Virginia Democrats have agreed to impose a new energy tax on data centers, resolving a monthslong budget impasse that threatened the state’s first government shutdown.
Data centers would face a temporary tax on their power use — costing the industry an estimated $600 million per year — under a budget agreement reached Friday by state House and Senate leaders. The deal maintains the industry’s sales tax exemptions, which are worth nearly $2 billion a year and had been at the center of the intraparty standoff.
The deal would also reroute nearly half the state’s revenues from the Regional Greenhouse Gas Initiative into ratepayer rebates. Virginia is set to rejoin the northeast’s cap-and-trade system in July, and the state’s largest utility plans to pass along about $13 per month onto bills for RGGI costs.
The agreement needs approval from both legislative chambers as well as Democratic Gov. Abigail Spanberger, who did not respond to a request for comment. Spanberger and House Democrats were against the Senate’s initial bid to repeal the sales tax exemption, arguing it would amount to breaking a contract and could hinder Virginia’s business climate.
“This budget agreement reflects our shared commitment to making Virginia more affordable for families,” Democratic state Sen. L. Louise Lucas and Del. Luke Torian, the leaders of each chamber’s budget-writing committee, said in a joint statement.
The deal marks a pivot point in the politics of data centers. Since the Great Recession, Virginia has leveraged tax incentives to become the global epicenter of data center development, cultivating billions of dollars in investment to the state — along with a steadily growing backlash to the sector’s noise, pollution, and energy and water use.
Until now, the tech industry has been able to defend its Virginia incentives by threatening to move elsewhere. But as the data center boom swells nationwide, other states have begun considering more restrictions or even moratoriums on the energy-hungry sector.
That dynamic led Virginia Senate Democrats to bet that they had both the leverage and the popular support to extract more revenue from data centers. The success of their gambit could become an example for other states.
Under the deal, data centers would pay $0.011 per kilowatt-hour of electricity consumed per month. The tax would be capped at $600 million per year, with any additional collections refunded proportionately, and the tax would only apply for the next two years.
Monthslong impasse
Lucas, the Senate president pro tem, was the driving force behind the upper chamber’s bipartisan push to tax data centers.
Lucas argued that Virginia Democrats — in their first year of a government trifecta — risked getting on the wrong side of public opinion by defending the industry. She spent the past week touring the state on a “data center listening tour” soliciting public grievances against the sector’s expansion in Virginia.
“We have all these trillion-dollar companies who are whining about paying their fair share of taxes,” she said last week at a stop in Manassas.
The Senate’s first bid to nix the sales tax exemption — which is slated to run until 2035 — ran into opposition from House Democrats and Spanberger. House leaders would agree only to tie the tax incentives to environmental benchmarks.
That impasse led the state legislature to adjourn in March without a budget agreement. Months passed with little movement between the Democratic leaders, who were also juggling an ultimately unsuccessful redistricting effort.
Earlier this month, House negotiators released an updated proposal that seemed to put the sides further apart: their budget would have dropped their earlier effort to link tax credits to environmental standards, and instead punt the entire issue to a commission. Spanberger endorsed that plan.
Lucas and the Senate responded with their own counteroffer: an impact fee on data centers tied to their emissions, estimated to raise about $1.7 billion over two years.
The Data Center Coalition asserted that Friday’s deal — which would cost the industry $1.2 billion over two years — would “raise costs on Virginians and Virginia businesses, drive away investment and job creation, and tarnish Virginia’s reputation as a reliable partner and a good place to do business.”
“The message to businesses in all industries is clear — Virginia is no longer a reliable partner,” the trade group said.
