What New Taxes Mean for Virginia’s Data Center Market

The Cost Base Rises

Perhaps the most obvious impact of the tax is cost, especially for power-hungry AI workloads. A tax of $0.011/kWh is material for large campuses running at high utilization. Some estimates suggest that for a 100 MW facility operating continuously, the tax could equate to some $9.6 million per year. For capital-rich hyperscalers and major operators, that’s not a figure that will provoke panic, but it is enough to make a material difference.

The extra cost is unlikely to dent Virginia’s appeal, but it does make power consumption a more notable operating cost than it was previously. One outcome of this is that we may see efficient, high-value workloads remain in-state, whereas more speculative projects like AI training move elsewhere in search of better incentives.

Virginia Remains Attractive, but More Expensive

The fact that the sales and use tax exemption survived is crucial. Had Virginia removed the exemption on servers and data center equipment, the impact on hyperscale and cloud economics would likely have been far more disruptive. Instead, the state has chosen a middle path, keeping the core investment incentive but taxing ongoing power use.

In short, the change doesn’t mean Virginia is “closed for business”; far from it. Ashburn and its surrounding counties still have an ecosystem that’s very difficult to replicate quickly anywhere, save perhaps Texas. Northern Virginia possesses excellent connectivity, a large enterprise base for cloud deployments, experienced contractors, and a deep development pipeline, and that hasn’t changed. Of course, the tax makes the market more expensive, but it remains world leading.

New Projects May Face Tougher Underwriting Conditions

One area that is likely to change as a result of the introduction of the new tax regime is underwriting conditions. Developers and investors will now need to model a higher and more politically exposed operating cost. This compounds existing risks present within the market, namely constraints around power availability, transmission, land, planning, and community opposition. The new tax adds another layer of risk in project planning, particularly for proposals with long delivery timelines or uncertain power commitments.

For projects with strong fundamentals, the tax is likely to be little more than a minor consideration. However, for more speculative projects, particularly those outside the strongest connectivity zones or without all elements of development secured, the change could make underwriting a more difficult process.

Accelerated Spillover to Neighboring Markets

The tax is very unlikely to stall Northern Virginia’s growth. However, it could strengthen the case for nearby alternatives where power, land, permitting, or political risk look more favorable. Markets in Virginia beyond the traditional Loudoun, Prince William, and Fairfax corridor may benefit, but so could neighboring states if they can offer power availability and a more predictable fiscal environment.

This goes beyond avoiding the tax itself. Operators and hyperscalers also need to be able to secure power at scale, get projects approved, and maintain community support. Add the new tax to these existing considerations, and it could make the comparison between Northern Virginia and nearby markets less favorable.

The Most Important Impact Is Political

The most important implication is not the two-year tax itself. It is that Virginia, the world’s most important data center market, has moved from actively incentivizing data center growth to asking whether the industry is paying enough for its power, environmental, and community impact. Governor Spanberger described the measure as a “foundation for further discussions on the industry’s environmental and community effects.”

This is important because Virginia often sets the tone for the wider US market. If the tax is politically successful, we could well see other state legislatures follow suit. On paper, power-based taxation looks like a plausible way to capture the value of AI infrastructure while keeping local communities onside. Time will tell whether this approach is successful, but other states will certainly be watching developments in Virginia with interest.

The Bottom Line

Virginia’s position as a world-leading data center market isn’t seriously under threat. However, these developments are a further signal, following Dominion Energy’s announcement of its power crunch in 2022, that the era of easy growth is coming to an end. The new tax doesn’t undermine Northern Virginia’s structural advantages or leadership legacy, but it does mean future developments are likely to be more selective, more expensive, and subject to greater political scrutiny.

For industry stakeholders, the priorities going forward will be using power as efficiently as possible and engaging with communities early to provide compelling evidence of local benefits. This creates an opening for competing markets, with Texas, already predicted to overtake Virginia by 2030, likely to be the biggest beneficiary. However, this rests on alternative markets’ ability to continue offering the one thing Virginia increasingly can’t guarantee cheaply: scalable power. With constraints on the rise everywhere, this, too, is far from guaranteed.

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