The specter of data centers is looming ominously over America, posing a triple threat to its electric power-generating capacity, limited water resources, and environment. Or so a chorus of self-styled progressives and populists is claiming. This brewing negative sentiment is reflected in a recent Gallup poll, in which 71% of respondents indicated they opposed the construction of data centers in their neighborhoods. It is time to nip hysteria in the bud. Far from being part of the problem, data centers are a critical part of the solution to address the nation’s overarching existential challenge: sustainable economic growth.
Virginia will be ground zero for the effort to anchor the response to data centers in economic reality. Virginia has the largest concentration of data centers — an expected total of 685, of which 398 are currently operating. Texas and California, with the second- and third-largest concentrations of data centers, respectively, have significantly lower concentrations.
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When the concept of data centers was in its infancy, Virginia decided to exempt data center investments from sales taxes to encourage the development of an ecosystem of them in the state. In 2025, the sales tax exemption benefit on such investments amounted to $1.9 billion.
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Offsetting the forgone state sales tax revenue, however, is the significant amount of property taxes paid by data centers to local governmental authorities.
For example, Loudoun County raked in almost $1 billion in property taxes on data center investments in 2025.
Yet second-guessing regarding data centers is around the corner.
Virginia is on the brink of a fiscal crisis because of an impasse over the commonwealth’s budget. Legislators in Richmond resist making painful decisions to curb state expenditures and instead push to raise additional state revenues by rescinding previously granted sales tax exemptions for data centers. Gov. Abigail Spanberger (D-VA) refuses to renege on the state’s promises with respect to such sales tax exemptions. At the local level, Loudoun County is signaling its doubts on encouraging the continued growth of data centers by adopting a more stringent approach to zoning approvals.
So, what might be a constructive response to Virginia’s misguided data center naysayers?
First, cut Richmond’s fiscal Gordian knot.
Spanberger should acknowledge that the state faces fiscal headwinds due to factors beyond its control. For the foreseeable future, federal revenue transfers to states (primarily to fund programs such as Medicaid) will decline due to the One Big Beautiful Bill Act of July 2025. Also, while the long-term impact of the U.S.-Iran war has yet to be quantified, the U.S. economy’s growth rate will clearly be lower than originally anticipated before the conflict. Consequently, revenues from state income taxes are likely to be significantly lower than originally projected.
Accordingly, the governor should reaffirm the existing sales tax exemption and propose instead an emergency 1% tax on existing and future investments of data centers for the next two years. The emergency tax could be extended for additional two-year periods until the expiry of the sales tax exemption in 2035. By way of illustration, data center investments that benefited from the sales tax exemption amounted to $33 billion in 2025. A 1% emergency tax on such investments would have yielded $330 million to the state treasury. The estimated benefit to data centers from the sales tax exemption was $1.9 billion in 2025. So, the net benefit to data centers from the sales tax exemption would still have been substantial while helping Virginia deal with a force majeure fiscal emergency.
Second, encourage localities that host data centers to be fiscally resilient. For example, Loudoun County should consider establishing a fiscal resiliency fund with an initial life of 10 years.
The FRF would be financed by allocating 1% of the annual revenues from real and personal property taxes on data centers. In 2025, data centers generated about $1 billion in annual revenue for the county through such property taxes. An annual allocation of 1% to the FRF would amount to $10 million per year.
The size of the FRF would grow to about $156.2 million over a decade, assuming: (1) an initial contribution of $10 million in the first year, increasing by 2.5% per year (to reflect expected inflation) in each subsequent year; (2) no withdrawals in the first 10 years; and (3) an annual rate of return of 7.5% on the investment portfolio.
The FRF would have an investment portfolio consisting of 60% in U.S. equity securities (S&P 500 Index) and 40% in U.S. Treasuries (10-Year Treasuries).
Loudoun County has key priorities that must have sustainable funding, most notably affordable housing, public transportation, and K-12 public education.
Third, the data center industry should acknowledge the political reality that it must earn a de facto social license to operate.
Accordingly, the industry must accept the costs associated with closed-loop cooling systems that do not represent a net drain on the water resources of the communities in which data centers operate. Similarly, the data center industry must work closely with electric utilities to develop a robust energy grid, including self-contained electric power-generating systems that do not burden retail customers with the costs of expanding capacity. Finally, the industry should embrace transparency to build trust with the communities in which it operates.
Samir Tata is the founder and president of International Political Risk Analytics, an advisory firm based in Reston, Virginia, and author of the book Reflections on Grand Strategy: The Great Powers in the Twenty-first Century.
