annually. 

Data centers will now be charged just over 1 cent per kilowatt-hour used per month. If the state collects more than $600M through the tax in a given year, the surplus will be returned to data center operators by the end of the year. The new levy applies regardless of whether a data center acquires power from a utility, gets it behind the meter from a power plant or produces it on-site. 

Lawmakers said the legislation is a temporary compromise that leaves few completely happy but is necessary to prevent a state government shutdown. The bill now goes to the desk of Gov. Abigail Spanberger, who before July 1 must sign, veto or recommend changes to the bill.

While she hasn’t definitively indicated which action she will take, the first-term Democrat said in a statement that she views the final budget favorably.

“This is a compromise proposal — one my administration helped craft — and it builds a strong foundation for further discussions about the future of this industry in Virginia on issues like environmental and community impact,” Spanberger said.

The debate in the run-up to the budget’s passage centered around the fate of Virginia’s pioneering sales tax exemption. 

Virginia was the first state to implement a sales and use tax exemptions to promote data center development, and the tax breaks are often credited with turning the commonwealth into the industry’s global epicenter. It allows firms to avoid a 5.3% tax on the value of the equipment housed inside data centers, a benefit that can be worth hundreds of millions of dollars for a single building.

The spending bill, passed by the House and supported by Spanberger, proposed keeping the tax incentives in place, albeit with provisions requiring that facilities meet certain efficiency and environmental standards. The Senate’s budget bill, on the other hand, proposed ending the tax breaks outright in 2027, ahead of their scheduled 2035 sunset date.

Fierce disagreement between the two chambers over the fate of the tax exemption prevented the passage of a budget before the end of the legislative term, requiring special legislative sessions to avoid a government shutdown. 

In a note to investors, analysts at Evercore ISI said the new energy tax was “likely calibrated to be non-trivial but also not existential for hyperscalers.” According to their analysis, a 100-megawatt data center could face an annual tax burden of around $9.6M. Average electricity rates for data centers in the state would effectively increase by roughly 11%.

Virginia has frequently served as the canary in the coal mine for new data center regulation. The analysts said the new tax may be a harbinger for other markets.

“The combination of rising fiscal pressures and anxiety about the socioeconomic fallout from AI adoption is likely to make data centers a ripe target for new revenue proposals,” they wrote. 

In addition to the new energy consumption tax, the compromise budget directs the Virginia Department of Environmental Quality to study the impact of certain data centers on groundwater and designate areas where the use of water for data center cooling systems will be environmentally detrimental. The DEQ is also ordered to create statewide noise abatement regulations by 2030.