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A proposed 1.2-gigawatt data center in Delaware City hit a roadblock this week when environmental regulators in Delaware said the project’s design is not permitted under the state’s Coastal Zone Act.

The “Project Washington” data center proposed by Starwood Digital Ventures has been met with scrutiny from community members and lawmakers who are concerned about increased electricity bills and potential environmental impacts.

The Department of Natural Resources and Environmental Control on Tuesday said the project’s intended use of backup generation isn’t permitted under the state’s Coastal Zone Act. The landmark law was passed in 1971 to protect the Delaware Bay and the state’s shoreline from industrial activities.

The agency said smokestacks associated with the diesel generators would be the largest source of nitrogen oxide emissions in the entire state, with the sole exception of the Delaware City refinery. The plan would incorporate a tank farm larger than 5 acres, which DNREC said is also not compatible with the state’s environmental regulations.

DNREC Secretary Greg Patterson called the proposed 6 million-square-foot facility “unprecedented.” The largest number of generators currently utilized by any entity in the coastal zone is eight — the facility, with 11 two-story data centers, would require 516.

Environmentalists are calling the decision a “monumental win” for residents and the environment.

“The Coastal Zone Act is a recognition that our coastal ecologies, and the tourism and benefits of resiliency that they provide to the state, is well worth protecting and preserving,” said Dustyn Thompson, director of the Delaware chapter of the Sierra Club. “We’re glad to see the intention of the law being respected with this decision.”

Representatives for Project Washington said they are undeterred, however. Starwood Digital Ventures said its proposed data center would generate hundreds of jobs and generate millions in tax revenue. In a statement, they said they are confident the project will remain on track despite the agency’s decision.

“Project Washington is proud to have the support of the Delaware unions and trades, the business community, and hundreds of New Castle County residents,” a spokesperson said in an email.

“We are committed to working with DNREC, state and local regulators, and the entire community to make certain that Project Washington will be a state-of-the-art, data center campus that will bring thousands of jobs to Delaware.”

Starwood Digital Ventures could appeal DNREC’s decision, or redesign the project in a way that meets Coastal Zone Act requirements.

Excise taxes versus other types of taxes

Adam Hoffer is director of excise tax policy at the Tax Foundation, a nonpartisan tax policy nonprofit organization.

He said excise taxes are different from broad funding sources like income taxes, sales taxes and property taxes, because they are specialty charges put on a targeted set of goods.

Tobacco, alcohol and fuel have been historically known as the “big three” excise taxes, but it has widened over recent years to include recreational marijuana products and sports betting.

Hoffer and other tax policy experts say one of the concerns with states relying on excise taxes is that they generate the most amount of money from the people who can least afford it.

“Almost all products that receive an excise tax are more heavily consumed by lower-income Americans,” he said. “So when we tax them, those taxes are regressive.”

Aleks Casper, director of advocacy for the American Lung Association, said they endorse states using tax increases for so-called “sin” products like tobacco, in the hopes it will drive people to change their behavior. She said they are not concerned that the price increase would hit lower-income Delawareans.

“If you look at the history of where tobacco and tobacco companies have historically marketed and targeted, it is many times those low-income communities that already suffered disproportionately from smoking-caused disease, disability and death,” she said.

She said her organization is focused on public health benefits, not on the possible revenue generating aspect of raising tobacco costs. Meyer said on WHYY’s and Delaware Public Media’s “Ask Governor Meyer” call-in show last week that he believes the state would save money if higher prices cause fewer people to smoke.

“The more people that use tobacco, the worse it is for our health care system and it increases the cost of health care,” he said.

But Hoffer said he doesn’t believe using regressive taxation to force behavior change is effective.

“If you’re trying to improve the lives, especially of lower-income households, then regressive taxes, by their definition, make that really hard to accomplish,” he said. “Because you’re going to make a lot of those households worse off because you’re taxing them more heavily.”

Hoffer said tobacco tax revenue can also be unreliable to fund an entire state government because the number of smokers in Delaware and across the U.S. has been dwindling for the past several years.

“Over the past 60 years, we’ve seen fewer people smoke each and every year,” Hoffer said. “This is an overwhelming win for public health and [the] health of American consumers, but as states have become more and more reliant on cigarette tax revenue, then they start facing bigger and bigger challenges, because it’s a shrinking tax base.”

In fiscal year 2025, Delaware collected $87.5 million in cigarette taxes, compared with $92.4 million in fiscal 24.

Last year, Meyer proposed making the state’s income tax brackets more progressive by making people earning more than $600,000 a year pay a higher rate than someone making $60,000. But legislation attempting to do that failed to garner the necessary political support in the General Assembly.