In 2008, a legislator who represented a swath of rural Southside introduced what seemed to be a modest bill intended to serve as an incentive for a new industry to locate in Mecklenburg County. The industry was one that wasn’t well-known or well-understood at the time, but the plight of rural counties in the southern part of the state certainly was. At the time, Mecklenburg’s unemployment rate stood at 6.0% but had been nearly twice that just a few years earlier.
The bill by Del. Tommy Wright, R-Lunenburg County, drew little controversy. It passed the House 97-2 and the state Senate 40-0. The only significant tweak to the bill along the way was to change the tax incentive being applicable only in Mecklenburg County to any locality with an unemployment rate of 4.9% or more.
The required fiscal impact statement saw only minimal impact on state revenues: The state would likely forgo up to $1.54 million of general fund revenue but get more than 100 jobs at twice the prevailing wage rate in Mecklenburg, which seemed a pretty good way to attract a major employer to that part of the state.
When Gov. Bob McDonnell inked his signature to the bill, Virginia officially provided its first tax incentive to something called a data center.
In the nearly two decades that have followed, Virginia’s tax incentive for data centers has succeeded in ways that legislators could scarcely have imagined when they voted for Wright’s bill. His bill foresaw the state passing up $1.54 million in tax revenue to help draw a new industry to some of the most economically distressed parts of Virginia. A 2024 report by the General Assembly’s investigative arm put the size of Virginia’s data center industry at 74,000 jobs, with $5.5 billion in labor income and total impact on the state’s gross domestic product at $9.1 billion a year. Virginia now has more data centers than anywhere else in the world. Silicon Valley may be in California, but Data Center Alley is in Virginia, just not the part of Virginia that Wright’s original bill set out to help. Instead of data centers going to economically deprived rural areas, they have instead clustered in the most affluent part of the state — and the amount of taxes that the state is passing up to attract them is now estimated at $1.6 billion, according to a recent report filed by the state comptroller.
The figure, cited in the state’s “Annual Comprehensive Financial Report,” has popped open more than a few eyeballs and raises a philosophical question: Did the state lose $1.6 billion through a tax giveaway that’s gotten out of hand? Or is that a quite reasonable tax break given the $9.1 billion in economic activities that data centers generate annually?
The answer really depends on whether those data centers would have come to Virginia without that tax incentive. If yes, then it’s definitively a giveaway. If no, then this incentive is functioning exactly the way it’s intended to and Virginia’s not losing anything, it’s gaining new businesses. If it’s somewhere in between, well, that’s where things get complicated.
Wright’s bill certainly paid off: Two years later, Microsoft located a data center in Mecklenburg. The tax revenue from that data center complex now accounts for about one-quarter of the county’s budget, has helped pay for a new high school and allowed the county to reduce its property tax rate. At the time, median household incomes in Mecklenburg were slightly lower than in Halifax County to the west; now they’re about 5% higher, according to the Federal Reserve.
To say they have been somewhat more controversial elsewhere is an understatement. They have roiled local politics in Northern Virginia and are now being blamed statewide for rising electric rates. The spread of data centers, their energy demands and the growing size of the tax abatements connected to them are all going to be topics that legislators will grapple with in this year’s General Assembly session.
Virginia’s expansion of the tax incentive for data centers began in 2010, and it’s useful to remember why and how that happened — especially since only 14 of the 100 members of the House of Delegates and only seven of the 40 senators were in their respective bodies at the time. Turnover comes at the expense of institutional memory.
In 2009, Apple announced that it would build its first East Coast location — in North Carolina. Virginia felt stung. A $1 billion investment by a “name” company going to our rival next door was not something state leaders felt they could tolerate.
In the 2010 General Assembly session, state Sen. Walter Stosch, R-Henrico County and a key figure at the time for financial matters, introduced a bill that took the tax break Wright had secured two years before for economically distressed localities and applied it statewide. Del. John O’Bannon, R-Henrico County, introduced the House companion.
