Virginia has finalized a new two-year state budget that places fresh regulatory requirements on its massive data center industry, including a first-ever energy consumption tax, new water use restrictions, and upcoming noise standards — moves that could reshape how the industry operates in the state that hosts more data centers than anywhere else in the world.
Why It Matters
Virginia’s data center sector is enormous by any measure. The industry consumed roughly 5,050 megawatts of power in 2024, and energy requests for large loads in the Dominion Energy queue had reached 70,000 megawatts by the end of 2025. The state also grants the industry a sales and use tax exemption worth an estimated $1.9 billion annually — a subsidy now under formal review.
The new budget preserves that exemption for now, but it also establishes a work group tasked with studying whether to phase it out. That group must deliver a report to the General Assembly by November. The growing scale of the industry has already deepened divisions among Virginia Democrats over how aggressively the state should regulate it.
What Happened
Lawmakers approved the two-year budget Monday, embedding a series of new data center provisions alongside the state’s broader spending plan. The centerpiece is an energy consumption tax of $0.011 per kilowatt-hour of power used by data centers. The tax is capped at $600 million per year, putting total projected collection over the two-year budget cycle at $1.2 billion.
Sen. Scott Surovell, D-Fairfax, framed the move as a national inflection point. “We have more data centers than anywhere else in the entire world, and I think the entire country is looking to us to set policy on this,” he said, adding that the budget represents “the first step this year, in terms of generating some more revenue.”
Beyond taxation, the budget imposes water use requirements on data centers located in designated scarcity zones. The Virginia Department of Environmental Quality must identify water-scarce areas by July 2027. Data centers operating in those zones — or within the Eastern Virginia Groundwater Management Area — will be required to minimize water used for cooling purposes before 2032 and must adopt best available water-efficient technologies or DEQ-approved alternatives.
Facilities in scarcity areas are permitted to use direct evaporative cooling only when paired with other approved methods. DEQ must also complete a study by October 15 examining how existing data centers in the groundwater management area could be retrofitted for greater water efficiency.
Noise Regulations Added for the First Time
The budget also directs DEQ to regulate data center noise levels — a first for Virginia. The agency must establish an industry noise standard by 2029, with that standard taking effect for data centers starting in 2030.
Some lawmakers voiced concern that the new provisions may not go far enough. Sen. Danica Roem, D-Prince William, said her focus has consistently been on legal enforceability. “My concern here always goes back to sufficient legal recourse because right now, we have plans and we’ve got minimalization, but what we don’t have, in my point of view, is sufficient requirements.”
By the Numbers
- $0.011 — energy tax rate per kilowatt-hour
- $600 million — annual cap on energy tax collections
- $1.2 billion — projected two-year total from energy tax
- 5,050 MW — data center power consumption in 2024
- 70,000 MW — large load energy requests in the Dominion queue as of late 2025
- $1.9 billion — estimated annual value of the sales and use tax exemption
What’s Next
The work group reviewing the sales and use tax exemption will shape what may become the budget’s most consequential follow-on decision. A November report to the General Assembly could set the stage for lawmakers to act on that exemption in the next legislative session.
DEQ faces multiple deadlines under the new law — scarcity zone mapping by mid-2027, a retrofitting study this fall, a noise standard by 2029, and full water minimization compliance from industry by 2032. Virginia’s governor has been navigating significant Democratic divisions over the budget, and implementation of these provisions will test whether the state’s regulatory framework can keep pace with the industry’s rapid expansion.