Virginia Approves First Data Center Power Tax but Keeps Billion-Dollar Incentive
The first statewide tax in the United States specifically tied to data center electricity consumption comes with a bit of a catch.
Virginia lawmakers have approved what appears to be the nation’s first tax on data center electricity use.
The budget deal, which ends months of budget negotiations, will impose a new charge on the power used by data centers in the Commonwealth beginning July 1.
But…the compromise stops short of rolling back the long-standing and controversial sales tax exemption on equipment that has helped fuel Virginia's massive data center industry.
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The legislation now heads to Gov. Abigail Spanberger, who is expected to sign it before the start of the new fiscal year. Here's more of what you need to know.
Virginia data center tax compromise
The new data center tax emerged from negotiations during this year’s General Assembly session, as Virginia lawmakers struggled to reconcile competing views on how to tax one of the Old Dominion state's fastest-growing industries.
For months, some state senate lawmakers pushed to scale back or eliminate Virginia’s sales tax exemption for data center equipment.
Supporters of repealing the billion-dollar tax exemption argued that the incentive — first enacted in 2008 — has become increasingly costly as data center construction has accelerated across Northern Virginia. State estimates show the exemption now reduces revenue by more than $1.5 billion annually and is expected to rise further as new facilities come online.
Still, some House of Delegates lawmakers and Gov. Spanberger opposed eliminating the incentive outright. A concern was reportedly that eliminating or changing the exemption before its slated end in 2035 could undermine Virginia’s reputation as a destination for stable technology investment.
The disagreement had stalled broader budget negotiations until lawmakers reached a compromise earlier this week: keep the exemption in place, but add a new tax tied directly to electricity consumption.
Under the FY 2027–FY 2028 biennial budget agreement:
- Data centers will pay 1.1 cents per kilowatt-hour of electricity consumed, billed monthly.
- If Spanberger signs the budget, the tax will begin on July 1, 2026.
- Revenue is capped at $600 million annually, with excess collections refunded to the data centers at the end of the fiscal year.
Virginia's Data Center Alley: Why this matters
As Kiplinger has reported, Virginia is home to the largest concentration of data centers in the world, with Northern Virginia’s “Data Center Alley” anchoring a global hub of cloud computing and digital infrastructure.
Around 200 facilities are currently operating in Loudoun County alone, with more planned. These facilities handle over one-third of the world’s daily internet traffic.
But the scale of the data center industry has sparked debate over everything from electricity and water usage to noise concerns.
- Utilities and grid planners have warned that data center electricity demand is growing rapidly, driven in part by artificial intelligence (AI) workloads that require more computing power than traditional cloud services.
- In some forecasts, data centers could account for roughly 20% to 30% of electricity demand in parts of Virginia over the next decade if current growth trends continue.
- For some Virginia residents living near data centers, the constant hum from cooling systems, back-up generators, and other equipment has become a quality of life issue.
Data centers also typically rely on large diesel-powered backup generators to ensure uninterrupted operations during power outages, which raises concerns about local air quality in some communities.
And, depending on the design and cooling technology, large facilities can consume hundreds of thousands of gallons of water per day to cool server racks. Some large campuses reportedly use volumes comparable to those of a small town, raising sustainability questions in some communities.
Adding to the debate, the existing data center sales tax exemption in Virginia cost an estimated $1.6 billion last fiscal year, according to the Commonwealth’s tax disclosures.
That massive exemption and the growing backlash over the more than 600 data centers already in the Commonwealth have made data centers a politically sensitive issue.
But Virginia isn't alone. Similar data center debates have erupted across the United States.
A recent Gallup poll finds that 71% of Americans now oppose the construction of AI data centers in their local communities (with 48% strongly opposed). The pollsters note that local data center construction is more unpopular in the U.S. than building a nuclear power plant.
As of June 2026, according to various online trackers, more than 25 states are either advancing data-center-related legislation or have enacted measures that address grid cots, reporting requirements, utility regulation, tax incentives, or local authority over data centers.
Virginia data center tax exemption: What's next?
For most residents, the immediate impact of the new tax will likely be indirect, since the data center tax revenue will flow into the Commonwealth's general fund.
Notably, under the budget compromise, the Virginia Department of Environmental Quality (DEQ) would play a larger role in regulating data centers. The agency is currently responsible for protecting Virginia's air, water, and land resources. would study data center impacts, create rules, and oversee limits on issues including noise and water use.
Will Spanberger sign? Gov. Spanberger, who has signaled support for the compromise, is expected to sign the budget.
Her signature will end this year’s fiscal standoff, but not the broader debate over how and whether the data center industry should be taxed or constrained. So stay tuned.
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