Those measures lowered the number of jobs expected (to 50, and as low as 25 in economically distressed communities) and also expanded the type of computer equipment that would be covered — from hardware “for the processing, storage, retrieval, or communication of data, including but not limited to servers, routers, connections, and other enabling hardware” to include “chillers and backup equipment.” Those four words mask a lot of dollars. Chillers can sometimes account for 15% to 20% of the cost of a data center, according to TrueLook, a construction website. Electrical systems account for another 40% to 45%, according to Blue Cap Economic Advisors, and much of that is for backup systems because data centers are expected to operate without interruption.
The fiscal impact statement for the bill estimated the state would forgo $2.8 million in general fund tax revenue in fiscal year 2012 as a result of the bill.
The fiscal impact statement also carried this cautionary note: “This revenue estimate only reflects the initial investment for one specific project. Given the uncertainty regarding the number of qualifying data centers in the future, as well as the amount of upgrades, replacements and expansions of the computer equipment and enabling software, the revenue impact of this bill in Fiscal Year 2013 and later years is unknown.”
We are now in those “later years” and the revenue impact is now very much known.
This tax incentive has been wildly successful. We’ve gone from Virginia losing a project to North Carolina to becoming not just a national leader but a global leader in data centers. This tax incentive stands as a textbook example of a state using tax policy to grow an entirely new industry. The policy question is whether this tax break has been too successful. The numbers in a 2025 Joint Legislative Audit and Review Commission report are staggeringly large: From 2015 to 2024, some 53% of the state’s incentives went to data centers. That seems very lopsided, but all things must be taken in context. Data centers are where much of the development is happening nationally. We’ve seen other economic reports that say without data centers (and artificial intelligence, which require data centers), the nation’s economic growth would be almost nil. Both presidents Joe Biden and Donald Trump, each in their own way, have tried to increase manufacturing growth and both have had little impact on the numbers.
In his response to the JLARC report, Jason El Koubi, president and CEO of the Virginia Economic Development Partnership, wrote: “Incentive spending on data centers is rising in proportion to capital investment. Virginia — and the nation — are experiencing the highest levels of infrastructure-related capital expenditure, as a share of GDP, since the railroad boom of the 1880s. These investments are driving critical economic activity and generating substantial tax revenues across the Commonwealth at a time when federal workforce reductions and spending cuts are exerting temporary pressure on Virginia’s economy.”
Everything is connected: If we reduced or even eliminated those tax incentives, what would happen? Would we have more tax revenue to spend (or return to taxpayers)? Or would we find ourselves back in 2010, losing projects to North Carolina? Or maybe we’ve had enough of data centers and are fine seeing them go elsewhere? Some places might be, others not so much.
The questions about data centers involve more than tax breaks. They also involve energy issues and environmental ones — which themselves are complicated.
The answer to the question about whether we should slow down data center growth also depends partly on where you live, both on the political spectrum but also geographically. Until recently, data center growth has been concentrated in Northern Virginia, with some data center development along the Interstate 95 corridor south to the Richmond metro. The data center that started the push for incentives — Microsoft in Mecklenburg County — has been a rarity: a data center in a rural area outside the urban crescent. As both land prices and political pressures rise in Northern Virginia, we’re now starting to see data centers show more interest in rural areas. Google is coming to Botetourt County; Wythe County recently announced a data center, too. While data centers are not without controversy in rural communities, the ones in Botetourt and Wythe are headed to existing industrial parks, which has mitigated opposition. They’re not eating up green space.
Those who want to slow down data center growth or stop it altogether must contend with this sensitive aspect: Many rural areas, which perpetually feel shut out of economic opportunities, feel they are just now starting to benefit from data centers and the tax revenue they generate — some of those rural communities will be much aggrieved if they feel legislators from the “have” parts of the state shut the door before the “have nots” can get their share.
On the other hand, data centers are driving the demand for more electricity — electricity that realistically is going to be produced in rural areas that aren’t always happy about that. The result may be that some places would be thrilled to see data centers slowed down; others would feel they’re being deprived.
How legislators choose to resolve these issues over the coming weeks is something of a $1.6 billion question — or maybe a $9.1 billion one.
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