Proposed data center consumption tax marks major policy shift for Virginia (copy) (copy)
It’s one line in your electric bill — the total from a $0.001595 per kilowatt-hour tax.
However, for Gov. Abigail Spanberger, the first change to the 25-year-old electricity consumption tax is about data centers paying their fair share of taxes and being better neighbors.
The budget compromise that the House of Delegates and state Senate approved on June 22 would increase the consumption tax to $0.011 per kilowatt-hour — a big jump from the $0.000875 that data centers and other big electricity users had been paying. It's an alternative to the demand from Senate Finance Committee chair Louise Lucas, D-Portsmouth, to end the current sales tax exemption for data centers that was at the heart of a four-month-long impasse over the state budget.
But there's still more to the consumption tax idea. Spanberger sees it as a first step to changing data center practices — their huge demands on the electric grid that outstrip Virginia-based supply of power, pushing Virginians’ electric bills higher, their heavy use of water to cool their ranks of computers, and the noise and emissions from their backup generators, administration sources say.
Update: General Assembly approves budget deal
It marks a break from past tax policy. That consumption tax discount for big users was meant to encourage business investment, said former state Sen. John Watkins, R-Chesterfield, who wrote the 1999 legislation that completely changed Virginia’s approach to taxing electric utilities.
Lower tax rates, like the lower base rates for electricity in utilities’ State Corporation Commission-approved tariffs of charges, have long been a draw for businesses. That’s the idea behind the sales tax exemption.
The consumption tax, along with requiring utilities to pay the state's corporation income tax, replaced the longstanding "gross receipts tax" utilities paid. It was meant to tie tax bills to regulatory changes that focused on linking electric rates to the kind of investment — on power plants, high-voltage transmission lines and substations, and the power lines running through neighborhoods — that utilities make, Watkins said.
At the same time, "We also wanted to encourage business investment" by setting a lower consumption tax rate for big power users, he said.
The consumption tax increase for data centers is a tweak to versions Spanberger had been floating since March. It drops her suggestion that data centers receive credit for investments in renewable energy and battery storage — ideas raised in legislation she backed that died in the Senate Finance Committee, not long before that committee proposed ending data centers’ current sales tax exemption.
Spanberger says ending that exemption is bad policy for two reasons.
It breaks a state promise to data centers, she has said repeatedly.
And it would make it all the more expensive to buy the solar, wind and battery equipment that data centers would need to help Virginia meet its clean energy goals, as well as any “behind the meter” generators that would reduce the amount of electricity they take from the grid.
Data Center Coalition president and chief executive Josh Levi called the tax increase "more than a billion dollars in unnecessary new taxes that will raise costs on Virginians and Virginia businesses" that he said would drive investment away from the state.
A key study
Meanwhile, language elsewhere in the budget directs the Joint Subcommittee on Tax Policy to look at “any potential future exemption or incentives” for data centers, aiming at meeting clean energy and more efficient energy use.
In the interim, the higher tax rate will be an incentive for data centers to take steps to reduce the amount of power they draw, officials say.
“There is an old saying in economics, if you want less of something, tax it,” said Tony Carilli, an economist at Hampden-Sydney College.
But whether that’s less electric use or fewer data centers is the question.
“How could an 1,157% increase in electricity consumption tax not have an effect on the desire to build or leave?” Carilli said.
“As for the effect on behind-the-meter generation, the relevant comparison must include not only the cost of electricity locally versus the investment in renewables and storage, but also the relative cost of not building in Virginia or leaving Virginia to build elsewhere,” he said.
“When regulation makes things more expensive, difficult, individuals will find lower cost alternatives,” Carilli said.
Other states
Key will be what other states do, said Chris Herrington, a Virginia Commonwealth University economist.
Last month, Ohio Gov. Mike DeWine directed the Ohio Tax Credit Authority to pause consideration of any new data center tax exemption while a legislative committee studies the impact of data centers on the state. Arizona lawmakers paused state data center incentives, as has Illinois Gov. Jay Robert “JB” Pritzker.
“One thing to keep in mind is that these data centers involve massive fixed cost investments, so those already in place are highly unlikely to uproot and leave any time soon,” Herrington said.
“Moreover, Virginia currently has more data centers than any other state, and it remains a very attractive option for new construction. But certainly the companies building these centers are considering all of these policy changes closely, and they're taking a long-term view with respect to these investments,” he said.
“They will consider not just upfront construction costs, but their expected energy costs, tax costs, and other factors for the foreseeable future. That's the nature of large investment decisions,” he said.
The money
The main issue for the legislature with the consumption tax was the money, not incentives or disincentives.
“The compromise agreement was $600 million per year for the data centers to pay what Senator Lucas would dub their fair share,” April Kees, director of the Senate Finance Committee staff, told senators before they voted on the budget.
“That’s what the agreement was. And then, using the data the State Corporation Commission had, staffs from both bodies calculated what was needed to achieve that amount,” she said.
“So we said we wanted to hit $1.2 billion over the biennium … just kind of a number we said this is going to be their fair share for the biennium?” asked state Sen. Bill DeSteph, R-Virginia Beach.
“That was an agreement between the conferees from the House and Senate on the amount, and that was calculated to the best of our ability based on that amount,” Kees replied.
A policy issue
The change in the consumption tax raises a basic tax policy question, said Travis Taylor, an economist at Christopher Newport University.
One big issue, he said, “is about not asking one tax to do two jobs."
“If the concern is that data centers are pushing grid costs onto households, the direct fix is the large-load rate class that the State Corporation Commission already approved,” because it bills data centers and other big electricity users for the infrastructure needed to serve them, Taylor said.
“The consumption tax is really a revenue measure, and I'd keep that rationale separate; otherwise the industry ends up charged twice for the same underlying problem,” he said.
As a revenue measure, Taylor said it is defensible because it taxes something, data centers, that can't easily move.
“A running data center is enormous sunk capital, and a surcharge on the order of 8%-15% of its power bill is significant but nowhere near the point where it pays to abandon a facility worth hundreds of millions or billions of dollars,” he said.
“That same immobility is what makes the tax relatively efficient; you raise revenue with little of the distortion you'd get from taxing something more mobile,” he said.
On the other hand, “that sunk-capital logic runs the other way for new construction: a company choosing where to build next hasn't committed anything yet, so the tax does factor into that decision, and some projects will land in Georgia or Ohio at the margin,” he said.
“Virginia's reputation as a stable place to invest is itself valuable, and changing the rules after the fact puts some of that value at risk,” Taylor said.
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Read the stories from the Richmond Times-Dispatch's three-day series on data centers and the key issues they pose.
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