By Steve Haner,

The new energy tax being imposed on Virginia’s data center industry effective July 1, assuming the new state budget conference report passes next week, is totally ecumenical.  The same tax is imposed on electrons from a solar panel or wind turbine as is imposed on electrons from coal.

A data center that has largely or fully supplied its needs with generation on site or with a contract with a competitive service provider will pay the same tax per kilowatt hour as a data center straining the general utility grid.   This is what the new provision states:

…regardless of whether the electricity is provided through an incumbent electric utility, an incumbent electric cooperative, a competitive service provider, or is self-supplied. For electricity that is self-supplied, the data center operator shall report its usage quarterly to the Department of Environmental Quality, who shall verify such usage with the State Corporation Commission.

The $11,000 per 1 million kilowatt hours (and data centers use hundreds of millions in some cases) will be in addition to the existing $875 per 1 million kilowatt hour tax on large electricity users in an existing law.   But that tax is only on utility-delivered power.  Taxing the self-supplied power is new. 

The state’s tax receipts and general fund spending from this money are capped at $600 million per year, and any excess tax collected will be rebated.  That means that the more energy the data centers use from renewable sources, including sources they paid to build, the less tax is imposed on data centers using the grid with all its coal and natural gas power.

A “sum certain” tax on an industry with rebates of any excess is also something new to the Virginia tax code, to this author’s knowledge.  

The dollars just flow into the state budget for the usual stuff.  The very real financial challenges to the electrical system posed by the explosive growth of this industry, the need for massive new generation and transmission assets, will have to be addressed with other dollars in another forum.

Yeah, they really thought this one through.  If the goal was to push these data centers away from using hydrocarbon generators on site, either as main or backup sources, this approach changes nothing.  It provides no edge to solar or wind or special burden on natural gas and diesel.

If the goal was to discourage the industry entirely, this new energy consumption tax is not likely to be effective.  Spread across so many data centers, $600 million is not a major impediment to their continuing to grow.  This will have far less impact than the loss of the sales exemption on computer equipment which was the State Senate’s goal.

No, clearly the goal was simply to raise $1.2 billion over two years by taxing a very unpopular industry.  This tax sunsets on July 1, 2028, although it is a safe bet that the state will become attached to this revenue stream and it will be hard to remove in the future.  It could grow, and eventually could include a cut for localities, as the existing consumption tax does.

As expected, a proposed legislative study on the issues around data centers and the existing tax exemption is also mandated in the conference report amendments to the 2026-28 budget. 

Several provisions also call for studies on water use and groundwater protections related to the demand for water from some of the data centers.  “Data Center Cooling Water Scarcity Area Regulations” are established.  There may be other data center provisions missed in this cursor review of the conference report, which was posted late Friday.

The existing electricity consumption tax that has been on the books about 25 years is a graduated tax, with the highest rate imposed on users taking less than 2,500 kilowatt hours per month.  The tax has nothing to do with the class of customers or what the power is used for, just the amount which runs through the meter.

The minimum tax of $.000875 per kilowatt hour is imposed on the excess over 50,000 kilowatt hours in a month. That would be what most industrial and many commercial users pay now, 88 cents per kilowatt hour.  The first 2,500 kilowatt hours is taxed at $.001595, or $1.60 per 1,000 kilowatt hours.

The combined tax rate on the data centers ($11.88 per 1,000 kilowatt hours) will thus be about seven times higher than the tax rate paid by most homeowners in a typical month.  Again, a homeowner only pays tax on power from the utility and not on power they might generate from a home solar installation or a generator. 

This cash flow solved the budget deadlock, but the political struggle that has erupted over this technology will not abate.  People who want to eliminate the tax exemption, people who want to discourage or ban gas or diesel backup generation for the centers, and those who want to stop the industry cold, none of them will be quieted by this.