By Alexa Barnes | VCU Capital News Service

RICHMOND, Va. — State lawmakers will soon return to the Capitol after ending the General Assembly session without a budget, in part due to some debate whether to continue current tax breaks for data centers.

The Democratic-led Senate Finance and Appropriations Committee put forth a budget that would end the tax exemption for data centers by 2027, and free up approximately $1.6 billion in additional revenue. House leadership argued against the change, saying there is an obligation to honor the state’s existing commitments to data centers. 

The tax break, called the Data Center Retail Sales and Use Tax Exemption, was originally approved in 2008 by the Democratic governor Tim Kaine to attract the industry to the region. Under the incentive, qualifying data centers are exempt from paying Virginia’s sales tax on computers and other equipment used in data centers. This includes servers, network gear and software. 

Sen. Tim Kaine has since commented on the incentive as it stands now.

“Virginia has had some favorable tax provisions for data centers,” Kaine said. “Those tax provisions, along with some other factors, have made Virginia the data center capital of the United States and probably the world.”

Kaine acknowledged that these tax exemptions do have a cost, however.

 “The offering of those incentives essentially takes money out of the state treasury that could be used for other important priorities, education, public safety, etc.,” Kaine said. 

Kaine concluded that the solution doesn’t have to be all or nothing, and that it could be possible to keep some exemptions for data centers while eliminating others. 

“I watch these things from afar and I always figure they’ll find an answer somewhere in the middle of the two positions,” Kaine said. 

Megan Davis, a senior tax and budget policy analyst at The Commonwealth Institute, said the incentive has not only worked, but grown far beyond what was imagined when it was created 17 years ago. Davis said the original fiscal impact estimate of $2.2 million in 2009 has since ballooned to $1.9 billion in 2025.

“That’s a huge, huge increase,” Davis said. 

Davis emphasized how the revenue gained by ending the exemption early could help to lower the cost of child care, make health care more affordable and improve public education resources. 

“The revenues that we get from this are able to go towards struggling families and people who really need it,” Davis said. “The data center industry is booming, and we need to be making real investments for Virginia families right now.”

The data center industry is estimated to generate 74,000 jobs, $5.5 billion in labor income and over $9 billion in gross domestic product to Virginia’s economy annually, according to a 2024 report by the Joint Legislative Audit and Review Commission. The study credits the data center’s positive economic benefits in Virginia to substantial capital investment in the industry. 

Opponents of ending the tax exemption say Virginia’s business reputation would be damaged by the move and make the state less attractive to potential investors in the industry. Gov. Abigail Spanberger voiced a desire to abide by the state’s contracts and commitments in a statement to reporters, according to VPM.

Christopher Miller, president of the Piedmont Environmental Council, said the argument there is a commitment to maintaining the tax break is a weak one. 

“The contract that the people signed with the Virginia Economic Development Partnership … says the sales tax exemption is subject to change, and any change brought by the General Assembly is hereby incorporated,” Miller said. “The contract is very explicit that you shouldn’t count on a sales tax exemption and that’s subject to change from year to year.”

Miller said the focus should instead be on how much revenue is lost and what that loss prevents Virginia from supporting, and how this is part of the pattern of data centers not paying their fair share. 

“People are deeply offended that private enterprise in the form of the five or six richest companies in the world are asking us to subsidize them for their global enterprise,” Miller said. 

Data centers and related infrastructure have surged across Virginia. The state is home to nearly 150 of all known hyperscale data centers worldwide, according to the Virginia Economic Development Partnership. Those are massive data centers with huge workloads. There are an estimated 600 operational data centers in the state, with an additional 595 under construction or planned, according to a 2025 report by the American Edge Project—a pro-tech investment group. 

Additionally, a 115-mile transmission line through Campbell to Culpeper counties has been planned by Valley Link Transmission. The $1 billion joint venture between Dominion Energy, Transource and FirstEnergy seeks to answer Virginia’s growing energy demands.

“The state has failed to analyze the aggregate and cumulative effects on land, air, water, on communities and what the implications of those are for citizens of the state but also ratepayers,” Miller said.

Senate Finance and Appropriations Chair Louise Lucas, D-Portsmouth, and House Appropriations Chair Luke Torian, D-Prince William, released a joint statement on March 13 regarding progress made on budget negotiations.

“We are pleased to report we are making meaningful progress toward a final agreement that reflects the priorities of Virginians across the Commonwealth,” the committee chairs stated. 

According to the joint statement, Lucas and Torian are pleased with the progress made toward a final agreement that reflects the priorities of Virginians. The joint statement emphasizes the shared goal of balancing investment in local communities and maintaining Virginia’s business reputation and competitive advantage in the data center industry.

“We expect to resolve the remaining outstanding issues soon and look forward to presenting a final budget that Virginia families, businesses, and communities can be proud of,” the committee chairs stated.

Spanberger has called for a special session to finalize a biennial budget for the state before the fiscal year starts July 1. 

“I remain in close contact with leaders in the General Assembly, and I look forward to calling lawmakers back to Richmond on April 23 to pass a budget that delivers on the responsible, pragmatic leadership Virginians voted for this past November,” Spanberger said. 

Capital News Service is a program of Virginia Commonwealth University’s Richard T. Robertson School of Communication. Students in the program provide state government coverage for a variety of media outlets in Virginia.