After months of debate, Virginia fails to pass data center clean energy requirements

This article was originally published by Inside Climate News.

RICHMOND, Va.—Before the start of Virginia’s legislative session in January, 53-year-old William Ward attended a Virginia League of Conservation Voters rally in Petersburg, where he learned about how the state’s data center industry is straining the grid, harming the environment and driving up electricity costs. 

He also learned about the $1.9 billion in sales and use tax the state waived for data centers in 2025. 

“It affects the common people,” Ward said. “We have to pay, they don’t have to pay. I understand we need data centers, but why here? They need to pay their fair share.”

What started as a promising pitch in February to fix the concerns of Ward and other Virginians by linking environmental protections to the tax exemption ultimately went nowhere. Virginia lawmakers balked and created a new tax instead. 

On June 29, two days before the deadline to pass a budget, months of debate over the tax exemption culminated in an approved spending plan that adds no clean energy requirements and makes no changes to it.

Instead, the legislation created a new tax on data center energy consumption to generate state revenue, capped at $600 million a year. That amount is roughly one-third of the value of the exemption the industry receives. It directs a commission to deliver a report by Dec. 15 on the impacts of data centers and recommended changes for the existing tax exemption, similar to a years-long study that was published less than two years ago.

Language was added to the budget requiring reporting on electricity, water and diesel backup generators, but many of those efforts are already underway. Additional language was added to establish rules for water-dependent cooling technology that data centers can use in regions with water shortages, but it lacks specific standards and allows for less conservative evaporation cooling. 

The budget now also includes a provision that addresses the potential economic impacts of data centers when a facility wants to connect to the grid of Dominion, Virginia’s largest electric utility, in “historically economically disadvantaged communities,” which often lack resources to oppose projects and have long dealt with the harms of industry.

“What just passed didn’t make anybody’s life better,” Lee Francis, chief program and communications officer at the Virginia League of Conservation Voters, said in an interview. “What [lawmakers] did was really went back on the original intent, which was to hold the industry accountable to strong environmental standards, and that’s no longer on the table.”

Known as the data center capital of the world, Virginia has more of the warehouse-like facilities, which process and store the data that powers the internet and artificial intelligence, than any other state or country outside of the U.S. Many more are on the horizon. 

The tax exemption, created in 2008 to spur economic activity, waives a 4.3 to 7 percent levy when a company building a data center purchases server and backup generator equipment. Big tech companies like Amazon, Microsoft, Google and Meta, the richest corporations in the world, have defended the exemption, which about 90 percent of the industry uses.

The growth of the industry led Dominion to propose its first new gas plant in years that regulators approved in 2025, and other gas plants and fossil fuel buildouts could follow. To make data centers in Virginia more sustainable, environmental and community advocates lobbied for lawmakers to end the exemption and to force the industry to “pay their fair share.” The proposed changes were seen as one model for how other states might respond to data center development.

The previous state study on data centers, published in 2024, found that generation and transmission costs could raise monthly bills by $37 by 2040. A long-term plan from Dominion found a monthly residential bill could increase from $142.77 in 2024 to $255 by the end of 2035 and $268 by the end of 2045 if it built out all its gas, nuclear, and renewable technologies and more to meet data centers’ demand.

A recent poll, like one from the Christopher Newport University Wason Center in January, found that 63 percent of Virginians supported site assessments for data centers to evaluate impacts on water, electric grid, emissions and farming, among other protections.

Democrats gained trifecta control of state government in November in part by vowing to rein in data center growth. But as debate during the actual lawmaking process heated up, the industry and economic development officials warned that any changes to the exemption would hurt the “4,000 jobs, $5.5 billion in labor income, and $9.1 billion in (gross domestic product)” and local tax revenue data centers contribute annually to Virginia’s economy, which has been hit hard by the Trump administration’s DOGE cuts. 

The Data Center Coalition, an industry advocacy group, did not respond to a request for comment. In a statement days before final approval of the budget, President Josh Levi said labor jobs are at risk as businesses prioritize new investment in states with competitive and stable business environments.”

“The message to businesses in all industries is clear—Virginia is no longer a reliable partner,” Levi said.

The House of Delegates took the lead by mandating several clean energy requirements for data centers that seek the exemption. The Senate took a bolder approach, proposing a sunsetting of the exemption at the end of 2026, nine years before its current sunset in 2035, or 2050 in the case of Amazon because of its increased investment. Spanberger sided with the House, wanting to honor existing deals while still stating her desire for data centers to pay their “fair share.” 

Lawmakers ended the session in March without a budget deal. Little agreement was found until both sides revealed new proposals in June, less than a month before the shutdown deadline. Both kept the exemption as is and created the study. Tensions boiled over with environmental groups calling for a moratorium on the industry while the government crafted comprehensive environmental protections for data centers. 

Lawmakers instead delayed any meaningful changes to the exemption.

Inside Climate News asked Spanberger’s press secretary, House Democrats and Lucas if they can guarantee the exemption would be revised in 2027 to include clean energy requirements. 

Lucas declined to comment, but posted on X that the work isn’t over. The Virginia House Democratic caucus said in a statement it was “proud” to fund what it did in the budget and that “we remain committed to ensuring the industry’s growing energy demands do not come at the expense of Virginia’s natural resources or residential customers and small businesses.” 

A spokesperson for Spanberger said she was “proud” to approve the data center energy consumption tax, while pointing to other legislation on data centers that passed. One includes a requirement for cleaner diesel backup generators, though the law lost its requirements for clean energy storage. Another incentivizes data centers to fund zero-carbon energy sources. None of the bills place clean energy requirements on the facilities. 

“Governor Spanberger will continue to listen to the needs of local communities and make sure data centers adhere to strong standards that protect ratepayers, strengthen grid reliability, and keep surrounding communities strong,” the spokesperson said.

Jay Ford, Virginia policy manager for the Chesapeake Bay Foundation, said claiming the budget as a success “feels a little bit like a shell game.”

“Very rarely, when there is a delay in action with a major industry, do you get a better answer on the other side,” Ford said. “I never heard any citizen saying, ‘I really want you to put an electric consumption tax on them, and use it in the budget.’ I heard them say, ‘I want you to deal with the impacts of these facilities,’ and that’s largely where we fell short.”

On Saturday, advocates held a rally outside the Virginia State Capitol to denounce the legislature’s actions. Eric Kasten, who worked in chemical pollution monitoring and now lives in Chesterfield County, said he and his family don’t regret voting for Democrats, but they may consider other candidates in the future if they don’t see further action on data centers.

“We understand that the state made a deal years ago to give them certain tax breaks. Can we continue to offer that? I don’t think that’s really been addressed,” Kasten told Inside Climate News. “I don’t think we’ve made any real steps forward in reaching a true compromise. The data center development seems to be moving forward just like it always has, and nothing’s really changed. [Lawmakers] just need to move faster.”