The Budget Message to Data Centers is Clear: “Here’s Your Hat, There’s the Door”

The energy regulatory provisions buried in the final conference report on Virginia’s 2026-2028 budget, approved by the General Assembly on Monday, are as complex and detailed as energy bills reviewed earlier during the regular session. They are also just as damaging.

The data center industry was a particular target. The political fights over its partial sales and use tax exemption and its sources of energy were not resolved at all, but another new tax and a host of new regulations are now imposed on just these companies.  A harsh and clear message was sent.

Why even have a 60-day General Assembly session if all the big decisions are made in a closed room in a delayed budget negotiation? This conference report could not be amended, could not be divided into separate votes on separate provisions, and was “must pass” because the June 30 deadline is next week.  The public disenfranchisement was total.

All the headlines are focused on the new consumption tax imposed on the data centers, effective July 1, which is similar to and in addition to an existing state and local energy consumption tax. The additional tax of 1.1 cents per kilowatt hour will raise $600 million in each of the next two years and then sunset, but this tax likely will only go away if something even more detrimental to the industry is adopted.

Three things are important to note about that new consumption tax.

• All the dollars simply flow into the state’s treasury for general spending. None of those dollars will be used to address any of the problems that the explosion of data center energy demand is causing. None of them will pay for additional generation assets or transmission lines, or for upgrades to the water supply. Dollars for those still must be found, and who pays for those must still be decided.
• Charging a utility customer a tax based on what an electron is used for is a new and dangerous idea. The additional consumption tax will not be charged to a large factory with a similar energy load or apparently even the data centers running our telecommunication networks. Why should Amazon Web Services pay more for electricity than Verizon or Newport News Shipbuilding?  Drawing this line will keep lawyers busy.
• Charging the data centers a tax on all their energy consumption, including even the power they generate onsite “behind the meter” with their own generators, is also a huge policy leap. It is like charging sales tax on a tomato you grew in your garden. The consumption tax is also equal on all sources, hardly what the solar, wind, and battery advocates would have wanted. They wanted a means to discourage natural gas and diesel, and they will continue to push hard for that.

The additional 1.1 cent per kilowatt hour tax on electricity will be in addition to the 1.3 cent per kilowatt hour imposed early next year under the Regional Greenhouse Gas Initiative (RGGI). In another major energy initiative that bypassed the full Assembly process, an amendment sets up a rebate process for residential and the smallest business customers to give them back any direct RGGI taxes charged by their utility. All large users will pay RGGI in full.

Spiking the cost of their raw material is only part of what the Assembly is doing to data centers. The budget includes several new regulatory provisions targeted directly at data centers, once a source of major pride for Virginia and now a political pariah. Its sales tax exemption on installed computer equipment will be subject to a study, due to report recommendations to the 2027 General Assembly. To use a legislative colloquialism, that tax break now has a fever that could end its life.

The growing (and not always legitimate) concerns about the water needed as these centers proliferate will be addressed by the Department of Environmental Quality. One amendment directs DEQ to create “Data Center Cooling Water Scarcity Area Regulations.”  Another amendment sets up a study on the water challenges in Western Loudoun and Fauquier Counties, at the heart of Data Center Alley.

The goal? “…all new data centers that submit a complete application for a Department of Environmental Quality air permit after January 1, 2027, shall either use air cooling systems, 100 percent recycled water, and/or stormwater for cooling, or use a closed loop system. The Department, by October 15, 2026, shall conduct a study and provide a plan on the retrofitting of existing data centers in the Eastern Virginia Groundwater Management Area to use air cooling systems, 100 percent recycled water and/or stormwater for cooling, or use a closed loop system.” (Emphasis added.)

DEQ’s marching orders also include an amendment outlining a new state “lowest achievable” noise ordinance, just for data centers as defined in the law.  Other commercial industrial sites can be very noisy to their neighbors. At some point, the question of selective enforcement must come up.

Buried in the regulatory State Corporation Commission’s budget, a short amendment makes a change in the rules that the commission will use in deciding on the interconnection of new data centers. This one may make it easier to get a new data center connected due to “potential economic benefits to historically economically disadvantaged communities”. That language should not have bypassed the full legislative process.

There should also have been debate in the regular General Assembly over the mandate now imposed on electricity providers to report to the legislature by October 1: “(i) all electric service agreements or equivalent contracted demand with data centers, including their electric load, from all electric utility providers; (ii) all data center water usage information from municipal or private water providers; and (iii) permitting information on data center generators and tier of each generator.”

Again, the issue of selective regulation is bound to be raised. While other industries that use large amounts of water and electricity, or create noise, are left alone, will that remain the case?  The state may have to expand all this intrusive regulation to other industries to pass legal muster.

Sadly, many of the legislators may not mind applying the same heavy hand to other Virginia industries as they are now pressing down on data centers.

Steve Hanner
Jefferson Forum

Steve Haner is the Senior Fellow for Energy and the Environment at the Jefferson Forum and may be reached at Steve@thomasjeffersoninst.org