Virginia budget passes with water regulations, energy tax for data centers
Virginia lawmakers passed a new budget that includes an energy use tax on data centers and new water regulations. The budget aims to collect $1.2 billion in tax revenue from the industry over two years. Environmentalists have raised concerns about the impact of data centers on water supply, air quality, and energy demand.
Virginia lawmakers passed a new budget after weeks of debate, which includes an energy use tax on data centers and stricter water regulations. The budget anticipates generating $1.2 billion in tax revenue from the data center industry through a $0.011 per kilowatt hour charge on electricity consumption, effective July 1, 2026, to July 1, 2028. This revenue is slated to boost infrastructure and education in the state.
Environmental groups and some lawmakers, including Sen. Louise Lucas (D-Portsmouth), had advocated for ending the retail sales and use tax exemption for data centers, which has been in place since 2010. While that exemption remains until 2035, the new energy tax is a direct response to calls for the industry to contribute more. Data centers currently represent a significant economic force in Virginia, with 56 self-reporting $48.5 billion in investment and 1,600 jobs added in 2025.
Additionally, the budget addresses environmental concerns by directing the Department of Environmental Quality (DEQ) to establish criteria for "cooling water scarcity areas." By July 1, 2032, data centers in these areas must demonstrate minimized water use for cooling and cannot solely rely on evaporative cooling. New data centers applying for air emissions permits after January 1, 2027, in the Eastern Virginia Groundwater Management Area will face similar rules, and existing facilities will receive guidelines by October 15 for retrofitting cooling systems.