Once upon a time, as all good fairy tales begin, Virginia passed a law to persuade a goose that lays golden eggs to nest in the state. As an incentive, it offered that goose a generous tax break, which seemed easy enough at the time because the state had no geese and a goose that laid golden eggs seemed a pretty good deal. The state would lose nothing from what it had at the time, but it might wind up with a horde of golden eggs.
That’s exactly what happened. Virginia today has an entire flock of geese laying golden eggs, more than anywhere else, but not everybody is happy about that. Geese can be noisy, obnoxious neighbors who foul everything they touch, and how many golden eggs do you really need anyway? They’re piling up everywhere — on farms, next to battlefields, next to residential areas. Now, some in Virginia are thinking that maybe their tax break was too generous and should be revoked — except that some people who don’t have any geese are saying, “Hey, where’s our golden egg? You’ve got more than you want, but we don’t have any! Before you kill those geese, can’t we get at least a few of those golden eggs?”
Ideally, by now you’ve figured out that this column isn’t about surly, bad-tempered waterfowl but about data centers. In 2010, Virginia legislators took a tax break designed only to attract data centers to a very specific group of economically distressed counties and extended it statewide. The result has been spectacularly successful: Virginia is now the data center capital of the world, although we’ll likely soon lose that title to Texas. In the process, that tax abatement whose impact was originally listed as “unknown” is now known: The state forgoes $1.9 billion worth in taxes a year. Some see that as a giveaway, others a bargain, because that has to be balanced against the $9.1 billion in gross domestic product that data centers produce in Virginia each year.
All this has temporarily broken Virginia’s budget-making. Although both chambers of the General Assembly are controlled by the same party, the House and Senate budget writers disagreed so profoundly over data centers that the legislature adjourned without passing a budget.
The immediate issue is that tax abatement, which is scheduled to run through 2035. Senate Finance Committee Chair Louise Lucas, D-Portsmouth, wants to end it next year — eight years early. Others have warned that it sets a dangerous precedent for other industries, that Virginia can’t be trusted to keep its word. A Danville-based economic development group, the Future of the Piedmont Foundation, issued a lengthy statement addressing that point.
Toward the end of the session, Gov. Abigail Spanberger floated the notion of a “consumption tax” — taxing data centers on the amount of electricity they use.
This is a fundamental shift in policy and is said to be one that the data center industry supports, although not a single data center representative I contacted was willing to talk about the issue — I suspect because this is all quite sensitive.
Across the country, 37 states have some sort of tax incentives to attract data centers, according to the National Conference of State Legislatures. While each of these varies, they are all generally about the same, according to a list compiled by Data Center Dynamics, in that they involve some kind of break on sales taxes or other taxes. They’re still paying taxes, just not the full rate — the lower rate being an incentive to locate in that state. No other state appears to have a consumption tax, and no details have been offered on what one in Virginia would look like, which means we don’t know exactly how this would work
In the midst of this, a Republican legislator from rural Virginia has advanced a detailed version of how a consumption tax might work and how it could be used to spread the digital wealth in Virginia (my phrase, not his).
That legislator is Del. Wren Williams, R-Patrick County, who has put together an extensive fact sheet on how a consumption tax on data centers might work to benefit rural Virginia. To start with, he prefers not to call it a consumption tax, but a severance tax, similar to severance taxes on coal. The theory with the latter is that coal is a finite resource, so the severance tax serves as a license by which coal companies pay back a locality for removing that resource. Conceptually, Williams says Virginia should treat electricity as a resource, even though electricity can be generated anew, unlike coal. He’s not even sure this should be regarded as a tax. “It’s more of a license,” he says, “a business paying a fee to use our grid” — and then getting charged accordingly. If you use more, you pay a higher rate for the license.
All that’s more a matter of semantics and theory; the most interesting part, from a regional perspective, is that Williams says this charge — whether you call it a consumption tax or a severance tax or a license or a fee — should be based on a locality’s economic status.
Simply put, a data center in a prosperous county would pay more than a data center in an economically distressed county. Williams envisions three tiers, using the fiscal stress index developed by the Virginia Commission on Local Government, which is periodically updated as conditions change. He pictures something like this, with some examples given of some of the localities that might qualify for each tier:
- Tier 1 — Distressed (Patrick, Buchanan, Dickenson counties): $0.000/kWh for first 10 years, then $0.001, then $0.002 after 20 years
- Tier 2 — Moderate (Shenandoah Valley, Southside): $0.002/kWh
- Tier 3 — Prosperous (Loudoun, Fairfax, Prince William): $0.006/kWh
His rationale: This system might prompt data centers to localities where they’re more wanted — and needed, from a fiscal point of view. “I do think they’re not paying enough,” he says, but if Virginia wants data centers to pay their “fair share,” as the phrase goes, those rates should be used to help spur economic development in rural Virginia. “I think it’s a creative solution,” he says.
In the closing days of the session, Williams presented his idea to Senate Majority Leader Scott Surovell, D-Fairfax County (a sign of how legislators from different parties and different regions do talk to one another — even different chambers!).
Surovell told me it’s an “interesting idea.”
Sen. Creigh Deeds, D-Charlottesville, and one of the Senate’s budget negotiators, told me via text message: “It’s on the table as are other ideas.” He also cautioned that “costs would get passed on to customers,” as all costs eventually do.
The legislator whose district has more data centers than any other is Del. David Reid, D-Loudoun County, says it’s a concept that needs more research but points out that a few years ago there was a suggestion that, if Northern Virginia localities wanted to slow down data center growth, they should seek a change in the law that would have the full tax on data centers apply in that part of the state. Those localities opposed it vehemently, he says.
Reid wonders whether it’s legally and technically possible to structure a consumption tax so that it only hits data centers (whose popularity right now is low in some quarters) and doesn’t inadvertently bring in other high-energy users, such as, say, Newport News Shipbuilding.
He also wonders about legal issues with different tax rates, although there are other things that have different tax rates, based on geography. That’s the whole concept behind “enterprise zones,” having a lower tax rate in some economically distressed areas as a way to attract jobs.
The idea of a tax break for data centers based on geography is not new at all. Virginia’s very first tax break for data centers, passed in 2008, was intended to apply only to Mecklenburg County but was expanded to allow localities with an unemployment rate of 4.9% or higher. It was only later that the tax breaks were applied statewide, which helped set off the data center boom in Northern Virginia.
A consumption tax for data centers would be new, but a tiered system intended to encourage data centers to locate in economically distressed localities would take Virginia’s data center policies back to first principles.
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